By now, hundreds of pages have been written on whether business closings caused by the COVID-19 pandemic and resulting government shutdown orders are covered by the different types of business interruption coverages provided by insurance policies. However, resolving the coverage issue is only the first step for a business to recover under such an insurance policy. The business also must document its losses to the insurer.
Broadly speaking, business interruption coverages are designed to compensate business for increased expenses and losses caused by a triggering event. This is generally calculated by measuring the profits a business would have earned had the triggering event not occurred.These estimates “are invariably based on the results of past business performance and adjusted on the basis of present business conditions.” Am. Med. Imaging Corp. v. St. Paul Fire & Marine Ins. Co.
, 949 F.2d 690, 693-94 (3d Cir. 1991). “Consideration is to be given to the past experience of the insured’s business and its probable future experience had there been no business interruption.” Finger Furniture Co. v. Commonwealth Ins. Co
., 404 F.3d 312, 314 (5th Cir. 2005).
Documenting a business interruption claim therefore requires looking at the past, present, and future of the business. Documentation of past financial performance is necessary to establish a baseline for the business. The business’s additional expenses from the interruption need to be documented as they occur.Finally, the business’s anticipated future financial performance, but for the interruption, needs to be forecast.
With all of the disruptions caused by the COVID-19 pandemic, recordkeeping likely is not at the top of a business’s priority list. However, a claim for business interruption coverage is only worth as much as the loss that can be documented. Maintaining all records of additional expenses to mitigate the interruption (such as cleaning supplies, janitorial services, equipment to work from home, additional information technology resources and the costs to prepare loan application) is an obvious starting point. Special ledger codes often can be created to track COVID-19 related expenses. Examples of other documents that should be retained include:
- Monthly profit and loss statements;
- Daily, weekly and monthly production reports;
- Inventory reports;
- Invoices and purchase orders;
- General ledger or accounting data files;
- Tax returns;
- Bank statements;
- Audited or compiled financial statements;
- Payroll records;
- Financial projections; and
- Critical vendor or customer contracts.
With the economic distress caused by COVID-19, it is natural for a business to want to minimize its professional expenses. However, outside accountants, attorneys and insurance professionals can be helpful, and in some circumstances, even necessary, to document and prepare a business interruption claim. It may be more efficient to involve such professionals early in the process rather than attempting to address problems after they have arisen.
Once a claim is submitted, an early meeting should be scheduled with the insurer to discuss documenting the loss and addressing documentation issues. The business should be prepared to address questions the insurer may have and prepare a timeline off the loss. It also should designate a point person to manage the flow of information to the insurer and the team that will support that point person. The business should ask for a written list of information requests from the insurer and keep a log of what information has been provided so that requests do not fall through the cracks. While it may not be possible to set a definitive schedule for the production of information at an initial meeting, discussing deadlines and target dates can be helpful to manage expectations and keep the process moving forward. Finally, the business should be sure that the information it submits (and that the insurer requests) is consistent with the coverages and limitations provided by the policy.