What must a policy owner provide to the insurer for validation that a loss has occurred?

Business interruption policies define the nature of the indemnity but do not define the exact documents required to support a claim. This article addresses common and best practices in one of the most important steps toward a smooth settlement—documenting your business interruption claim.

When a company is analyzing and documenting a business interruption claim, it turns to its insurance policy to define the areas of coverage that will indemnify its loss. While business interruption policies define the nature of the indemnity, they do not define the exact documents required to support a claim. You will rarely, if ever, find a policy that provides a list of documents that should be included to verify and support your claim submission. This article will address common and best practices in one of the most important steps toward a smooth settlement—documenting your business interruption claim.

Right To Inspect Books

Although policies do not define what documents are needed, most do include endorsements that provide the insurer with the ability to audit and inspect the insured's "books and records." You should first meet with your adjuster to discuss the claim before making copies of all of your books and records, however.

The Adjuster's Accountant

For most complex business interruption claims, an adjuster will hire an accounting firm. Don't be fooled by the fact that you have never heard of these firms before, as they are well-trained professionals that specialize in this area of auditing. They will spend a significant amount of time auditing your claim. These accountants often call themselves loss accountants, loss consultants, or forensic accountants.

If an adjuster is going to hire an accountant, they should disclose this to you immediately after your loss to allow you to have input as to which firm is hired. It would be wise to hire your own accounting firm to help prepare your claim and lead you through this process. Some policies will pay for the cost to hire your own accountant.

First Meeting

Your initial meeting with the loss adjuster and their accountants should be an open dialogue where you discuss the impact that the loss has placed on your business and the items that you expect to include in your claim. The adjuster or accountant can identify the documents that they would like to review to support your claim. Since there are no exact documentation requirements in the policy, it is important to have this meeting with your insurance adjuster early in the claim process. As Robert Fuselier and Ray Warren note in the 1995 revised version of The Insurance Settlement Handbook, "Documentation is nothing more than providing the information necessary to prove liability and damages."

However, the insurance adjuster and their accountants will arrive with their own expectations of what information is necessary or required. Gauging their expectations for claim documentation during this early stage can therefore be valuable. Be ready for many questions about your business and operations, as they will be looking to obtain as much information as possible about these topics in a short period of time. Good claim practices will require them to review, analyze, and adjust your claim on a timely basis. For a more productive meeting, you should set an agenda and share it with the adjuster before the meeting. Your own claim accountant can be very helpful at this stage.

Information Overflow

The information age has expanded the amount of data and reports that are available to businesses. This expansion of information has raised insurers' expectation to receive comprehensive detail with each claim submission. Also, an expanded reinsurance market has added more layers of skeptics to review your claim. The development and support documents of your claim can help break through this review process. It is important for the policyholder to recognize that a claim is no longer a computer-generated spreadsheet summarizing the loss but rather is a document-intensive analysis that includes well-referenced source reports and detailed descriptions of the claim categories.

Where To Begin

Ultimately, a policyholder will want to focus on providing enough documentation to answer the questions of the adjuster and their accountants while not overburdening anyone with too much information that may be irrelevant to the claim. So what is needed? Here is a sample list of documents typically requested by the insurance company:

• Monthly Profit and Loss Statements
• Monthly and Daily Production Reports
• Monthly Inventory
• Monthly Cost Accounting Reports
• Invoices and Purchase Orders

The list can go on. The questions below will help you navigate through a typical document request.

Frequently Asked Questions

Question: What data is vital to validate a claim once an incident has occurred?

Answer: Any and all information that is relevant to your claim should be provided to the insurer. This will range from historical production and sales records to annual budgets and forecasts. You will also want to provide Profit and Loss statements and Inventory records. The claim auditor may ask to verify some records to the General Ledger to ensure completeness of the reports.

Each industry or business is unique. For manufacturing operations, it is important to provide the typical production days and actual production days, noting normal maintenance or downtime. For retail operations, mark-ups and markdowns will be analyzed along with inventory turnover and inventory obsolescence.

Question: What internal documents should a company secure immediately after an incident in anticipation of government involvement?

Answer: It all depends on the loss factors. For example, if there is a question of safety or health after the loss, then the Occupational Safety and Health Authority (OSHA) may be involved. Always check with your in-house counsel or compliance officer in such a case.

Question: What is the preferred method for projecting long-term lost profits immediately after an incident has occurred?

Answer: It depends on the situation. Certainly having historical sales that are on an upward trend would provide excellent support for using a growth trend in your sales calculation. Also, having budgets or sales forecasts that are close to actual results is helpful. The key in developing a lost sales projection model is to present an analysis that is consistent with the anticipated business environment during the loss period.

Question: For extra expense claims, is there a method to distinguish claim costs from normal expenditures?

Answer: Combining the Specific Identification method and the Analytical Review method should result in identifying all claim costs. The Analytical Review method compares expected expenses to those incurred during the loss period. The difference is the claim. However, a careful study and verification should be made to see if these variances are reasonable based on the loss situation. For instance, if you are shipping material to another location to mitigate a loss, then you should see an increase in shipping costs. If not, then this item should be further investigated.

A common mistake is to put these under "cost of material" instead of freight. That is why the Specific Identification method is also an important tool. The Specific Identification method will identify such costs as invoices, purchase orders, and payroll costs. These costs will be coded or tracked in a separate claim account. Ideally, both the Special Identification method and the Analytical Review method should provide you with enough information to formulate your extra expense portion of the claim.

Question: What electronic files should be provided?

Answer: Any documents that are needed to help support the claim should be provided. The adjuster may ask for all e-mails. If this happens, it will benefit both parties if the adjuster is more specific in his request. If you find that the adjuster or their accountants' requests are unreasonable, a meeting should be suggested to clarify any uncertain matters.

Question: What can a company expect from an insurer's accountant?

Answer: A company should expect someone who specializes in these types of claims and is knowledgeable in both accounting and the application of costs to the policy endorsements. You should expect a high degree of audit skepticism coming from this individual. You should also expect that they would handle your claim within the general rules that govern auditing standards. This would include treating you and your claim with due professional care, technical proficiency, and effective communication while serving the interest of their client, the insurance company.

Question: What are the top 10 things an insured can do to expedite the insurance company's accountant's investigation?

Answer:

1. Hire your own professional and independent accountant to help you prepare the claim and anticipate questions from the insurer.
2. Give the insurer's accountant an overview of your operations and business so that they can better understand your company and business.
3. Prepare a well-documented comprehensive claim, which includes source documents that are consistent and referenced.
4. Include insurance policy classification of the amounts claimed and provide descriptions of the expenses in the claim.
5. Review your claim with other professionals on your team prior to meeting with the insurance company's accountant. Include your risk manager, broker, claims consultant, CPA, and other financial executives to review the claim prior to any meetings.
6. Ask for a written document request by the insurer's accountants to avoid confusion over what has or has not been requested.
7. Maintain a log of information provided during the process to avoid re-sending information that has already been provided.
8. Ask for any claim analysis from the insured's accountants that they have performed prior to meeting with them. This way you can focus on the key issues and have time to understand any different approaches that have been considered by the insurance company. It will also make for a more productive meeting. Resistance to this request should be a "red flag."
9. Identify one key contact within your company to deal with the insurer's accountants. Your company representative should make sure that someone from your claims team is involved with any meetings that take place with the insurance company's accountants.
10. Set a schedule. Ask for a commitment to a time frame when certain claim analyses will be complete. Plan meetings to resolve any open items.

Question: What effect do external factors have on an insurer's evaluation of a company's lost profits?

Answer: The insurance company will be looking at all factors that could impact your business. It is your responsibility to present a supportable claim that contains relevant data. Many times industry data can be used to demonstrate the full impact of the loss.

Question: Do I need to provide tax statements or bank information?

Answer: Seldom do claim reviewers ask for tax information for public companies that received unqualified audit opinions from a certified public accountant. For the smaller business that may not receive an audit, it is not uncommon for the insurer to request state or federal tax information and sometimes even monthly bank deposits.

Question: When is the best time to present loss projections to the insurers for payment?

Answer: An initial loss reserve should be prepared and presented to the insurance company fairly soon—usually within the first 30 days—after the event. The insurance company needs this information to identify their potential exposure. The initial loss estimate may help you procure an advance payment.

Wrapping It Up

After compiling your documents and meeting with the adjuster and their accountant, you will begin to analyze the information. You want to make sure to obtain input from many groups within your company such as: accounting, risk management, production and operations, marketing, and legal.

One of the most important aspects of claim development is to have one person or group in charge of orchestrating the claim. This includes obtaining the necessary information to support the claim and reviewing it within your organization before you submit it to an outside party. Many companies are taking this team approach. The team is led by risk management along with the outside independent accounting firm hired to help prepare the claim. An independent accountant can help with the complex claim and document issues along with bringing a healthy dose of audit skepticism to the claim. You should also involve your broker throughout the claim process and discuss the claim with them prior to submission.

A Well-Documented Claim

After your review, the claim is ready for submission to the adjuster and their accountant. At this point, your claim should be a stand-alone document in which an audit trail is established and which references the corporate source documents. The claim will be reviewed by several parties, including the adjuster, their accountants, the broker, the insurance company, possibly reinsurers, and your own management. With so many eyes on one document, it is important to present it in a format that is easy to understand. The best tests to determine if you have put together a well-documented claim are as follows:

1. Is this a stand-alone document that someone not involved in the claim can read and understand without any confusion?
2. Would this claim theory, approach and presentation format hold up in a court of law?
3. Have you provided meaningful and detailed source documents that support the claim?

If you can answer these three questions with a resounding "Yes," then you have gone beyond the policy and prepared a well-documented claim.

Conclusion

Remember that good claim documentation is only one of the cornerstones to effect a positive claim settlement. Throughout the claims process you need to invoke good claim management skills that range from managing the expectations of everyone involved to setting realistic time schedules and ensuring that proper technical support is available to you. When all of the above tools are in place, you are on your way to a smooth settlement.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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