The devastating economic impacts of the COVID-19 pandemic have put Business Interruption (BI) coverage in the spotlight as companies strive to recover and move forward. However, BI claims can be difficult to quantify because a physical loss isn’t always involved. When a physical loss occurs, the cost of replacing a building, equipment, or materials is a straightforward calculation. But, BI claims can be much more intricate, requiring adjusters to pinpoint the claim’s start date, review past business performance, and examine predicted revenue and expenses to accurately measure a claim settlement. Because it is complicated even in the best-case scenario, policyholders should take a proactive approach that includes completing an accurate BI Worksheet and involving appropriate specialists throughout the claim settlement process.

How Does the BI Worksheet Help Clients Buy the Right Limits at the Right Price?

Companies that wisely choose to purchase Business Interruption coverage may be surprised to learn that they can benefit from adding just one more page to the paperwork. The BI worksheet is usually a 1-page form used to quantify a company’s BI exposure for a 12-month period. It captures the previous year’s income and expenses as well as anticipated revenue and expenses for 12 months into the future.¹ It’s typically used to supplement the statement of values for the insured property and is often completed by the policyholder’s CFO or finance team.² The worksheet specifics can vary by carrier or industry, but it generally takes the company’s revenue and converts it to a gross earnings number (essentially profit + continuing expenses) so that in the event of a BI loss, revenue and costs can be accurately captured.

For many clients, completing a BI worksheet is about as much fun as a root canal or filing taxes, and because it’s not mandatory it’s tempting to skip it or simply throw in a gross sales number. However, the worksheet is essential in accurately quantifying gross earnings and related risks. Completing the BI worksheet helps ensure the purchase of adequate insurance limits, provides a comprehensive understanding of the company’s exposure and shines a light on how specific policy terms and conditions will apply.¹ Unfortunately, if an insured skips the worksheet or fails to complete it correctly, the business may find that it’s underinsured when a loss occurs or that annual premiums are higher than necessary. For those that do complete it, the same steps are usually followed each year to ensure consistency. However, if a mistake is made and the approach is repeated, the error is perpetuated each year. Unfortunately, it’s only when a loss does finally occur and the provided values are more closely examined that the error comes to light.²

What Are Some Common BI Worksheet Mistakes?

The BI worksheet may be a short form, but it can cause big problems if not completed accurately. Plugging in a gross value without considering any other factors is a common error. Remember, an organization’s BI value is always an annual figure, equal to fixed expenses and net annual profit for 12 months. Only once that number is known, can businesses begin to adequately determine their exposure based on loss mitigation practices and the amount of time required to return to the previous level of operation.^1,2 Clients often make the mistake of including all payroll in the category of Ordinary Payroll.  Ordinary payroll may also be limited to a specified number of days typically 30, 60, 90, 180, or 365 days are used by most buyers. In actuality, Ordinary Payroll refers only to those employees that wouldn’t be retained during a shutdown. Payroll for executives, management, and others retained during a shutdown is generally considered a continuing expense and shouldn’t be deducted because doing so can understate the company’s BI value.² Clients can also hurt themselves by incorrectly assessing fixed and variable costs. While it’s usually straightforward, some expenses can be more difficult to categorize. For example, depreciation is often treated as a variable expense when in reality it’s a fixed expense because it doesn’t vary based on revenue. There are also other expenses, like electricity usage, that can be semi-variable and more difficult to quantify.⁵

While it is useful, the BI worksheet isn’t a one-size-fits-all tool. Not every line will apply to every client. On the other hand, depending on the size and complexity of a business, the BI worksheet provided by an insurer may fall short in adequately explaining a company’s potential exposures. Many businesses with more complex operations find it helpful to proactively partner with a forensic accountant when completing the worksheet to better illuminate business operation intricacies for underwriters, which can result in more appropriate coverage and may even generate a better premium rate.^2,3

Businesses may also consider a more comprehensive Maximum Probable Loss (MPL) assessment to supplement BI values and more specifically address their risk in light of specific factors that could impact the loss. Fully assessing a company’s MPL considers multiple factors, including sales across all locations, discontinued costs in the event of a loss, the company’s loss mitigation ability, and a reasonable timeframe for finishing repairs. A solid MPL calculation can help ensure that policy limits are reasonable without being excessive and assist the insurer in deciding if an adjustment is appropriate.²

Who Are the Key Players in the BI Claim Settlement Process?

No one expects to suffer a loss, but if a claim is necessary, working with the right partners can help streamline the settlement process. Because time is a key variable when calculating a BI loss, landing on an appropriate settlement amount can be difficult. Typically, both the insurer and the policyholder hire forensic accountants and/or BI consultants to review the nature of the business over the period in question and evaluate past business trends as well as future revenue forecasts. The final settlement is typically only reached after a comprehensive review and negotiation between both sides to determine the reasonable loss amount.

In addition to forensic accountants or BI consultants, the claim settlement process may also include attorneys, forensic engineers, and others. Because calling on experts can be costly and time-consuming, businesses would be wise to meet with and thoroughly assess potential partners before needing such services to choose those that best suit the organization. Forensic accounting firms often specialize solely in assisting either policyholders or insurers, so it’s important to understand which side of the equation a firm sits on. Generally, the documentation associated with hiring someone to help with the claim settlement process, such as W-9s and non-disclosure agreements, can also be completed in advance so that if a claim occurs, the forensic work can begin immediately. As with most claim situations, the more prepared a company is, the better the results are likely to be. ³

Because an insured is likely to spend thousands hiring a forensic accountant that invests days and weeks pouring over BI worksheets, revenue and expense documentation, and other operational details in the pursuit of a fair claim settlement, the insured should also consider asking the forensic accountant or BI consultant to complete the BI worksheet. No one else will know it better, and often they will do it for free because it takes only a few minutes after all the settlement accounting has been done. This ensures that the BI values are correct going forward.

Bottom Line

Many clients do not realize the value of accurately completing the BI worksheet; however, informed coverage buyers should provide one every year to protect against underinsurance or unreasonable premiums. Having a thorough understanding of a company’s operations, likely response to a loss, and involving the correct expertise when purchasing coverage or settling claims will help guarantee that BI values are accurate and the business can recover.¹

Clients will find that not all agents and brokers are willing to dig into the details, but CRC Group’s property brokers are committed to helping clients obtain the right coverage at a fair price. Collaborating with partners that understand the complexities of BI coverage and claims is just one more way that CRC Group is placing clients first. Agents should contact their local CRG Group producer to discuss how we can help your clients optimize their Business Interruption coverage today.

Contributors

• David Christopher is a Senior Broker with CRC Group’s Dallas, Texas office where he specializes in Property, Stock Throughput, and Builders Risk placements & coverage. He’s also a member of CRC’s Property Practice Group.

ENDNOTES

1. BI Worksheets Suck!, Insurance Nerds, 2017. https://insnerds.com/bi-worksheets-suck/
2. Measuring Business Interruption Exposure: Business Interruption Values and Maximum Probable Loss, IRMI, October 2012. https://www.irmi.com/articles/expert-commentary/measuring-business-interruption-exposure
3. Checklist to Prepare for Business Interruption, January 26, 2015. Insurance Thought Leadership, https://www.insurancethoughtleadership.com/checklist-prepare-business-interruption/
4. BUSINESS INTERRUPTION/BUSINESS OWNER'S POLICIES (BOP), NAIC, December 9, 2020. https://content.naic.org/cipr_topics/topic_business_interruptionbusinessowners_policies_bop.htm
5. Challenges in Assessing a Business Interruption Claim, IRMI, February 2009. https://www.irmi.com/articles/expert-commentary/challenges-in-assessing-a-business-interruption-claim