Managing the “What-if” Scenario of a Business Interruption Claim

Have you ever stopped to consider what would happen if your business was suddenly interrupted to the point that you were forced to shut down your operations for days, weeks, months, or even longer?

Hopefully the answer is yes.

Causes of business interruption (BI) can range from something as simple as a power outage from a winter storm, to a complex cyber-attack, to something as catastrophic as a hurricane. When one of these ‘what-if’ scenarios becomes a real-life scenario, your mind will eventually, if not quickly, turn to one of cost. What is this interruption going to cost in terms of lost revenue, lost productivity, lost market share, lost opportunities, etc.?

A recent FinancialExecutives.org examination of 10-K regulatory filings from nearly 100 major publicly traded companies that suffered property damage and business disruption from Hurricanes Harvey, Irma or Maria found the following eye-opening examples of BI losses:

• A large power company in the southeastern United States reported $333 million in storm-related damage from Hurricanes Irma and Maria, as well as other storms.
• A large bank holding company reported $53 million in hurricane-related losses during the third quarter of 2017, primarily affecting its retail automotive loan portfolio.
• A Fortune 500 healthcare company reported a $32 million third-quarter 2017 charge related to the impact of Hurricane Maria in Puerto Rico, and a negative impact on fourth-quarter sales of approximately $70 million.
• A large global pharmaceutical company reported $43.4 million in costs associated with the temporary shutdown of its Puerto Rico-based facilities following Hurricane Maria.
• A major multinational information technology company reported $93 million in disaster charges as a result of Hurricane Harvey.
• A large U.S. department store chain reported $16 million in losses related to the costs of property damage from Hurricanes Harvey, Irma and Maria.
• A major American conglomerate headquartered in New York cited net catastrophe losses of $256 million from the three hurricanes and California wildfires.

Source: https://www.financialexecutives.org/FEI-Daily/February-2019/Can-You-Master-The-Disaster.aspx

What would a business interruption cost you?

The work of valuing a real or potential BI loss is typically performed by an experienced financial forensics professional. Forensic accountants are called into action by insurance companies and businesses alike to verify and validate the true cost of business interruption loss in order to ensure an insurance claim is processed quickly and accurately.

Before such an event happens, though, you should be thinking about what an interruption could cost and how you might be able to mitigate those costs and the associated risks by having a proactive plan in place.

Kaye Shelton, a senior vice president on the Lowers Forensics International team, recently wrote about some actions that could be used to mitigate what a BI might cost you. Here are some things to consider:

• Preparing ahead of potential interruptions
• Having a loss prevention plan in place
• Setting up a temporary location
• Using other owned facilities to help reduce lost sales
• Using a competitor to produce your product at an incremental cost until you can reopen
• Decreasing the actual downtime caused by the event
• Using your own employees to get the business back up and running, versus using outside assistance

What happens when you experience a loss?

In the event of a loss, you and/or your insurer may decide to call for the help of a forensic accountant to evaluate and substantiate the losses a business suffers as a result of an interruption.

Understanding that BI is a complex issue, you should be prepared to answer questions such as:

• Were you able to mitigate potential lost sales at other locations?
• Were incremental costs incurred to mitigate potential lost sales at other owned locations, or were competitors utilized?
• Were contracts canceled as a result of the event?
• Is the business seasonal?
• Are there any outside factors that may be affecting the potential lost sales that aren’t related to the loss event?
• Did the down time exceed the waiting period for your insurance policy?
• How long do you expect to be down, fully or partially?

Proactive mitigation is key.

There are some simple things you can do to be prepared for a potential business interruption loss. Know your exposure amount and account for any changes in exposure as your situation changes; back up your financial information regularly; understand which of your risks are covered by insurance and which you’ll need to prepare for separately; and know who to contact in the event of a loss.

While no one wants to think it will happen to their business, the ‘what-if’ scenario of a business interruption loss is something every business should plan for.