As we reach peak hurricane season businesses should not only be prepared to protect the physical work facilities, but business owners should also have their financial house in order. Anita Zimmer, CPA, ABV, CFF explains how businesses should prepare now for that potential business interruption claim.
In the event your business incurs damage and is unable to fully operate, you can file a business interruption (BI) insurance claim. Read this article from the National Association of Insurance Commissioners for general information on business interruption insurance policies.
For recovery of a financial loss, your insurance company will prepare an analysis comparing the lost revenues and expenses before and after the damage event and will require financial documentation from the you the insured. Work with your IT support to ensure that the accounting software and scanned supporting documents are properly backed up. Having the following documents electronically secured where they can easily be accessed will assist in processing your claim faster. Additional records may be needed depending on the type of business. Access to these documents will help you prepare now for that potential business interruption claim.
- Copy of the insurance policy and declarations page
- Monthly and annual profit and loss statements, for typically 2 years
- Historical sales data by month
- Prior two years tax returns
- Monthly payroll data by person and/or department
- Inventory reports and manufacturing cost statements, if applicable
In the event of a loss:
Take pictures of all damaged goods and if possible, keep a detailed list of the items disposed, both internal use items such as desks and office supplies, and inventory usually for sale.
After initial clean up, you may be able to re-open partially or set up a temporary facility to continue operations. Keep track of dates of stages of the recovery status, and document with pictures, and emails or phone calls with the adjuster. There are sometimes disputes with insurance about the timeline of recovery which may lead to a shorter compensable BI period.
In addition to lost net income, the BI insurance pays continuing normal operating expenses incurred, including payroll. Continuing is a key point here. If you have the funds, pay regular payroll and other operating expenses. If employees work overtime to help with cleanup and repairs, that will be paid by insurance also as an extra expense; therefore, document those overtime hours with a separate payroll code. If you do not pay employees, then the payroll expense is not “continuing” and may be difficult to get paid as part of the BI claim, even if you plan to pay employees when you receive the BI funds. Request an advance from the insurance company to assist with your cash flow to allow you to pay bills and payroll. Your insurance company will still need some basic documents to estimate the amount of the advance. Having your accounting records in order will expedite handling of the claim and additional advances while the claim is still in process.
Record normal continuing operating expenses to their usual general ledger accounts. But set up a separate general ledger account code to track expenses related to hurricane repairs and other related expenses. Keep a copy of bills and receipts for those expenses either in a virtual or physical file folder for easy access. You will need to provide these to the insurance company. Coverage for “extra expenses” is included in most business insurance policies. These are non-ordinary expenses incurred during the period of restoration to enable the business to continue operations and reduce its losses. These include supplies for immediate repairs, generator, temporary facility rent, buying or leasing equipment or furniture for the temporary site, security, among others.
If you do experience a business interruption, many policies include coverage for accounting services to assist you with your claim. The team at Wegmann Dazet has vast experience to assist you in:
- Analyzing and reviewing your historical operating results
- Comparing your company’s operating results to industry data and determining the event’s effect on earnings
- Projecting your performance had the event not occurred and compare to actual performance
- Calculating lost net income and continuing expenses attributable to the event
- Tracking any extra expenses incurred which are solely attributable to the event
- Working directly with the insurance adjuster and his accountant reviewing the claim
Hopefully we will make it through the next couple months without any storm threats. But business interruptions can occur unexpectedly all year round due to fire, commercial building collapses, oil spills, among others. Prepare now for that potential busin!
Contact us to learn more.
Anita M. Zimmer, CPA, ABV, CFF
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