By Chris Mortifoglio, SVP and Director of Forensic Accounting, Procor Solutions + Consulting. Connect with Chris on LinkedIn>
Let’s face it: Business Interruption is a confusing topic for most insurance industry people. Brokers and policyholders alike often struggle with the concept. When it comes to figuring out how much Business Interruption insurance should be purchased, confusion usually is abound. Here are five reasons why your clients need a Business Interruption Valuation right now:
1. IGNORANCE IS NOT BLISS
Many businesses do not have a great sense of what coverage is provided by Business Interruption insurance or how a Business Interruption loss is calculated. It is often believed that this insurance will reimburse any revenue a business would lose in the event of a loss such as a fire or a flood. This is not the case - often most policies will provide coverage for any lost net profits and the continuing, operating expenses of the business. A BI Valuation will bring this coverage and the terms associated with it to the forefront of a policyholder’s mind, allowing them to view how the insurance coverage would respond in the event of a covered loss.
2. PROPERTY ISN’T THE ONLY COVERAGE THAT MATTERS
Yes, it is very important to make sure that the appropriate limits and coverage are purchased to rebuild and repair any physical damages. However, just as important, and maybe more critical in the event of an extended period of shutdown, is Business Interruption coverage. This coverage can assist businesses with cash flow when they need it most. Performing a BI Valuation prior to a catastrophe can help to alleviate any uncertainty surrounding the size of a potential loss. This in turn can help the adjuster set a more accurate loss reserve and can help facilitate the flow of funds early on during a loss period, allowing the business to stay afloat.
3. THOSE OLD BI WORKSHEETS DO NOT WORK
BI Worksheets have been the traditional method for estimating the amount of Business Interruption insurance a business should purchase. This typically consists of an outdated spreadsheet, created a long time ago, as a “one-size-fits-all” solution without making any distinction for the business size or industry, being sent to some employee of a company who may or may not understand how to use it and the purpose of the worksheet. Pitfalls of these worksheets range from formula errors to the wrong financial information utilized. The end result is always the same - BI Worksheets provide little to no certainty as to what the true Business Interruption exposure of a business might be. A customized BI Valuation will provide your clients an analysis of their business, removing the risks associated with this traditional method of calculation.
4. YOUR CLIENTS COULD BE PAYING TOO MUCH NOW
It is critical that the business have a proper understanding of what their Business Interruption exposure might be in a worst-case scenario. In order to do this, the business’ financials need to be analyzed through the lens of the insurance policy. A simple “Lost Revenues” approach to quantifying Business Interruption exposure will result in an inflated BI value. This in turn could lead to a policyholder purchasing an excessive amount of Business Interruption coverage and paying premium without any benefit. A BI Valuation will help provide greater certainty around the actual potential exposure.
5. YOUR CLIENTS COULD PAY (MUCH) MORE LATER
Conversely, if a policyholder purchases too little Business Interruption coverage, they may find their business in dire straits when they were relying on the insurance company. The insurance will pay no more than the limit of coverage purchased. If for example a client has purchased $2MM of BI insurance, but has a loss of $5MM, the client will incur $3MM of uninsured losses. Furthermore, certain policies have co-insurance provisions that penalize the policyholder if they do not maintain adequate limits. This could very likely be the death blow to any business. Business Interruption coverage only works if the appropriate levels of coverage are purchased. A BI Valuation will greatly reduce the risk of your client being underinsured.