The coronavirus not only has wrought havoc on our collective health, but also on the stability of our businesses and the economy. As a result, many organizations will be filing business disruption claims in an attempt to stem some of the damage. In this podcast, we talk with Jeffrey Willoughby, director with Forensic Resolutions Inc. in Westmont, N.J., to discuss the number of business disruption claims, the basic components of such claims, and the timeframe for the recovery of businesses who go through this process.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Podcast Transcript

Among the many effects of the coronavirus has been the disruption of our state and national economy, meaning the interruption of businesses throughout Pennsylvania. As a result, many organizations will be filing business interruption claims to try and make up for some of the damage that was done. If you are in this position, hopefully your business has kept good track of your records and can provide proper documentation of coronavirus-related damages. If you have struggled to do that, you can still catch up. To talk us through this process, today we are with Jeffrey Willoughby, a director with Forensic Resolutions Inc. in Westmont, N.J.

For the uninitiated, hopefully we can lay some groundwork here: can you tell us a little bit about what a business interruption claim is?

[Willoughby] A typical interruption claim is going to be after a fire or a flood or some sort of significant event where a company is unable to operate under its normal conditions because of an event like that. Because they're unable to operate, they're losing income, the company seeks coverage from its insurance carrier for its inability to operate. Some of the components of those types of claims are going to be loss of income due to those events, but there's also, sometimes includes extra expenses as well. Those are the types of things that'll be incurred when there is an interruption of a business because of something like this.

How has the status of business interruption claims been affected by coronavirus? Is it too early to tell or has there been an uptick?

[Willoughby] It is sort of early to tell, but at least what we're seeing right now, there are several states –the last count I have is seven states – that have proposed legislation that will mandate coverage for business interruption claims due to the coronavirus interruption, even if there is an applicable exclusion or if there was no premium collected for the business interruption coverage. Usually what that means, and what that will mean for the insurance company, is they may have to end up paying out claims for things that they never intended to cover or that no coverage previously existed.

For what that means for the insured is they hear this on the news or they hear this from their insurance broker that there's legislation that some of these losses might be covered and they're thinking there's some sort of relief out there that they may have some of their loss of income covered because of the legislation that is pending. As of right now, as of this morning, none of those states have passed any of their legislation into law, so they're all pending right now. But we'll have to wait and see if any of them do pass.

What are the components of a business interruption claim and why are they important?

[Willoughby] There's really four different components to a business interruption claim, and any one of them can make a fairly good size difference in any claim that's being filed. Their lost revenue continuing or non-continuing expenses. Then there's extra expenses and then the fourth one is the period of loss. Taking them one at a time, revenue, that's the top-line number. That is the number that drives the business. It's the number that allows the business to keep functioning and pay its bills and pay its employees and be a productive member of the business community. That number is the number that is the most important.

Then below that is continuing or non-continuing expenses, and most policies will reimburse continuing expenses and not reimburse non-continuing expenses. Continuing expenses are things that are going to happen anyway, things that you would've paid for regardless, and non-continuing expenses are those things that stop when your business is shut down or your production stops. The extra expenses are exactly that. They're expenses that you wouldn't have incurred otherwise. They're repairs and maintenance, clean-up, and those types of things that are specifically due to the interruption and those things that can be documented there specifically due to the interruption are usually additional expenses that get reimbursed with any policy that has this coverage.

Then the final thing is the period of loss. And as you can probably imagine, a period of loss, the more that extends, the more the recovery amount goes up. A period of loss that lasts only a few days, that recovery amount is going to be less than a period of loss that lasts for weeks or months. As we're seeing now, the shutdown of the economy and stay-at-home orders, so we're going to see some longer-term effects as a result of the coronavirus pandemic.

What's the process around tracking lost revenue for these businesses? What do they have to do to track it, document it, and the like?

[Willoughby] Lost revenue, the most important thing is to distinguish between normal market fluctuations and any revenue that is actually lost revenue. If a company has a declining trend in their revenue or they've seen a recent downturn, then that's going to affect any future projection or any estimated amount of revenue.

Just as an example, we were asked to look at a claim recently where there was an interruption, and in the period around the interruption, we saw a dramatic decrease in revenue and we started asking questions, and some of the questions, the answers that we were getting, just something wasn't adding up. We asked more questions and I did a little more digging and found out that the company's largest customer had canceled their contract just weeks before this interruption. That was totally separate and apart from any sort of business interruption period that had begun.

Ultimately, asking those questions led to uncovering some other event. But the message is whatever your lost revenue is, whatever you project, whatever you think that number's going to be, be prepared to document it, be prepared to support it, and make sure that it makes sense given the business environment that you were in immediately before any interruption.

In the area of continuing expenses, how can the tracking of continuing expenses affect the amount that's ultimately paid out on a claim?

[Willoughby] Continuing expenses or non-continuing expenses, however those are classified, depends, or that will determine how it's treated in terms of recovery. A lot of policies will reimburse for any continuing expenses. They don't reimburse for any non-continuing expenses or any expenses that have gone away or saved expenses. So being able to determine and classify expenses as continuing or non-continuing is going to make a difference in how that is included with any recovery and whether it's added or subtracted from the ultimate number, the revenue number, the income number that is determined.

You mentioned this to to a certain extent earlier, but just figure I'd ask this just to see if there's anything more specific: what's the difference between continuing expenses and extra expenses?

[Willoughby] Continuing expenses are going to be those things that will continue on after an event happens, after an interruption or a shutdown occurs. Businesses are still going to have those expenses. They're still going to have some level of payroll. They're still going to have insurance to pay. They're still going to have office supplies. We here in our firm, we still have certain expenses that we have to cover even though we're not currently in the office right now.

The extra expenses are expenses that are solely related to an interruption. Say there's a flood, and, as a result of that flood, there is some restoration that has to happen. There are repairs that have to happen. There are things that are occurring specifically because of that flood, or the fire, or whatever event occurred. Those are extra expenses and they're all on top of anything that you would have spent, or are spending, to continue your business or keep your business open.

How is a period of loss determined? Is there a formula or a structure? What's that?

[Willoughby] We're not experts in interpreting insurance policies, but typical language will say when a business returns to normal or should have returned to normal, and that's subject to a little bit of interpretation and when a business opens its doors back up it doesn't automatically go immediately back to it's a pre-shutdown or pre-interruption levels. It does take some time for customers to come back and for people to find out that the business has reopened. But typically, it's when that business is back in its normal operations or should have been returned to its normal operations. It's done on a case-by-case basis, and that period can be longer or shorter if a business has highly specialized equipment and can't reopen right away. Sometimes that period of loss can be longer, but typically is done on a case-by-case basis.

Speaking of case-by-case basis, sometimes you ask these questions and you get the old "it depends" answer, so I'll be OK if you give me that answer for this one, but what is the usual timeframe for businesses when getting back to normal after making a business interruption claim?

[Willoughby] Well, I guess you see the future because it does depend. There may not be a typical timeframe for how long it takes a business. Generally, it'll depend on the nature of the business itself. But one of the biggest factors is going to be how much planning and how much effort that business put into being ready for an interruption or some sort of a slowdown or a shutdown.

If they've taken time to put in a recovery plan ahead of time and they've made arrangements, typically in today's economy there's a lot of things that are done remotely, there's a lot of things that are done electronically. If you've given your employees capabilities to do those things remotely, that's going to help you in shortening that recovery time in that period of lost time because that's ultimately what companies and business owners are trying to do. They're trying to get back to their normal way of doing business. They want to return to the way things should be.

The insurance companies are going to look at the efforts that a company is making, that management is making, in terms of trying to return to normal because, as I said a minute ago, that language will say when a business should have returned to normal.

If you're not making appropriate effort, you're not making a good-faith effort to try and return to normal, the insurance company is going to consider that when they look at what they believe that lost period to be, and that's going to affect any sort of recovery under one of these policies.