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Uncover the ins and outs of business interruption payments. Find out how to calculate the business interruption payment amount and the steps it takes to ensure that the figure you receive is as accurate as possible — for the future of your company.
Without help, a substantial interruption to regular service for a company can result in a number of negative possibilities, including:
- Forced lay-offs
- Scaling back the business
- Needing to move premises
- Disputes between directors
- The forced closure of the company
Read our blog and learn more about the potential stumbling blocks that can stand between you and an accurate account of business interruption payments. Along the way, we’ll also examine a few of the common mistakes people may make during the process.
What is a Business Interruption Payment?
A business interruption payment is a form of insurance policy that offers financial protection to companies in the event that they have experienced significant financial disruption — to the extent that their operation and, as a result, their revenue have been impacted.
A business interruption insurance policy will cover a wide variety of interruptions. Any factors that have physically impacted the business and had an impact on the operation, will apply. This includes, but is not limited to:
- Fires or explosions that cause damage to property or vital equipment
- Breakdowns of vital equipment resulting in periods of disruption
- Significant theft or vandalism
- Disruptions to major supply chains. This can include supplier bankruptcy, labour disputes, etc.
- Viral diseases. The most prominent example of this in recent years was the COVID-19 pandemic. However, there has been great debate in recent years on whether viral outbreaks should qualify under business interruption insurance.
Should any of the above, or similar, examples, affect your business, you will be able to file a claim with your insurance provider. Should the claim be deemed legitimate, the provider will provide financial compensation to help your business to recover from any losses incurred as a result of the interruption to trading.
Your business interruption compensation can include lost income, additional operating expenses you would not have needed to pay out if it weren’t for the interruption, and any other costs that you can associate with getting your company back to being fully operational.
How do COVID Business Interruption Claims Work?
As mentioned above, COVID business interruption claims have provoked an ongoing debate in the industry since the pandemic started. This is because, particularly at the time, many interruption insurance policies only covered physical damage to a business’s operation.
This led to many policyholders disputing that any losses caused by the pandemic did not qualify for coverage. As a result of this, litigation between companies and insurance companies was, and still is, common. These cases have ruled in favour for both sides, depending on specific factors.
The pandemic shone a light on business interruption payments. The end result being that many insurers began to offer packages that included pandemic coverage to protect businesses against unexpected disruptions, However, it also resulted in many company owners realising the importance of paying attention to the fine print of their policies and gaining a full understanding of their coverage should the worst ever happen.
Calculating a Business Interruption Payment Amount
The process of calculating a business interruption insurance payment amount can be highly complex, particularly for those unaware of its intricacies. In order for calculations to be accurate, there are a number of factors you need to be aware of. This includes precise interruption dates and estimates for lost income and revenue during the period.
It’s important to note that the complexity of the process makes accuracy of information absolutely essential. Additionally, not every step is applicable to every type of interruption and there are differences between policies. Therefore, it is often recommended that you consult with an expert at the earliest possible juncture to receive specific guidance and consultation for your circumstances.
While the process may vary somewhat from business to business, the general process of calculating a business interruption payment amount includes:
Determining Your Business’ Total Period of Interruption
Determining your company’s total period of interruption is a vital step when it comes to calculating your business interruption payment amount. Without it, it would be impossible for an insurance provider to appropriately compensate for your loss-period. The period of interruption is likely to be limited to the indemnity period, i.e. the fixed period over which the insurer provides insurance for the loss.
Generally, the business interruption time frame begins on the date of the initial interruption event, and will only conclude once the company is operating at full capacity again or the end of the indemnity period.
Taking the step of accurately working out your interruption period before doing anything else will ensure that your final payment amount and losses can be calculated accurately and that you comply with your policy.
Calculating the Overall Loss of Income During the Stated Period
The figure you need to calculate is the overall amount of income your company would have earned during the stated interruption period, had operations not been interrupted or impacted.
Making sure the amount calculated is accurate is key to determining the appropriate amount of compensation you would be entitled to under your business interruption policy.
This is arguably the most important step in the process, because:
- It determines how much money you can receive. Inaccuracy at this stage could lead to you receiving significantly less than entitled.
- Accurate calculation of the amount lost is pivotal in the event that you find yourself in a dispute with your insurer.
- Determining the amount of income you lost allows you to better plan ahead and make more informed decisions for your future.
Consider Your Expenses
A common mistake for some when calculating a business interruption payment amount is to forget to factor expenses into the process. Some outgoing expenses, such as payroll, rent on your premises, money to vendors, etc. may have been saved as a result of your interruption period where the company was not operating.
Any such savings should be removed from your overall loss of income amount.
Contrastingly, it is possible that you may have needed to pay out a number of additional expenses during the interruption period. Common examples of this could include rental costs for temporary equipment or premises, moving costs, additional labour costs, fees to hire additional lawyers/consultants, and more.
This type of expense can be added on to the amount.
Ensure You are Covered for Everything Calculated
The final vital step in the process is to make sure that you are eligible to be covered for everything needed under your agreement. This means checking that the business interruption insurance policy covers the period of time you were interrupted. If not — and your policy only covers some of this timeframe — you must double check your numbers to ensure that the stated loss of income and additional expenses are all from the period of coverage.
Additionally, depending on your policy, it is possible that the final business interruption payment amount may be limited by a cap set by the provider. It is important to understand the terms of your policy before applying for any compensation.
Receive What You Deserve With An Expert Forensic Accountant
Ultimately, the core of business interruption payments is rooted in doing all you can to ensure that you receive the full entitlement of compensation for what can be a catastrophic halt to your regular operations.
For many directors, a long-term interruption to their business could result in them needing to close. Business interruption payments can help them to keep their heads above water and ensure that the business has a future and that staff can keep their jobs.
Therefore, if you find yourself in a position with stakes as high as this, it’s important that you take a meticulous approach and ensure that absolutely nothing is forgotten. Having an expert forensic accountant in your corner can maximise your chances of getting what you deserve and are entitled to.
The Inquesta team of forensic accountants are trained to the highest standard and have been there and seen it all when it comes to a variety of topics. Our team can assist with a number of different issues, from supporting you with business interruption payments, financial crime and fraud investigations, and more.
Having an expert forensic accountant backing your case up guarantees that you are 100% prepared for anything and have made sure you have the best possible chance of success. Get in touch with a member of our team today to find out more.