The Trigger and the Triggered
Disclaimer: None of this should be considered actual accounting advice. If you need accounting advice, please hire a CPA firm to give it. This article is just to give a general idea of what I do, and what issues might come up in a business interruption claim. Use of any of this information is at your own risk!
Business interruption insurance is usually linked to the trigger of property damage. If there is no damage, there's no business interruption. Of course, there are a few other triggers, such as civil authority, but those usually come with a time limit on the interruption. However, a business interruption triggered by property damage can go on for as long as it takes to get the business up and running again, with due diligence, of course. If you're delaying just to get more insurance money, they can cut short the time period to how long it SHOULD have taken you to get it back up and running. Best to get it back up as quickly as possible, so there is no room for estimation.
Where does this property damage have to be? Well, it has to be your property, or on your property, you meaning the business.
Most of the time, we as accountants will not look at the property damage portion of the claim. Often, we are just told what the period of restoration is, and we calculate based on that. In fact, that is always the case. We are not qualified to make a PoR decision, anyway.
However, in certain businesses, property damage is extremely important to look at. In the case of a hotel that only had certain rooms damaged, we might look at the support that shows when each room was turned back to the hotel. As each room is turned back, the interruption related to that room is over.
Hotels are funny animals. When a large disaster hits, hotels are in major demand. Rooms for all the insurance and constuction guys are needed, but the hotels are down. When Hurricane Andrew hit, one of the hotels made the argument that they would have been at 100% occupancy had they not been damaged, and therefore should receive proceeds for 100% of their rooms.
They won.
So, instead of that now being what happens, the insurance companies rewrote the policy. Now the policy has wording that does not allow a damaged hotel to benefit from any favorable business environment caused by the event that caused the damage. However, you can, at a higher premium, still buy the old policy. If you are a construction company, that could be the policy for you.
Property damage is tied into business interruption, every case. Some cases it's more important, some less so. But without it, I wouldn't have a job. Thank you, property damage, for giving me and others the chance to figure out how much the insurance companies need to pay.
There's another property damage trigger, too, but it does not relate to BI insurance. No, it's contingent business interruption insurance, which is triggered by damage to a major vendor or customer which causes you to lose revenue. How exciting! I haven't done one of those yet, but with all the hurricanes and no CBI available, we have seen a lot of reductions due to the fact that these poor hurricane victims had no customers or vendors anyway, so how could they be making any money? Knowing the difference between a BI and CBI is tough, because it's almost subjective at times.