Magazine article Risk Management

Tips for Settling a Business Interruption Claim

Magazine article Risk Management

Tips for Settling a Business Interruption Claim

Article excerpt


In the wake of a business interruption, settling the resulting insurance claims can be difficult and time-consuming. The potentially confrontational nature of the claim resolution process can make policyholders feel that they are being treated unfairly and can also dilute the trust and positive relationships that characterize a successful partnership. Fortunately, risk managers can take a number of steps (listed in Exhibit 1) to prevent common problems and avoid delays and disappointment in the settlement process.

The first step in preparing a claim is identifying the areas in which you have sustained a loss. To begin, answer the following questions: Did the insured property sustain physical damage? As a result of the physical damage, did the policyholder suspend operations? What is the cost of this suspension? An additional question to consider is whether your company has incurred any 'extra expenses' (as defined by the policy) in an attempt to minimize the suspension of business.

These answers will provide the outline of your claim. However, compared to property damage, business interruption coverage is more ambiguous. With business interruption, you do not have the benefit of seeing the damage, repairing or replacing damaged equipment or inventory, or using sales invoices or repair bills to measure the loss. Business interruption coverage requires determining the amount of 'net income that would have been earned and continuing normal operating expenses incurred.' The words 'would have been' imply a projection of earnings, and a level of uncertainty is inherent in any projection. It is this uncertainty that often leads policyholders and insurers to calculate completely different claim amounts. As a policyholder, it is wise to anticipate this and prepare a persuasive claim that is fully supported by contemporaneous business records.

To gather evidence to support the claim amounts, start by interviewing key managers. Obtain their assistance in identifying important business records, such as budgets and operating forecasts, as well as other documents unique to your organization that will provide additional support.

Be aware that claim preparation is an ongoing process. Accordingly, it is imperative to maintain accurate records during the restoration period. Policyholders often incur additional expenses immediately after a business interruption loss as a result of efforts to mitigate its effects. These efforts may include renting temporary facilities and/or equipment, as well as shipping products from alternative plant locations. Maintaining accurate documentation of the expenses incurred can be especially difficult when normal business methods have been suspended. However, keeping diligent records strengthens the policyholder's position for full reimbursement of the claim and reduces the insurance adjuster's inclination to dispute expenses due to insufficient documentation.

Assemble a Team of Specialists

For many risk managers, a large property loss is the first time a business interruption claim is filed. Consequently, the insured is at a distinct disadvantage in the settlement process, compared to the insurer (for which settling claims is a daily routine). In this instance, the policyholder can help level the playing field by lining up the expertise of claims specialists who will represent and/or defend the claim in the settlement process.

Even if it is not the first claim filed by a policyholder, it still may be wise to call on experts to receive the desired claim settlement. In her article 'Tornadoes? Earthquakes? Bring in the Accountants,' in The Wall Street Journal, March 28, 1997, Elizabeth MacDonald notes that 'Collecting on claims can be complicated.' She further notes that insurers hire their own 'army of bookkeepers' to calculate the loss.

Fortunately for risk managers, many policies contain coverage for claim preparation costs. …

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