It is not uncommon for clients to provide initial estimates of their losses when filing a business interruption claim. They often state, "I've lost a million dollars in revenue" or "We've had canceled sales of $300,000." However, these initial estimates are frequently inaccurate because the insured party may need a proper understanding of their insurance policy coverage. One of the most common misconceptions about business interruption insurance is that it entitles policyholders to recover their lost sales or revenues entirely. In reality, the coverage typically allows for the recovery of an amount that more closely resembles the business's cash flow.
Analyzing business interruption claims requires a comprehensive assessment that goes beyond calculating lost revenue. The primary goal of business interruption insurance coverage is to restore the business to the same financial position it would have been in "but for" the loss, without making it better or worse off.
While multiple methods exist to analyze and determine a business's non-continuing expenses during an interruption period, a quick estimation can be made by reviewing its gross profit rate. The insured party should be able to recover their actual gross profit, which encompasses all additional operating expenses incurred during the interruption period. Any remaining amount as net profit or loss would also be accounted for in the overall claim. This aligns with the standard definition of business income, which includes the net profit or loss plus the continuing expenses necessary for the business's operations
Business Interruption Coverage: Three Common Misconceptions
Three of the most common misconceptions associated with business interruption coverage that policyholders should be aware of include:
- Full Recovery of Lost Sales or Revenue: One of the most prevalent misconceptions is that business interruption coverage will fully reimburse policyholders for their lost sales or revenue. In reality, the coverage is designed to restore the business to its financial position as if the loss had not occurred, considering factors such as saved expenses and the business's actual cash flow. Policyholders should understand that the coverage is intended to mitigate the financial impact of the interruption rather than providing a complete replacement for all lost income.
- Immediate Coverage Activation: Another misconception is that business interruption coverage kicks in immediately after a disruption. In most cases, there is a waiting period, known as the "deductible" or "waiting period," during which the policy does not provide coverage. Policyholders should carefully review their insurance policies to understand the specific waiting period applicable to their coverage. It is essential to have a contingency plan in place to manage the financial implications of the waiting period until the coverage becomes effective.
- Coverage for All Types of Losses: Policyholders may mistakenly assume that business interruption coverage will compensate for all types of losses, including those resulting from natural disasters, pandemics, or other unforeseen events. However, coverage can vary significantly depending on the policy terms and conditions. Certain events, such as pandemics, may not be explicitly covered, or coverage may be subject to specific exclusions or limitations. It is crucial for policyholders to carefully review their policy language and discuss potential coverage gaps with their insurance provider to ensure they have appropriate protection for various types of business interruptions.
Policyholders can make more informed decisions regarding their insurance coverage by understanding these common misconceptions. It is essential to review insurance policies thoroughly, seek clarification from insurance professionals, and consider additional coverage options or endorsements to address specific risks that a standard policy may not adequately cover. Being proactive in understanding the scope and limitations of business interruption coverage can help businesses better prepare for unexpected disruptions and navigate the claims process more effectively.
If you have questions or concerns about your business, contact Imperium to speak with one of our business interruption experts.