COVID-19 is just one reason why a hard-working entrepreneur would need to use business interruption insurance. 

More common natural and man-made crises that could require the use of business interruption insurance include fires, earthquakes, tornadoes, hurricanes, and even traffic blockages. 

Less common business interruptions include mold, bacteria, and gas leaks. In one case, a landlord could not rent his property after kicking out a tenant who bubbled meth in the bathtub until he had it remediated!

Note:  Insurance companies are flat denying these claims causing Lawyers to get involved before policy holders can even negotiate the value of the claim.  When lawyers bring these claims in Court, we use professionals such as forensic accountants to point damage.

However, there are specific methods you must use in order to accurately calculate your financial losses and use your business interruption insurance. Let us review them.Table of contents

First: Projecting Business Results But For the Business Loss Trigger

First, we will need to project what the business results would have been if the even triggering the business loss had never occurred. 

Second, we will determine the actual business results during the loss period. 

Finally, we subtract the actual business results from the projected business results to determine the loss value. 

That means we are looking to see if the business is trending upwards, downwards, or staying the same.  

Has the business increased sales over the last three years? Increased net revenue? We want to account for that.  

Is the business seasonal?  For example, retail businesses obtain most of their sales in a small window of time at the end of the year.  We want to take that into account as well. 

Documents Needed:

The building block for a business loss calculation is tax returns or net income statements.  We are looking for three years of these statements to make sure we are making good projections.  Once we have our documents in hand, we can look at the formulas we will use to determine the business loss. 

Business valuators and forensic accountants have two formulas they can use to determine the loss.

Basic Formula # 1: Lost Sales – Expenses Saved As a Result of Not Accruing the Sales (aka “top-down” approach)

One way to calculate loss revenue from a business interruption is to determine the difference in sales and then subtracting the expenses saved as a result of not having the sales. 

In other words, determine projected sales, subtract actual sales, and then subtract expenses saved as a result of not having those sales.

Basic Formula # 2 Net Income + Continuing Expenses + Extra/Additional Expenses = Business Loss (aka “bottom up” approach)

The other way to determine net income loss is to calculate the projected net income first.  Then compare to actual income to determine the net income loss.  Then add in all the expenses occurred by the business.

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In Practice

Consider a restaurant.  Prior to Covid-19, it was humming along. Then the restaurant had to shut down 80% of operations. The restaurant owner streamlined his menu in the short term and canceled a significant portion of food deliveries to the restaurant from his supplier. 

Each meal served at a restaurant has a food “cost” associated with it that reduces total profitability to the restaurant. 

Under the top-down approach, the restaurant calculates what its total sales would have been but for the business loss and then subtracts the expenses saved as a result of not accruing the sales. 

Under the bottom-up approach the restaurant calculates what its net income would have been (revenues minus expenses, interest, and taxes), and then adds back the actual expenses incurred. 

Under the bottom-up approach, the restaurant can add back not just normal expenses but even the new weird ones that might have been caused because of the actual crisis. On the flip side, historical net losses are accounted for in the bottom-up approach.  

The benefit to the top-down approach is the calculation is a bit simpler.  The benefit of the bottoms-up approach is it does not treat losses as though they were in a vacuum.

Consider: The length of loss of coverage

Now that you have an idea on how to calculate your business loss, recognize that insurance policies are written to limit just how much money is paid to you. 

Most policies specifically define the length of time that a business can claim a business loss.  This is often called the period of indemnity.  We have seen these periods as small as 30 days and as large as a year. You will want to check your policy. 

Consider: Policy Limits

Also, recognize that insurers put coverage caps on the amount of coverage the policy offers. We expect most of these claims to be for policy limits. 

PPP Loans and Business Loss

In the Covid-19 world, approximately 10 percent of businesses have received PPP loans.  We understand that insurance companies are going to argue that the PPP money loaned should offset the business loss. 

First, consider that these loans are loans. They are unsecured and there are forgiveness grants built into them. But they are still loans and may need to be paid. Borrowed money is not the same as money earned.  Loans do not show up on income statements, there are on the balance sheet as they will need to be paid back. 

Second, these loans are not going to begin to cover actual losses sustained by the businesses.  We fully expect many businesses to suffer losses that are multiples of their loan amounts. 

Contact a Business Interruption Insurance

Calculating business income loss requires analyzing your taxes or income statements to project what your business would have earned but for the crisis, and then adjusting for actual expenses paid.

Many business owners can estimate these amounts, but in cases where there must be a lawsuit and business interruption insurance attorneys to get the claims paid, expect the help of a forensic account or business evaluator.

However, most business interruption attorneys will front the costs of these experts, and then seek to have the insurance company pay the expert’s costs later.

Contact us today so we can review your insurance policy even if your claim was denied.

Our attorneys will review your policy to determine if the insurance company acted in bad faith and if you are owed money for your business loss.

Call or text us at 813-365-3512.