Business owners in our region have proven to be resilient over the years, especially when disaster strikes or other challenging circumstances arise.  Some business owners obtain business income insurance coverage to protect against temporary or even permanent interruptions in their operations due to unforeseen events such as natural disasters, floods, fires, etc.

Business income coverage serves to indemnify the insured for its net losses (plus continuing operating expenses) during periods of interruption resulting from a covered loss. In some instances, the insured may also be covered for additional expenses attributable to the loss incident.  Said another way, a claim for business income loss is an attempt by the insurance company to put the business in the same position it would have been in but-for the disaster.  If applicable coverage exists, the insurance company is to step in to replace the profits that would have been earned during the period the business was interrupted.  However, a disagreement often ensues between the insurance company and the insured business over how the lost profit figure is calculated.

Additionally, insurance companies often seek to deny claims or identify loopholes to limit their financial responsibility for payment even if applicable coverage exists. Since the appeals process is somewhat daunting and time-consuming, many business owners give up and accept the insurance payment offered as full compensation for their loss.  Others retain legal counsel to interact with the insurance company on their behalf to fast-track the claims process and obtain a more favorable settlement under the policy.

In today’s uncertain economic environment which has undoubtedly been exacerbated by the novel coronavirus (COVID-19) pandemic, business owners should review their insurance policies to assess whether such business income loss coverage is available to them in light of the current government mandated business closures and related impositions on non-essential operations in response to the COVID-19 outbreak.

Accountants are accustomed to reading insurance contracts, understanding the definitions in the contract and applying them to the facts and circumstances at issue.  However, it’s important to note that accountants will not typically provide coverage interpretation because that is often the responsibility of legal counsel or the insurance adjuster.

If a business income loss is suffered, Mercadien’s professionals can work with impacted business owners to evaluate and quantify their business income loss by:

• Inspecting and assessing the operational and financial records of the business;
• Interviewing key members of leadership and management teams, vendors and customers;
• Compiling and analyzing industry data to evaluate the specific incident’s impact on profits;
• Performing a comparative analysis of budgeted to actual performance of the business before, during and after the loss period;
• Evaluating certain unrelated events and economic conditions that may have impacted actual sales during the loss period;
• Calculating estimated economic damages attributable to the loss event; and
• Testifying to analytical procedures, observations and conclusions reached, as required.

The services above can serve to expedite the preparation of an insurance claim for the purpose of indemnifying the policyholder for its business income loss under applicable insurance policies.

Mercadien‘s experts often work closely with business owners to identify and compile the relevant accounting and business records required to support the business interruption claim submitted to the carrier for payment.  Our accountants apply general knowledge of insurance coverages to identify and segregate applicable revenues and expenses to coincide with available coverages to facilitate the preparation of the claim and weigh-in on technical accounting and other business matters beyond the understanding of legal counsel or the adjuster.

A business income loss is typically calculated using two separate methods: (1) net income plus continuing expenses; or (2) gross earnings less non-continuing expenses.  After proper coverage is confirmed, the loss period is determined.  The documents required for further analysis often include the following:

1. Income tax returns (federal and state);
2. Income statements, balance sheets and cash flow statements (year over year);
3. Bank statements and underlying support;
4. Budget to actual variance reports;
5. Detailed general ledger reports;
6. Payroll registers;
7. Sales tax returns; and
8. Leases and amendments (office and equipment).

With respect to sales, projections as to what the sales should have been during the loss period but-for the loss incident are required.  Expenses/costs should be segregated into general categories such as fixed, variable, and mixed costs, which are a combination of fixed and variable costs. Fixed costs are considered continuing expenses in the loss calculation and usually include: (1) rent; (2) insurance; (3) property taxes; (4) interest expense; and (5) other contractual obligations. Variable costs are considered non-continuing expenses such as bad debt, sales discounts, merchant credit card fees, shipping and freight, raw materials, ordinary payroll expense and supplies. An example of a mixed cost that might have both a fixed and variable component is one where there is a base monthly charge with additional charges based on usage.

Once the loss period is established and revenue and expense trends are analyzed, the business income loss calculation can be performed.  Simply stated, the difference between the expected revenue and expenses and the actual revenue earned and expenses incurred by the insured company during the loss period, results in the business income loss.

As it relates to business interruptions, Mercadien’s team serves as a resource of technical knowledge in accounting related matters that an adjuster or legal counsel may find useful in their efforts to pursue an insured’s covered loss under the terms of an applicable policy.

In the meantime, each business owner should implement proactive measures to evaluate the effects that COVID-19 had and continues to have on their business while trying to stay abreast of the ever-evolving issues and impacts resulting therefrom.

Following these steps on an on-going basis should help business owners estimate economic losses and improve chances of potential recovery under these challenging and unpredictable circumstances:

• Evaluate overall business operations to identify potential areas of impact;
• Track resources expended (time and money) addressing and managing COVID-19 related issues;
• Maintain detailed records of direct costs expended to address any affected business processes;
• Proactively segregate extraordinary or potentially claim-related costs from normal operating expenses;
• Compile customer and vendor correspondence regarding cancelled orders and sales;
• Retain pre-COVID-19 business projections, forecasts, budgets, meeting notes and other business records that detail expected operations in the ordinary course of business;
• Retain support for any executive orders issued by local, state or federal agencies limiting access to facilities or imposing restrictions on other business-related processes and procedures;
• Work with legal counsel to review all insurance coverages to assess whether there are any potential business impacts not yet considered, but for which coverage is provided under the terms of your policies.

Like the other challenges we have faced and continue to face as business owners, this too shall pass. Retaining qualified independent professionals to handle your business interruption claim allows business owners to focus on running their businesses and maximizing their potential for recovery.

When it comes to tackling income loss from business interruption issues, consider enlisting the help of Mercadien’s qualified Forensic Accounting & Litigation Support professionals.

If you have any questions or would like further information, please contact me at 609-689-2319 or fpina@mercadien.com.

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice, and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.