What Businesses can do to Prepare for Hurricane Season 2018 and Understanding their Business Interruption Coverage

By Robert Glasser, Managing Director, Berkeley Research Group LLC

Robert Glasser, Managing Director, Berkeley Research Group LLC

With hurricane season beginning on June 1st, it is time for businesses to prepare for the devastating damages that can result from these natural disasters. Tropical storm Alberto has already inflicted major damage along the Gulf coast, making landfall in the Florida Panhandle on May 28th. Hurricane scientists at Colorado State University are currently predicting a slightly above average Atlantic hurricane season. The Climate Prediction Center classifies hurricane season above normal meaning between 12 and 28 tropical storms and between 7 and 15 hurricanes. If the 2018 activity reaches the upper end of predicted ranges, this year will be a difficult year but not as devastating as 2017. As hurricanes become an increasing threat, early preparation has never been a higher priority.

Most financial and risk managers are comfortable understanding and purchasing their property and liability insurance needs, and limits to protect their companies from a loss due to an insured peril. However, I have found time after time that their comfort level drops dramatically when it comes to business interruption coverage and limits. This discomfort and unsurety surrounding business interruption coverage, extensions of coverage and respective limits, consistently results in many middle market organizations finding themselves underinsured and short of cash when faced with a major loss.

"Calculating the appropriate business interruption values will help you select the proper coverage and respective limits and enable you to better manage, and more importantly, minimize your financial risk"

When you meet with your broker to review your insurance policy, we recommend focusing on your reported or insured values for your business interruption coverage and the numerous extension of coverages offered based on your organization’s specific operations and needs. Calculating the appropriate business interruption values will help you select the proper coverage and respective limits and enable you to better manage, and more importantly, minimize your financial risk.

Unexpected occurrences can happen to any business, and when a company is directly or indirectly affected by an outside event, it may not be fully prepared. Whether the outside event is a hurricane, flood, earthquake, or fire, the disaster can be catastrophic. Even when there is advanced warning for an event, such as a hurricane, prudent companies prepare for the unexpected, while also considering the safety of employees and customers. A catastrophic event can shut a business down for an extended period of time, dramatically affecting a company’s ability to generate future profits and pay employee wages.

Action Steps to Respond to Disasters

There are common action steps that must be taken by businesses of all types in order to respond to disasters:

1. The most important step for any business is to protect their employees’ safety. Some service businesses, such as hotels or restaurants, must also consider the safety of guests. Protecting employees and guests and knowing how to evacuate them successfully is essential.

2. Losses related to physical property can be mitigated by boarding up windows, knowing how to shutdown damaged utilities, and/or moving inventory and stock to a safer location.

3. Preserving financial records that are required for tax purposes, operations and insurance purposes are also critical. Historical records help a business demonstrate lost profits during a period that it is completely or partially shut down.

4. A business must then take steps to put into action the pre-planned recovery team to assist with safety and property preservation.

5. If the damage is covered by the insurance policy, call the insurance broker. The broker will put the insurance company on notice, which will trigger the assignment of an adjuster. The adjuster should try to get to the physical location as quickly as possible and assess the extent of the damage to the property. A first-hand look by the adjuster is always better than taking photographs and conducting remote interviews. When the adjuster is physically on site, it may speed up the recovery process, and can facilitate obtaining an advance quicker and possibly result in a timelier resolution of the claim.

Property Claims after a Disaster

The property loss aspect of a disaster is often most likely where a company will incur an immediate outflow of cash. The restoration process for a impacted facility requires immediate attention, whether it is removing flooded property, or drying out a building to avoid mold issues. Having an insurance company’s adjuster assess damage in the immediate days following a loss can help a business obtain estimates from restoration companies more quickly to begin remediation or restoration work. An insurance company can also help to fund short-term cash outflows. Depending on the length of time a business is completely or partially shut down, an adjuster for the insurance company may consider providing a business an interim cash advance based upon projected lost profits covered by the business interruption section of the policy.

A business interruption claim for lost profits takes a fairly lengthy time to prepare and settle because lost profits cannot be determined until actual profits or losses during a period of interruption are known and quantified. Insureds can benefit from having an experienced forensic accountant included with their team of professionals during a loss to start calculating pro forma revenues as soon as possible. Pro forma revenues are the estimated/projected revenues the company would have earned “but for” the loss. The forensic accountant will then take the pro forma revenue and subtract the actual revenue recorded by the company during the period of interruption to derive the “lost revenue”. Once the lost revenue is calculated, additional calculations are prepared to ultimately determine the estimated lost profits, which will be the amount of the business interruption claim submitted to the insurance company. This process, however, can be one of the most challenging and complex coverage areas for insureds. In order to recover, it has to be made clear during the claims process that coverage is for lost profits, not lost sales or revenues; insurance covers a loss to the bottom line, not the top line.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

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