In our Spring Vantage Points issue and in the wake of several disasters this winter, I talked a bit about the need for business interruption coverage and the standard and optional coverages available. Adequate business interruption coverage will go a long way toward protecting a company’s assets. Simply purchasing the insurance, however, is not enough; only an efficient resolution of the claim makes the coverage worthwhile. Efficient resolution is unlikely without adequate documentation; a process that must begin long before any disaster.

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." 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. You should note the documents requested and review them back to confirm that you have recorded the correct documents, and the correct time periods.

Documents typically requested by the insurance company in the initial meeting include:

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

For businesses who do not receive annual audit opinions, insurers will generally request state and federal tax information and copies of all monthly bank statements. Expect to be asked for historical production, income, expense and sales records. The claim auditor may ask to verify entries in the 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, markups and markdowns will be analyzed along with inventory turnover and inventory obsolescence. Location of the business is also significant; compare the income stream of a restaurant at the Outer Banks, a West Virginia ski resort and a local gift shop.  Most insurers will request six months of historical figures. However, if the information requested does not demonstrate the full loss or omits the two to three busiest months, it is up to the insured to provide the documentation and explain why it is significant. Historical sales that are on an upward trend provide excellent support for using a growth trend in your sales calculation. 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.

In large claims, most insurers retain their own accountant to evaluate and adjust the claim. 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.

The following tips will help the process run smoothly in the days both preceding and following a disaster:

1. Back up significant financial documentation electronically to an off site location daily.  

2. Notify all insurers immediately following loss. If policies were lost in the fire or disaster, notify your agent or broker of the loss and request copies of all policies. 

3. You should receive a call from an adjuster assigned to your claims within 24 hours.  Request an in-person initial meeting with your adjuster if possible. In the initial meeting, give the adjuster or his accountant an overview of your operations and business so that they can better understand your company and business. Identify one key contact within your company to deal with the insurer. 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 or adjuster.

4. Use your accounting system to capture extra costs. Policies usually contain coverage for extra expenses that would not otherwise have been incurred. Create accounts that are used only for extra costs relating to the tragedy. Since you will need to show that these costs are incremental to the disaster, contemporaneously record the reason that the cost was incurred, and why this was caused by the disaster. This should be done immediately because many costs incurred in the first 24 to 48 hours following the loss are never accounted for and therefore, never recovered. 

5. Hire outside help. Retain your own professional and independent accountant to help you prepare the claim and anticipate questions from the insurer. Some policies will pay for the cost of documenting the claim. When losses are high, you should match the carrier's efforts with your own expertise. An experienced claim consultant will be able to: 

• Provide a skeptical and independent view of what is reasonable
• Advise you as to what is allowable, and ensure that your claim is as large as permissible
• Avoid wasted time and effort from a claim that does not comply with policy restrictions

6. Use Multiple Approaches. Claims can be prepared based on (i) specific identification, and (ii) trend, statistical and other analyses. By looking at your claim from multiple perspectives, your business is more likely to address all claim amounts, and have a more comprehensive and convincing analysis.  

7. Prepare a well-documented comprehensive claim, which includes source documents that are consistent and referenced.

8.  Include insurance policy classification of the amounts claimed and provide descriptions of the expenses in the claim.

9. Ask for a written document request by the insurer's accountants to avoid confusion over what has or has not been requested.

10. Maintain a log of information provided and the date on which it was provided during the process to avoid resending information that has already been provided.

11. Set a schedule. Ask for a commitment to a time frame when certain claim analyses will be complete.  

12. Get an advance. Negotiate a funding arrangement that advances cash to allow your business to start its recovery. Insurers will generally agree to such advances. However, make sure that these advances are not a final settlement of claims and understand that these advances will be deducted from the total settlement amount unless you specifically agree otherwise.   

The future will likely hold a few surprises, some of which may be unwelcome, but following these guidelines can make your recovery and return to profitability quicker and smoother.