The Period of Restoration Does Not End When the Business Is Sold or Operations Cease
Michelle Claverol has been writing a weekly post every Sunday regarding business interruption and extra expense issues. I can tell that weekend posts are not read as often as those published during the workweek. I encourage those involved with commercial claims to go back and review her discussions of this important commercial coverage. She went home to visit with her family this weekend, and her leave provides me an opportunity to address a business income question that is asked of me on a fairly frequent basis:
What happens in the valuation of a business income claim when the business closes or is sold after the loss?
What generally "happens," is the insurance company limits the period of restoration to the time that the business decision is made not to re-open or the business is sold. I then get a phone call asking if the insurer can do this. As usual, the best place to start such an analysis is to read the relevant policy language and then check an authoritative source. In this case, I will use IRMI.com, which everybody who claims to be a "professional" in insurance coverage and claims should subscribed to, along with the FC&S Bulletins.
The form CP 00 30 reads:
c. Resumption Of Operations
We will reduce the amount of your:
(1) Business Income loss, other than Extra Expense, to the extent you can resume your "operations," in whole or in part, by using damaged or undamaged property (including merchandise or stock) at the described premises or elsewhere.
(2) Extra Expense loss to the extent you can return "operations" to normal and discontinue such Extra Expense.
d. If you do not resume "operations," or do not resume "operations" as quickly as possible, we will pay based on the length of time it would have taken to resume "operations" as quickly as possible.
Demonstrating its value and proving why it should be subscribed to, the IRMI.com has a specific discussion of both issues:
Election Not To Resume Operations. Note that the resumption of operations provision does not require the insured to resume normal operations as soon as possible. Instead, it establishes that the insured's business income or extra expense loss will be calculated based on the amount of loss that would have been suffered if the insured had resumed normal operations as soon as possible. Thus, an insured who elects not to resume operations at all is entitled to a recovery for the business income that would have been earned or the necessary extra expenses incurred during the time it should reasonably have taken to resume normal operations. The same is true of an insured who does not resume operations as quickly as possible.
Sale of Property during Period of Restoration. In BA Props., Inc. v. Aetna Cas. & Sur. Co., 273 F. Supp. 2d 673 (D.V.I. 2003), Hurricane Marilyn damaged the insured's hotel in the U.S. Virgin Islands. While the hotel was undergoing repairs, the insured sold the facility. The insurer argued that the sale of the hotel during the period of restoration terminated the insured's right to receive further business income coverage. The court disagreed. The court held that the amount of the insured's business income loss was fixed as of the time of the hurricane to the amount of lost profits that would have been earned during the period of restoration. The court noted that the business income policy did not expressly require that the insured actually recommence business activities at the hotel as a prerequisite for coverage. If the insured decided to shut the hotel for good after the hurricane, the insurer would still have been obligated to pay the entire business income loss through the entire time it would have hypothetically taken to rebuild and reopen the hotel. Selling the hotel midway through the period of restoration was no different than belatedly deciding to shut it down. In either situation, the insurer was still obligated to pay out the rest of the business income loss. (emphasis added)
Sometimes, a catastrophe is the perfect time to close or sell a business. Commercial policyholders that make such difficult business decisions can still obtain significant business income benefits which many insurance adjusters may otherwise deny.
My experience is that many insurance company adjusters lack the thorough understanding of finance, business management, and accounting required to properly adjust commercial business income and extra expense claims. Most commercial adjusters never do, and lack the skill to do, the income and extra expense calculations themselves. Instead, usually after a delay, the business income claim is referred to insurance accounting firms that provide the analysis only of the numbers, without also having the business operational skills needed to properly determine the amounts owed.
I suggest that unless the commercial claims representative immediately explains the broad benefits potentially available and shows a willingness to fully pay for them, most commercial policyholders need to promptly retain professional help. Often, an insurance agent or broker has a much more thorough understanding of how the insurance product, through business income and extra expense benefits, can potentially save a business from closure. Still, at this most crucial time following a loss, many commercial policyholders have to wait months to get agreement or payment of these benefits. Closures as a result of these delays can be prevented by insurance companies understanding their products and getting money, the lifeblood of any business, back into the business as soon as possible.
Experience shows that most insureds are very slow in providing the required documentation to properly assess business income loss. Improper accounting procedures, preoccupation with the restoration process are all factors which delay the process.
Should be noted that most attorneys retain the services of accounting firms as well. In 37 years never ran across an attorney that did not.
I agree that the insured should be advised of their options early on and most commercial loss adjusters are capable of doing that. I've settled hundreds of these losses without an accountant or an attorney involved.
If everyone involved in the settlement process plays their part fairly the involvement of external resources is rarely needed. I do encourage all insureds to familiarize themselves with the policy requirements and suggest that agents and brokers become more proactive in this regard.It's education that's lacking all around.
Chip,
In my experience the term "normal operations" as referred to above: "the insured's business income or extra expense loss will be calculated based on the amount of loss that would have been suffered if the insured had resumed normal operations as soon as possible" is an area where disagreement between the insurer and policyholder frequently arises.
What is "normal operations"? Is it when post-loss sales have reached pre-loss level amounts?; or is it when the insured's production capacity is back its pre-loss level?; or is it when the physical damage that triggered the Business Income loss has been replaced or repaired to its pre-loss condition?
As the period of restoration is the "driver" of the value of the Business Income loss the proper determination of the the "period of restoration" is critical.
In regards to the insurance veteran's comments:
Most insureds enter into business to sell a product or service and hopefully make a profit. Furthermore, most insureds, unless it is larger sophisticated operation, who have dedicated risk management and accounting departments, have little knowledge or interest in accounting issues, insurance coverage and their relationship.
This may explain why requested books and records are not presented in a timely manner to the insurer's representative and why the insured should engage an insurance and accounting professional,as soon as possible after the loss.
Based on the insurance veteran's assertions, he/she must be a very good adjuster. However, as to the comment that most commercial adjusters are capable of explaining the insured's options in a commercial loss situation, I have found that many adjusters are not comfortable with accounting issues when it comes to the valaution of a business income loss or other losses where accounting issues are involved. The use of external professional advice, especially if the insured's business operations and or facts and circumstance surrounding the loss are complex in nature is essential.
Finally, in regards to the comment:
"if everyone involved in the settlement process plays their part fairly the involvement of external resources is rarely needed. I do encourage all insureds to familiarize themselves with the policy requirements and suggest that agents and brokers become more proactive in this regard.It's education that's lacking all around."
All I can say is "Kumbayah!"
Veteran and Bruce,
If I had not added the last three paragraphs, I would probably never had this exchange between you.
Insurance Vet raises a great point regarding adjuster training, experience, and supervision. It has been raised in literature of insurance consultants as a major issue that has to be addressed by claims officers.
My experience is that most adjusters send a form letter asking for all kinds of accounting documents about a month after a loss. That is not promptly adjusting the business interruption and extra expense loss. Most independent adjusters lack any financial authority to approve extra expenses--more delay and indecision which threatens the survival of a business or hurts its performance after the period of restoration is over.
Thanks to both of you for your views. They are important.