Surviving Business Interruptions: What Do You Do Now? Part 1

Critical First Steps

When disaster strikes, it can be spectacular like a flood, a wildfire or an ice storm. Or it can be a more mundane event, such as a burst pipe, an overheated copier or someone unknowingly unplugging a freezer.

Whatever the circumstance, business interruptions can take a heavy toll on revenue, profits and reputation. Having up-to-date insurance policies in place are key to mitigating the losses suffered by your business operations. It is also very important to document the circumstances of the interruption in as much detail as possible.

In the first of our four-part series on business interruptions, we’ll explore the crucial first steps to take in documenting and identifying the event.

The first step after an incident results in a total or partial closure of your business is to call your insurance broker to file a report. The next step is to record what happened. Time fades memory, so it is important to record the details as soon as possible.

Insurance claims can take some time to resolve, so make sure to keep good notes about how your business was interrupted, for how long, and what you did to get back to normal.

Include information about contracts or jobs that you were not able to complete or any other revenue that was lost and start collecting documents to support these notes. The insurance companies will be looking for such documentation to support any claims.

• Photograph any inventory that was damaged and prepare a backup copy of any inventory records at the time of the incident. Perform an inventory count as soon as you can.
• Prepare backups of your records (production and financial) at the date of the incident and keep a separate copy that can be used for insurance purposes.
• If you dispose of items as salvage, keep records of what was disposed of and how much you were paid.

(Note: lost inventory is covered under property coverage and not business interruption insurance.)

Is the Incident an Insured Event?

Once you have your initial notes and photographs, review your insurance policy to see if the incident is covered under your business interruption policy. If you do not have a copy of your insurance policy along with a copy of current declarations obtain one from your insurance broker. Review your insurance policy in detail and obtain information regarding any limits on insurance either directly from your insurance broker or from a review of the declarations page of the insurance policy.

Many policies are dense with information, which can be daunting. Getting advice from a trusted advisor often will help you determine what can be claimed for insurance purposes. A trusted advisor can review your information and your policy to see if the incident falls within one of the listed insurable events. If there are concerns about the incident qualifying, he or she will likely request the insurance broker connect with the insurer at the insurance company to make a determination.

Incidents that are considered “acts of God” are generally not insurable events, unless a separate rider is purchased. For example:

• Running water over land is generally not insured under a regular business interruption rider as it is considered an “act of God.” However, it is possible to purchase an extra rider for flood coverage. Water damage as a result of a burst pipe is generally covered as an insurable event.

Identifying whether your incident fits under the business interruption policy in your insurance policy and capturing all evidence of the event while it is still clear in your head are critical steps to take right after an incident has occurred. Once this is done, you can focus on what is covered and associated costs.

In our next article in this series, we’ll explore how losses are calculated and address an immediate concern — will you be able to pay your employees.

Nadine Wightman, CPA, CA, CBV, CFF, is a Partner with MNP’s Valuation and Litigation Support group in Saskatoon. For more information on business interruptions, contact her at 306.664.8381 or [email protected]

For more information please visit Insurance Advisory Services.

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