Community Webinar Business Income Claims in a Bad Economy The class will begin at the top of the hour. There is no sound at this time. This class is being recorded. The recording can be found in the Community at Webinars Archive You can ask questions at anytime, type them into the chat box. Check your chat box for links to upcoming classes. This class is not approved for CE credit. Some things you should know: 1

2 Robb Greenspan President The Greenspan Company/Adjusters International Sponsored By:

 Business Income Claims have always been difficult to understand; prove and settle. No matter how hard we all try to set an appropriate limit and provide the necessary coverages/endorsements, we are always surprised that coverage may not apply OR that we did not have sufficient limit. 3

 This reality has only gotten worse in a bad economy. Do not be caught off guard and help your insurance customer to be pro-active and prepared for the worst. 4

 Understanding the importance of adequate limit setting  What your client must do to PROVE their loss  Preparing for the claim-before it happens  Financial requirements for being paid a business income claim 5

 Loss of Profits before taxes Plus  Necessary Continuing Operating Expenses

 Loss of Gross Profits Less  Non-continuing Expenses

 The insurance company will provide the income the Insured would have had if no loss occurred, less the amount of savings the business has from those expenses that are not necessary to continue operations. 8

 Most Business Owners Property Coverage (BOP) Forms covers business income loss for actual loss sustained up to 12 consecutive months after a direct physical loss.  It typically includes a 30 days extended period of indemnity that kicks in after the damaged properties have been restored.

 Are also widely used that are often written with a dollar limit.  They may contain other provisions that limit the amount the insured may collect on a monthly basis, by including a fraction or percentage figure on the declaration page.  These policies are typically less costly, but severely limit the amount of recovery. 10

 Most Insured's and their brokers just compare the policy limit amount and many times overlook the monthly limitation fraction. 11

 Many policies cover loss of business income and rental value and these can be either separate coverages or combined under one limit together.  Be careful to look at who owns the building (named Insured) and the business name 12

 We look at the expected net income, as defined by the policy, add back the anticipated continuing operating expenses and payroll.  Typically, this gets back to the gross income figure.  For manufacturing concern, payroll (direct labor) and fixed overhead should be added into value if the insured wishes to retain all its labor after a loss. 13

 When looking at the needs when writing the policy, we do need to consider the past one or two years BUT  You must ask the insured what their best guess is for earning income over the upcoming 12 month period! 14

 Typically, a standard loss will take up to 7 months to adjust a claim and receive the Actual Cash Value payment.  From that point forward, it will take somewhere between 6 and 9 months to rebuild on a standard fire loss and 9 to 16 months or more to rebuild on a large loss. 15

 Co-insurance applies the same for Business Interruption or Lost Income as it does for Business Personal Property or on Buildings.  Do we have enough Business Income coverage?  Today’s policies, when written with co- insurance, are written anywhere on a 50% contribution clause to a 100% contribution clause basis.

Revenue less Cost Of Goods Sold  Co-insurance is calculated as a percentage of Gross profit based upon ONE FULL years revenue  So what percentage is best? 17

 100% Co-ins. means you are buying coverage for 100% of the gross profits for a full year.  50% Co-ins. means the insured is covering 50% of the gross profits should it go a full year.  It is still a year long policy. It does not mean "50% should yield half of one year’s coverage." 18

Most policies cover Extra Expense as well as Expediting Expense. The difference is as follows:  Extra Expense; which works off the property portion of the coverage, reimburses the Insured for any out of pocket expenses over and above any normal expenses as a result of the loss. 19

 The policyholder does not have to justify the spending to reduce the loss. 20

 Paid under the Business Income limit and are extraordinary expenses the Insured has expended in order to reduce their loss.  The insured must show they reduced the liability to the insurance company to collect as expediting expenses 21

 Newer policies begin the restoration period 72 hours after the date of loss.  They can be endorsed to start on the on the date of loss through the theoretical time to rebuild.  This assumes due-diligence on both the insurance company in adjusting the loss and the Insured in re-building the loss. 22

 Many policies now include an extended period of indemnity for an additional 30 days. This extended period of indemnity can be written from 30 days up to a full year.  If the policy is written on an Actual Loss Sustained basis with no limitation on time period, then the coverage will last until the property is rebuilt or the dollar limit runs out. 23

 Even though a business is running in the red, there are still continuing expenses to that business that the policy will cover

 The period of indemnity shall be measured as the “theoretical period” or the time it would take in theory to rebuild the property using Due Diligence and Dispatch.  Contingencies should be built into the theoretical period for acts of others as part of the adjustment. 26

 Adjustment time  Building and Safety approval  Costal Commission approval  Design time  Material shortages 27

 In the normal course of adjustment, forensic accountants will look at a two year period prior to the loss in order to determine the projected increase or decrease in business.  These increases or decreases shall be projected into the upcoming loss period to determine reimbursement by the insurance company to the policy holder.

 In the calculation of Business Income value, the carrier will factor in the cost of payroll as part of the insurable amount needed. This can be a significant $ amount depending on the type of business. 29

 For service based business or manufacturing business, it can be 30% – 80% of a normal business operation.  Lower values can be written with an OPE endorsement, assuming that during the suspension period post loss, that policyholder does not keep those employees 30

 Protect financial records - It is most important that a discussion be held with the policyholder before and after the claim over important financial record keeping.  One of the first tasks that a business owner has after a loss occurs is to immediately salvage any financial records they can recover from the damaged property. 31

 Document lost sales  In any sales operation, it is very important that the Insured immediately start documenting all lost sales opportunities.  This includes calls by potential customers, re- orders that cannot be made and other potential lost sales.  A log must be kept to demonstrate the lost income to the insurance company. 32

 Income statements 2 years preceding the loss  Balance sheet“  P&L statements“  Sales journals “  Payroll journals “  List of post loss expenses  Records of lost sales post loss

 Forensic Accountants – The insurance company typically hires forensic accountants to help them determine the business income loss as well as value stock and merchandise on the property end of the claim.  This is for two purposes, co-insurance and to determine loss and value from the carriers point of view. 34

 Forensic accountants not only take on the role of an accountant, but in many cases, they look for issues such as co-insurance, lack of sales and coverage issues, thus trying to “do their job” for the insurance company by reducing the claim paid. 35

 There are differences in knowledge between a tax accountant and a forensic accountant.  Tax accountants are skilled in applying the tax rules of accounting.  Forensic insurance accountants are skilled in the accounting theories that correspond to the coverage provided by the insurance policy and how to reduce claims.  They are also skilled in negotiating claims down. 36

 It is a general rule of thumb that in any negotiations, the decision makers should not be present.  Your policyholder should not be negotiating claims because they are the decision makers.  The insurance companies never have a decision maker in the room. The adjuster will always make his adjustment based on approval from home office. 37

 Using a Public Adjuster who has accountants on staff and is skilled in insurance accounting, business projections and other insurance matters is by far the best approach.  Public Adjusters can ensure your client gets all that they are entitled to under the policy  They can resolve those insurance “problems” that seem to manifest themselves in large claims 38

 General release should never be signed unless you receive something as part of the settlement.  Unless the insurance company agrees to pay gray areas or overpay other areas, or areas in dispute, one should never sign a general release for they are releasing the insurance company from all further claims, whether realized or not, down the road. 39

40 The GREENSPAN COMPANY also handles claims due to;  Water damage  Employee Fidelity  Theft  Windstorm  Earthquake  VM&M Sponsored By:

 Laurie Infantino    Marjorie Segale  

Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state jurisdiction. The instructional materials provided by The Insurance Community Center and its authors is intended as a general guideline and any interpretations provided by The Community do not modify or revise insurance policy language. Information which is copyrighted and proprietary to Insurance Services Office, Inc. (“ISO Material”) is included in this publication. Use of the ISO Material is limited to ISO Participating Insurers and their Authorized Representatives. The Insurance Community Center assumes neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional materials provided. Insight Insurance Consulting Copyright 2012© 42