Business Interruption Claim

Sirius Solutions is not a CPA firm

HOUSTON · DALLAS · DENVER · LOS ANGELES · NEW YORK · LONDON

Taking the Mystery Out of Business

Interruption Claims

March 12, 2009 The Houston City Club

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2Sirius Solutions is not a CPA firm. March 2009

What is Business Interruption? The Chain Rule – Typical Policy Language• We will pay for the actual business

income loss you incur due to the actual impairment of your operations during the period of restoration not to exceed the applicable Limit of Insurance for Business Income shown in the Declarations.

• This actual impairment of operations must be caused by or result from direct physical loss or damage by a covered period to property, unless otherwise stated.

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Applying the Chain Rule to BI Situations• Direct damage to your manufacturing

line• Key production line machine breaks

• Contingent Business Interruption• Customer or supplier damaged

• Service Interruption• Loss of utilities or

• Consequential• Increase in loss due to suspension, lapse or

cancellation of any license lease or contract

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Understanding the Claim/Adjustment Process

• Read your policy and report the event• Assemble and meet with recovery team• Meet with insurance adjuster and set

reserves• Prepare a preliminary claim estimate• Analyze impact to the business• Prepare initial and supplemental claims• Negotiation and settlement

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Understanding Your Coverage

• Read the policy• Are you covered?• Is there a waiting period or

deductable?• Is there coverage for extended periods

of indemnity?• Do you have claims prep coverage?• What about extra expenses?

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Assemble your Recovery Team

Inside the Company:

• Chief Financial Officer• General Counsel• VP of Operations• VP of Marketing• Risk Manager• Sales Manager• Manufacturing line

supervisors• Maintenance

personnel

• Potential team members may include:

Outside the Company:

• Insurance Broker• Claim Advisor/Preparer• Engineers and

Architects• Construction

Management Advisors• General Contractor• Coverage Counsel• Accident investigators

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Setting the Reserve Estimate

• The insurance company’s best estimate of the cost to settle your claim

• This is cash set aside at the beginning of the adjustment process

• Do your best to ensure it is as accurate as possible

• More difficult to increase as time goes on

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Preparing a Preliminary Claim Estimate• Calculation is based on your income

statement• There are two general forms for

quantifying business interruption losses:• Gross Profits form:

•Gross margin – discontinuing expenses = lost profits

• Net Profits form (also known as European or business income):•Net Profit + continuing expenses = lost

profits

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Before You Analyze Your Operations• Track your Costs

• Set up a separate loss accounting system

• Make an extra photocopy of invoices• Track everything! You can’t include it

if you can’t find it.

• Make sure that your financial statements are not tainted with costs related to property damage or extra expense recovery amounts

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Calculating Your Claim – Big Picture• Three Column Format to calculate

business interruption claims• Expected – Actual = Loss

• Expected is projected or forecasted income statement over the period of indemnity

• Actual income statement over period of indemnity (no loss related costs)

• The Goal is to make you whole• Replace the net profit you would have

earned had no loss occurred

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Simplified Three Column CalculationDescription

SalesCost of SalesGross MarginFreight OutLaborSG&ADepreciationAmortization

Net Profits

Expected$ 1,200,000 (400,000)$ 800,000

45,000250,000300,000

50,000 25,000$ 130,000

Actual$ 400,000 (250,000)$ 150,000

25,000100,000150,000

50,000 25,000$ (200,000)

Loss$ 800,000 (150,000)$ 650,000

20,000150,000150,000

0 0$ 330,000

_=

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Gathering Information for Your Claim• Historical Information

• Assemble 3 to 5 years of monthly financial statements

• Assemble 3 to 5 years of scheduled maintenance records

• Assemble 3 to 5 years of monthly sales and supply agreements and records

• Make a list of business nuances•Seasonality•Cyclicality•Production lead times

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Calculate Expected Results• Analyze 3 to 5 years of historical

operational data by month• Note seasonal and cyclical variations• Note equipment turnarounds and

scheduled maintenance

• Analyze and forecast monthly operational data during the disruption period

• Compare expected to operational data after recovery

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Analyzing Expected Sales• Go to the sales people in your

organization• Document a thorough understanding of

the sales cycle• What information does your sales

department look at when budgeting sales• Analyze meaningful relationships in data

• Backlog to sales• Orders to production out put• Inventory turnover

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Presenting the Claim• The claim should read like a book

• It should “stand on its own”• Summary schedules should

summarize the loss at a high level• Subsequent schedules should provide

greater detail• Property damage should be

separate from business interruption• Include calculations for deductibles

and co-insurance

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Defend the Claim at Settlement

• Compare your model to the adjuster’s model• Note differences or adjustments in

historical information• Note differences in forecast assumptions• Note any missing extra expense items

• Ask for an explanation of the adjuster’s model

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Defend the Claim – The Settlement Meeting• Address differences one at a time

• Try to work through as many differences before the settlement meeting as you can

• Be prepared to document your positions at the meeting with additional information if necessary

• Be as fact based as possible• Logical and rational methods with

good data is very compelling• Thoroughly document all assumptions

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Defend the Claim – The Settlement Meeting• Be willing to modify some

assumptions within reason• This is a process of negotiation, be

open to reasonable arguments from the adjuster

• Analyze the issues in your claim and decide witch are worth fighting

• Settlement meetings should be conducted in a spirit of negotiation

• Always remain professional but firm

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With the End in Mind – Fair Settlement• The goal of the this process is

• Fair settlement amount• Minimize the interruption to your

staff preparing your claim• Continue the business relationship

with your adjuster• Made whole with business

interruption coverage

Sirius Solutions is not a CPA firm

HOUSTON · DALLAS · DENVER · LOS ANGELES · NEW YORK · LONDON

Time for Questions

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Sirius ResourcesDirector, Litigation & Dispute ConsultingAssociate Director, Navigant ConsultingManager, Deloitte LLP

Andrew has over 14 years of experience in dispute consulting, with significant experience in the energy, financial services and healthcare industries. His commercial dispute and internal investigations experiences include expert testimony, quantification of damages and design and execution of complex international investigations. Andrew’s consulting expertise is enhanced by his practical industry experience in both financial and operations roles.

BS Business – Lewis and Clark CollegeMBA, Owen School of Management, Vanderbilt UniversitySeries 7 & 63 Securities [email protected] 713-888-7284

Scott BushnellDirector, Litigation & Dispute ConsultingManager, Ernst & Young, LLP – Fraud Investigation & Dispute ServicesSenior Accountant, Deloitte, LLP – Dispute Advisory Services

Scott‘s primary focus is commercial disputes including financial and economic damages, business interruption and lost profits claims, and quantification of catastrophic event damages. He brings more than 13 years of litigation support and expert testimony experience in claims, litigation, mediation, arbitration, appraisal, and other alternative dispute resolution settings. Furthermore, Scott has assisted in international governmental disputes in Central America and the Middle East.

BBA, Accounting, Cox School of Business – Southern Methodist UniversityCertified Public [email protected] 713-888-7277

Andrew Sall

Business Interruption Claim

Economy & Finance

expected sales

years of monthly sales

claim historical information

sales orders

budgeting sales

sales cycle

sales department

sales people