Business income claims are not very emotional or passionate. Jurors will not get to weigh the credibility of wild and intriguing witnesses or examine the conclusions of a forensic medical examiner who will explain how a person died. These cases are dry and forensic accountants can only be so entertaining. Notwithstanding the dull topic, the role of a forensic accountant in a business income claim is very similar to the role of the medical examiner in a murder case: a business is dead or seriously injured and the jury needs to know the cause. It is always important to rely on experienced forensic accountants to assist the insured in this dry process.

J&K Body Shop, Inc. v. Zurich American Insurance, et al., Civ-11-0077-HE (W.D. Oklahoma, 2011), illustrates the importance of submitting a well-documented business income claim.

The loss in question was a burglary where the perpetrators vandalized the insured’s office and stole several items. The insured reopened for business shortly after the burglary. The insured, however, spent three or four days seeking bids to have the office repainted. Repainting took most of a week, and it took several days to install carpet in the office, several hours to compile the list of damaged and stolen items, 16 and 24 hours contacting, or trying to contact, the insurance adjuster, and at least three days shopping to replace the computer and other electronic equipment.

The carrier adjusted the loss and paid $2,871.94 for damage to the building, $2,733.20 to repair and replace the business property that was damaged or stolen inside the office. Six months after the loss and after a series of carrier delays, the carrier offered $2,231 for the business income claim. The insured did not dispute the adjustment of the property claim, but it disagreed with the adjustment of the business income loss. After the insured objected, the carrier doubled its offer to $4,462, but the insured refused and filed a suit. The carrier filed a motion for summary judgment, arguing that $4,462 was more than enough to meet its contractual obligation under the policy.

The insurance policy contained a business recovery expense endorsement which obligated the carrier to pay “the extra expenses and reduction of business income” as a result of a covered loss. The policy stated that the carrier would pay those expenses “for as long as it reasonably takes to restore the damaged or destroyed building or contents, and to resume operations with the same quality of service which existed immediately before [the burglary], regardless of the expiration date of this policy.”

The only evidence relating to the adequacy of the lost business income was a letter from the business’ accountant describing a year-to-year reduction in gross income figures for the indicated six month period. That letter stated that the insured’s gross was $121,360.79 less than its gross income during the same six month period the year prior to the loss. The letter, however, made no effort to address the insured’s net income during the period of restoration, and failed to rebut or contradict the carrier’s contention that it had adequately adjusted the business income claim.

Given the lack of evidence presented by the insured, the court ruled in favor of the carrier and stated:

The letter offers no support for plaintiffs’ assertion that the reduction during this six month period was attributable to the burglary. Plaintiffs’ submissions are insufficient to show a justiciable question as to the contract claim. The $2,231 originally offered by Universal was based on J&K’s total sales for May, 2009—the month of the burglary. See Def. Fact 16. It calculated J&K’s average daily sales by assuming that all its May sales were generated before the burglary and then used that average to calculate estimated lost income for the remaining eleven days of the month.

Because J&K was open for business and in fact had sales in May after the burglary, that calculation plainly overstated the daily loss to J&K. Further, the calculation was based on gross profit (i.e. gross sales less cost of goods sold) rather than net profit, the standard under the policy provision, and therefore overstated the loss on that basis. For those reasons, defendant reduced the calculation by half to reach the $2,231 figure. Plaintiff offers no evidence or argument which undercuts defendant calculation of the daily loss or the loss figure based on that. Moreover, defendant’s doubling of the amount to $4,432 eliminates any conceivable question as to accuracy of the loss calculation unless some basis is shown for concluding J&K was entitled to be paid for more than the liberally calculated losses estimated for roughly two weeks of operation.

Without more details about the claim or the policyholder attorney’s decision to submit a three (3) page response that relied solely on a letter from an accountant, I cannot disagree with the outcome in this case.

In a previous blog entry – The Speculative Card – Understanding Business Interruption Claims, Part 68, I discussed the fine line that practitioners must walk to avoid this type of situation.

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.

It is always prudent to consider retaining forensic accountants to help a business review its financial statements and prepare reports in support of its claim, especially if the claim is on the way to litigation.