Preparing for business interruption claims
While the novel coronavirus has had a catastrophic economic impact on businesses of all sizes, it is not clear that the effects will be covered under business interruption insurance policies because payouts on those policies are often triggered by physical damage. There is widespread confusion over how, and if, the COVID–19 pandemic or the resulting government shutdown orders qualify as “physical damage,” and the issue is already being litigated across the country.
However courts decide the issue in the coming months, there is much that CPAs can do right now to help clients or their own companies prepare for potential claims, even if most policies may not cover this pandemic, said Robert Glasser, CPA/CFF, CGMA, managing director of BRG’s Business Insurance Claims practice and an expert in business interruption accounting.
“CPAs can be critical in helping clients recover losses in business interruption claims,” he said. “Accountants can help create the necessary records and paper trails that businesses and clients will need to process any claims.”
CPAs should also be aware that claims and payouts are informed by the specific language of the claimant’s policies and that the coverage determination is highly dependent on the individual facts and circumstances of the loss and requires a rigorous claim investigation.
Glasser noted that, while every insurance contract and claim are different, he recommends that CPAs consider the following as they help clients build evidence for business interruption claims.
A key first step is to identify and catalogue expenses incurred by the organization as a result of the coronavirus that fall outside of normal business functioning, according to Glasser. These expenses can include facility cleaning, hiring extra security to watch over the business during closure, protective equipment, additional advertising or marketing to announce closure, or any other expenses incurred as a result of the coronavirus.
“It’s any invoice that you get that you can say, ‘But for coronavirus I would not have incurred that expense,'” he said. “Start a file and put that invoice in a file so that if there is an opportunity for a valid claim, you are going to have that.”
Glasser recommends that CPAs create separate files and tracking mechanisms for coronavirus–related expenses to create a clear total for the claim.
Another category of income loss for CPAs to capture and track are canceled or lost orders because of the coronavirus, according to Glasser. For example, for clients in the hospitality industry, that means keeping track of all canceled dinner reservations, or for florists, wedding arrangements that were called off because of the coronavirus. What’s important to note is that the organization would have made a sale were it not for the coronavirus.
“If you had any hard orders on your books before you had to shut down, then keep track of all the canceled orders,” he said. “That includes inquiries about orders that you were not able to take because of the coronavirus.”
As part of the record gathering for lost orders, CPAs should collect the order itself, the original date of the order, and the original date of the cancellation, Glasser said.
Demonstrating the loss of expected revenue is a key component of developing a claim, according to Glasser. CPAs should collect and store as many indications of not only what normal operations were before the crisis, but also what they were expected to be, he said.
“Expected revenues are an important part of a business interruption claim,” said Glasser. “Accountants should work with the client to calculate and preserve preclosure revenue projections.”
Accountants should be recording supply chain disruption, vendor closure, and infrastructure restrictions such as delivery delays that have a significant impact on an organization’s ability to produce and sell products as part of a potential business disruption claim, according to Glasser.
“CPAs should track any customers or suppliers whose businesses have also been disrupted,” he said. “They have a negative impact on your business and how you produce and sell your product.”
It can be challenging to pinpoint how and where someone else’s disruption impacts an organization, but Glasser recommends taking a wide view to increase the likelihood it will be covered.
One thing that may help make the case for physical damage claims is if an employee demonstrated symptoms or had a confirmed case of COVID–19. If it can be demonstrated that an employee’s illness required that an organization’s physical space, such as a shop, factory, or restaurant, be closed, then organizations may argue that there was physical damage to the space.
However, Glasser cautions that this is far from certain and remains untested in court. CPAs should carefully evaluate the implications of maintaining records on affected employees and pay close attention to adhering to federal health privacy and security regulations under the Health Insurance Portability and Accountability Act and to other state and local privacy laws. CPAs should also carefully consider if this raises liability issues under other insurance policies.
Many business disruption and business income loss policies contain “civil authority” provisions, which means that government orders that prevent access to or operation of a business qualify as triggering events. It is not clear that COVID–19 stay–at–home and social–distancing orders qualify under these provisions, and courts are also litigating the civil authority question.
Whatever the courts decide, Glasser recommends collecting all official government closure orders to help bolster a claim under civil authority provisions.
About the author
Drew Adamek is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at Andrew.Adamek@aicpa-cima.com.
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