Understanding Business Interruption Claims, Part 6: Competent Proof
(Note: This Guest Blog is by Michelle Claverol, an attorney with Merlin Law Group in the Coral Gables, Florida, office. This is the sixth part in a series she is writing on business interruption claims).
A very insightful reader posted this comment to my blog last week, Understanding Business Interruption Claims, Part 5:
I'd guess that many small businesses, such as mom and pop stores, independent contractors, sales agents etc might not be able to benefit from this ruling if they don't project forward. Many small business owners are not trained in business management, and might not be aware of techniques they can use to plan their business success.
Could the small business owner therefore have difficulty making a claim for projected earnings and expenses if they don't have a business plan?
I agree. Some mom and pop stores and small businesses may not be able to generate fancy projected earning and expense reports with pretty graphs, etc. However, as a matter of law, a carrier cannot deny a claim for a small business’ inability produce or generate these documents.
As a matter of Florida law, business interruption losses should be determined in a practical way, having regard for nature of business and methods employed in its operation, in order to give practical effect to intentions of parties and purpose of insurance as evidenced by terms, conditions, and provisions of policy. See, Travelers Indem. Co. v. Kassner, 322 So.2d 80 (Fla. 3rd DCA 1975).
The holding in Travelers does not mean that “anything goes” in business interruption claims. A speculative claim will never be covered by a policy and it is always the insured’s burden to provide competent proof of an actual monetary loss as a result of the suspensions of its operations.
In order to avoid this evidentiary pitfall, small businesses should consider retaining forensic accountants to help them review their financial statements and general business objectives and prepare reports in support of their claim.
In my 20+ years of forensic accounting experience analyzing business interruption losses, I have found a wide range of accounting expertise and records among policyholders, ranging from the limited knowledge of accounting and haphazard business records typically found in a "Mom and Pop" business operations, to the very competent accountant/controller with pristine books and records, which are typically employed by large corporate entities.
My function as a forensic accountant is to analyze the books and records available, along with other evidence supporting the business interruption, and apply it to the coverage as defined in the policy. I have found in business interruption claims that I have been engaged, there was always sufficient documentation available to prepare an analysis...however, just the availablity of sufficient records did NOT guarentee an indemnifiable business interruption loss, as an actual loss must be sustained, as defined in the policy coverage.
In conclusion, as a forensic accountant, there is nothing better than to see a good set of books and records. However, the lack of such does not translate to - "No Loss". Furthermore, the business interruption coverage is what will in the end dictate whether there is an indemnifiable loss.
I cannot agree more with Michelle and Bruce.
I also urge agents to remind small business owners about the value of extra expense coverage immediatly after a loss. It can often be more valuable than the income coverage.
Bruce Smith,
When you write that it is your job to "apply it to the coverage as defined in the policy"....do you think that your CPA licensure allows you to interpret policy language and use your findings to negotiate or discuss the damage on behalf of the policyholder with any insurance carrier or other CPA representing a carrier?
Chip has brought up a very good point regarding the importance of Extra Expense coverage.
In many cases the Extra Expense may be the material portion of a business interruption claim. If Extra Expense coverage is NOT purchased through an ISO (or similar) "CP 00 30 - Business Income (And Extra Expense)" coverage form, or separately through ISO "CP 00 50 - Extra Expense" coverage form, the insured may not be indemnified for those expenses incurred to avoid or minimize the suspension of business at either the same or temporary location, or to minimize the suspension if the business cannot continue operations. Needless to say the lack of this coverage may be as catastrophic as the event itself.
One side note, there is Extra Expense coverage available under CP 00 32 - Business Income (Without Extra Expense), however in order to collect for the addional expenses incurred, the policyholder must prove that spending the additional money resulted in a decreased Business Income loss.
asdfwearw qw
In regards to the calculation of a Business Income loss, I typically look to an adjuster and or attorney in respect to issues including but not limited to: period of restoration and whether there is a covered loss. However, I do used my expertise as a forensic accountant in terms of the mechanics of how to calculate a business income loss, AS DEFINED IN THE POLICY, and evaluation of the insured's books and records. I then report my findings to the appropriate person.
BDS
Michelle, Chip and all,
Facts: Prior to joining a major corporation as its Risk Manager and CFO, William was a CPA - forensic accountant and CPCU. He previously worked for a forensic accounting firm for oveer 30 years providing consulting and expert witness services to both policyholders and insurers, almost exclusively on Business Income claims. A catastrophic loss occured at the corporation. The insured had Business Income and Extra Expense coverage.
Question: Is William allowed to interpret policy language, review the appropriate books and records, and calcuate a Business Income loss analysis for the purpose of negotiating or discussing his findings on behalf of the corporation to his insurer or other CPA representing a carrier?
BDS
Bruce,
Is this a trick question or are you just trying to stump me?
"I do not know for sure," is the answer right now. So, you have stumped me. But, let's give it a guesstimate...which means that nobody can rely on this hypothetical answer to this hypothetical question.
A policyholder can always act for themself. A corporation does not have to hire a public adjuster to make a claim. So, there will be a lot of people that will say he can do this because he is a an officer and employee of the corporation.
Interpreting a contract is not practicing law. Interpreting law in relation to contractual terms is...but you failed to include that fact.
I have no idea if a CFO who is not a CPA is viloating some law about calculating an income loss....but because he is an officer of the corporation, I am not aware of a law that says he has to be a CPA. Is there such a law that you are aware of?
Let me know if I was stumped. I would enjoy learning.
Chip,
I wrote this hypothetical in response to:
"asdfwearw qw - February 1, 2010 7:43 AM
Bruce Smith,
When you write that it is your job to "apply it to the coverage as defined in the policy"....do you think that your CPA licensure allows you to interpret policy language and use your findings to negotiate or discuss the damage on behalf of the policyholder with any insurance carrier or other CPA representing a carrier?"
Chip, in your hypothetical answer response to my hypothetical scenario, you stated that, "Interpreting a contract is not practicing law. Interpreting law in relation to contractual terms is...but you failed to include that fact."
Going back to asdfwearw qw's response to my 2/1/10 email above, he/she seemed to imply that by applying my analysis of the books and records to the coverage, I was practicing law. Maybe what I said was unclear... but what I wanted to convey was that you must be able to interpret the contract in order to make the numbers meaningful in regards to presenting a Business Income loss analysis.
No trick Chip....your response was very helpful!