(Note: This Guest Blog is by Michelle Claverol, an attorney with Merlin Law Group in the Coral Gables, Florida, office. This is the part of a series she is writing on business interruption claims).

Accountants usually define “overhead” as operation costs that are incidental to the production process. Generally, there are three categories of “overhead:”

(1) those directly associated with plant operations such as power, lease costs and insurance;

(2) general selling and administrative costs attendant to the production, sales and delivery of a product; and

(3) costs incurred for the benefit of multiple operating units, including debt service executive management compensation, investor relations costs and corporate advertising (usually larger corporations with individual units or operating entities). 

After a calamity or insured event, category one (1) and two (2) above are typically not the subject of much quandary, insofar as overhead is considered a necessary cost during the Period of Restoration.

Category three (3), however, could give some insurance claims professionals an ulcer, especially in non-manufacturing-business claims, where the overhead cannot be easily tied to a specific production activity. One should expect and prepare for hours and hours of meetings and telephone conversations and debates over the accounting method used to allocate overhead expenses of to the individual business units of a larger corporation, if the calamity is sustained at an individual business unit or operating entity.

As a practice pointer, the insured should always be “at the ready” to argue and prove how the sales (or production) of an operating unit contributes to the general corporate overhead of the organization. Once this is established, the issue is not whether the insured is entitled to recover its fixed overhead expenses, but rather how much should be attributed to the unit or operations affected by the loss. If the company’s accounting and allocation methods directly tie overhead costs to the operating units, the calculator should take care of the amount to be written on the check. However, if the overhead calculation included in a business interruption claim deviates from the normal overhead allocations of the corporation for the affected units, the ulcers will start bleeding until the accounting methods are explained and supported. For this I say, thank God for accountants!