The Basics of Business Interruption Claims
Why You Need a Data-Driven Approach or Lose a Claim
Author: Tim McPoland
A business interruption claim can occur when physical damage or unforeseen events impact a company's bottom-line. In most cases, substantial proof linking the damage or interruption event to specific revenue and sales must be presented by the business. Many companies lose business interruption claims through incomplete evidence because it is difficult to prove something that did not occur.
This is where forensic accounting comes in. Forensic accounting experts use data trends from the business, logical assumptions regarding the business processes and accounting principles to construct proof for sales that did not occur. In order to do this, the expert works with in-house staff to develop a data-driven approach to business interruption claims. Basically, the work of developing a solid claim breaks down into the following procedure.
- Identify the damage.
- Calculate production lost to the damage.
- Use sales trends, data regarding distribution channels and order data to prove the company had the capacity to move items that would have been produced.
- Calculate loss of revenue on those items.
- Document company expenses associated with repairs, work-arounds, or expedited processing to meet orders that would otherwise have been met through standard business processes if the interruption event had not occurred.
The claim may include monetary compensation for lost revenue as well as reimbursement for abnormal business expenses and repairs. Not all business interruption policies cover physical damage or reimbursement for expenses, however. In addition to a forensic accounting specialist, companies should also have legal counsel who will interpret the coverage of any policy.
Comprehensive business interruption claims require a team approach. Legal counsel provides advice on policy issues and ensures a strong appearance in court, if necessary. A forensic accounting expert helps to document the strongest possible claim and can testify in court if needed. The business must also put forth in-house subject matter experts that can provide both the legal counsel and outside accounting firm with industry-specific knowledge regarding processes, sales and trending. Without all of these components, the business risks an incomplete claim that does not satisfy burden of proof and will not hold up in court.
For any questions on business interruption claims, contact our experts here or give us a call at 716.847.2651.
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