Business Interruption

Absolutely no complaints—only praise! Thanks to this team, we got everything we were hoping for from our insurance company. Without their help, we wouldn’t have received even a third of what we did! They’re prompt, reliable, deliver on their promises, and do an outstanding job!

— Shop Owner

Understanding Business Interruption Claims

Business Interruption (B.I.) insurance is widely regarded as one of the most challenging types of coverage to adjust. It is typically linked to a physical loss at an insured location, such as a building, and involves calculating the financial impact on a business, including lost earnings and ongoing expenses that were disrupted due to the loss. To estimate what the business would have earned had the loss not occurred, insurers must analyze historical financial data and consider how future plans and market trends would have influenced operations. B.I. coverage comes in various forms and should be tailored by the agent or broker to meet the specific needs of the client’s business.

A common misunderstanding about B.I. coverage is that it will fully compensate the insured for all losses following a covered event. However, most standard B.I. policies only cover losses incurred during the period required to repair or replace the damaged property. For instance, if a restaurant suffers a fire and repairs are expected to take six months, the insured may receive compensation for that six-month period. Unfortunately, businesses like restaurants often lose customers who may not return, or it may take longer than the repair period to rebuild the customer base and restore sales to pre-loss levels. This type of “loss of market” is generally not covered unless additional coverage is purchased.

A notable example of this issue is the BP oil spill. Many Gulf Coast businesses had B.I. coverage under their property insurance policies, but most were unlikely to receive payments because their financial losses stemmed from “loss of market” rather than physical damage to their properties. The decline in tourism, driven by fears of oil contamination amplified by media coverage, caused significant financial harm. However, without direct physical damage, these businesses were unlikely to recover under standard B.I. policies. The outcome of such cases often hinges on whether physical damage can be proven.

Determining the extent of a B.I. loss is complex and often contentious. Insurers rely on historical financial data, such as tax returns and profit-and-loss statements, to assess revenue and expenses. Future sales projections are also critical, as they help estimate what the business would have earned had the loss not occurred. Sales trends must be analyzed, and if positive, the projected growth should be factored into the calculation. However, there is no fixed rule for how far back to look when establishing a trend line, though some experts use up to five years of data to identify a positive trend.

Expenses are another key factor in B.I. calculations. The more ongoing expenses included, the higher the payout to the insured. Depreciation, for example, is a negotiable item that can significantly impact the final settlement. Salaries for employees and officers must also be considered, depending on the terms of the policy.

One unique case involved a resort business that relied on a central reservation system to rent out condominium units along the Gulf Coast. After a hurricane damaged these units, the business lost all revenue during the repair period. Fortunately, the client had purchased “dependent property coverage,” which allowed them to claim lost income for units they did not own or control. This case was highly contested but ultimately successful.

Another case involved a specialty nursery that supplied plants to major retailers nationwide. The owner, a former nuclear engineer, had built a thriving horticultural business. When a defective herbicide destroyed his entire stock, the insurance company initially offered a low settlement. After retaining experts, the client submitted a comprehensive claim for stock loss and business interruption. The rapid growth of the business meant the loss of future sales was significant. The initial offer of $846,833 was ultimately increased to $2,750,000, thanks to thorough documentation, a strong presentation, and effective negotiation.

In summary, B.I. insurance is a complex but vital coverage that requires careful analysis of historical and projected financial data. Proper documentation, understanding policy terms, and skilled negotiation are essential to achieving a fair settlement.

If you would like help with your business interruption insurance claim and understand your options, give us a call at 813-412-8357 or contact us.

FAQs About Business Interruption

How are business interruption claims typically settled?

Most business interruption (B.I.) claims are resolved through negotiation. Since these claims rely on hypothetical scenarios—what the business would have earned had the loss not occurred—they involve theoretical projections and calculations. These projections are based largely on the business’s historical performance, with adjustments for sales trends and future expectations. For this reason, it’s crucial to prepare your own claim, grounded in the specifics of your business, the coverage you have, and your assessment of the losses. Policyholders who attempt to handle these claims on their own are often at a disadvantage due to their lack of expertise in documenting, presenting, and negotiating B.I. claims. Insurance companies, on the other hand, have teams of external experts who handle these claims regularly.

Our business was destroyed in a hurricane, and we had Business Interruption coverage. The Board of Directors had plans to double sales through a plant expansion and increase the salesforce. Can we claim the lost profits we expected from this plan?

Likely not. Over the past five years, there has been significant litigation surrounding B.I. claims, particularly in hurricane-prone areas like Florida. Case law in some jurisdictions states that prospective business plans cannot be speculative. To make a claim, you would need to demonstrate that the expansion plans were concrete and actionable. This might include evidence such as secured bank loans, detailed pro-forma financial statements, signed leases, or construction contracts. Without such documentation, the plans may be deemed too speculative to qualify for compensation.

Our motel and separate restaurant building suffered a financial loss when the restaurant burned down. The fire caused a significant drop in revenue, so we filed a business interruption claim. However, the insurance company refused to cover the motel’s lost income because it wasn’t damaged. Can we claim lost income for the entire property even though only the restaurant was damaged?

This is a common scenario, and the outcome often depends on how courts in your state have ruled on similar cases. While the restaurant fire was a covered peril, and both buildings were listed on the policy, insurers often deny claims for losses to undamaged properties. In this case, the insurance company likely denied the motel’s claim on the basis that it suffered no physical damage, even though the fire caused a loss of market for the motel. Success in such cases can vary, and legal precedents in your jurisdiction will play a significant role.

Our business suffered a complete loss due to flooding in our community. Can we claim lost income under our all-risk property insurance policy?

Probably not. Standard property insurance policies typically exclude flood damage, and the National Flood Insurance Program (NFIP) does not provide Business Interruption coverage for flood-related losses. While some private insurers may offer flood insurance, it is not part of the federal flood program. If you did not purchase separate flood insurance with B.I. coverage, you are unlikely to recover lost income from a flood event.

Our business sustained a severe loss, and we plan to rebuild. Contracts have been signed, and the insurance company has acknowledged that we have a covered business interruption loss. Should we settle now or wait? What is the typical timeframe for settling such claims?

In our experience, B.I. claims are usually the last to be settled due to their complexity. Insurance adjusters often hire forensic accountants who specialize in representing insurers on B.I. claims. You can expect these experts to request extensive documentation, including financial records, tax returns, profit-and-loss statements, and state sales tax reports. Given the subjectivity involved in calculating B.I. losses, it’s essential to have your own claim prepared and evaluated by an independent expert. Relying solely on the insurance company’s assessment can put you at a disadvantage. B.I. claims are too complex to navigate without professional support on your side.