- On June 1, 2020
So far, the federal court has received a notice that 101 lawsuits related to COVID-19 business interruption claims have been filed just this week. These suits do not include suits filed in state courts. Attorneys say they expect the number to rise into the thousands.
While a definite decision hasn’t been made about whether insurance carriers will cover these claims or not, there are some important terms to know and information to start documenting. Read on to learn what they are.
Extra expenses are defined as the actual spending on expenses directly as a result of COVID-19 interruption. The documentation will include orders, invoices, shipping records, and related payment support documentation.
Your insurance will assess how reasonable these expenses are based on the documentation provided. Documentation detailing the expense’s purpose and the result will help build support for your case.
An example would be to expedite shipping to obtain a delayed product from suppliers. This might be recorded in the general ledger account with other regular shipping expenses. It’s easier to identity and document this extra expense during the interruption period than after.
Loss of Income
Insurers should be able to assess whether the loss calculations of the claim are supported, sensible, and reasonable. Your claim’s strength will depend on how comprehensive your historical financial reporting is.
Here’s what else your insurance company will look at in relation to loss of income.
Historical Financial Statements
Prepare at least three years of annual financial statements before the date of interruption. Also consider if you have been audited, reviewed, or compiled by an independent accounting firm. Audited financial statements provide an added layer of scrutiny so you and the insurance will be more comfortable with the accuracy of the results.
If your statements have not been audited or reviewed, consider doing extra diligence to try to give the same level of assurance. This can be done by performing your own testing and analytical procedures or engaging with an outside consultant to perform certain testing and analytics procedures.
Budgets, forecasts or projections
Gather your budgets, forecasts, or projections from before the interruption. These reports are important because they build the credibility and reasonableness of a claim since they provide estimates of financial activity “but-for” the interruption.
Monthly reports help capture seasonality in revenues and expenses. Additionally, take into account who the budgets were prepared for initially. If it were prepared for a potential investor, the numbers could be overstated.
Preparing these documents to reflect as an internal process to be used by management to evaluate on-going results might bring a reliable and reasonable estimate. But it is not always the case since budgets often contain estimates that don’t reflect achievable results or realistic expense containment.
Ancillary accounting and management reports
Specific documents like specific revenue and cost reports by product line, geography, or customer can be useful and relevant to the claim.
Typically these documents can be found in off-systems spreadsheets or management and operational systems. As with historical financial statements, at least three years of historical management reports should be prepared. These documents will help analyze trends and establish a reasonable basis for estimating future income and expenses during the interruption period.
Non-COVID-19 related income/expense effects
It’s also important to not overlook items unrelated to COVID-19 because it could impact the losses and could prompt a reevaluation of how present you are in the loss estimate or historical financial statements. Some things to consider:
- Are there changes in the application of generally accepted accounting principles (GAAP) that could impact, distort, or amplify estimated losses when compared to the historical financial reports?
- Are there new GAAP standards being applied that were different in prior reporting periods, and whose effects on financial statement comparability need to be considered?
- Are there non-recurring items that may be present in historical financial reporting that should be adjusted to remove their potential effects on an insured’s loss estimates?
- Did the insured improperly include expenses in the claim submitting process that should have been dealt with in prior periods and are unrelated to COVID-19?
- Are there customer or revenue stream losses unrelated to the COVID-19 claim that were previously known or should have been anticipated by the insured in the normal course of business?
If you haven’t filed a claim for a business interruption related to COVID-19, there’s still time! Business interruption insurance will cover any income lost due to an event happening that closes down your place of business. For other FAQs and more information, read our previous blog “COVID-19 Business Interruption Claim FAQs”.
If your business has suffered losses due to COVID-19 and you have business interruption insurance, you should check your policy for potential coverage. COVID-19 is creating unprecedented challenges for business owners. Save time, get peace of mind, and learn what options you have by requesting a comprehensive policy review from our team of experts. Click here to get started.