It is often said that the purpose of business interruption coverage is to do for the insured’s company what the business would have continued to do had no loss occurred. But Mike Hoffman, assistant vice president at Aon Risk Services Central Inc., says it is equally important to understand what the coverage is not intended to do.
“A business interruption contract is not a cure-all for an ailing business or industry,” says Hoffman.
Smart Business spoke with Hoffman about how business interruption coverage can help your business navigate a crisis.
How can a company navigate a business interruption loss?
There are four areas in a business interruption situation that must be addressed to effectively evaluate the exposure on any given loss. These are: 1) determination of the period of suspension; 2) the concept, definition and understanding of the term ‘actual loss sustained’; 3) the determination of the company’s projected business for the period of suspension; and 4) the establishment of those expenses that do not necessarily continue during a total or partial suspension of operations.
The human element should not be overlooked amid the more technical aspects of the determination of a business interruption loss. A major contributing factor to an improper and unsatisfactory loss adjustment is the failure by the parties involved to communicate effectively. It is important to open the lines of communication immediately following a loss to provide a quick and reasonable understanding of what is needed by all parties.
What is due diligence and dispatch?
The first issue to overcome in the loss analysis is the proper determination of the period of interruption. Involved parties should agree upon what is needed to complete repairs to damaged or destroyed buildings and equipment, and then arrange for the timely replacement of necessary raw materials, work in process, or other supplies essential to the resumption of operations.
Often, a business will want to make improvements during the repair process. The effects of replacing with dissimilar materials or type of construction or the intent to rebuild on a grander scale should be addressed as soon as possible after the plans are known. When plans are known early in the settlement process, an agreement can be reached between the business and insurance company as to what the time element loss would be without these changes, so future disputes over delays arising from the changes can be avoided.
