When Disaster Strikes
What do you do when you hear, “We had a fire.”? Too often, businesses focus on insurance as their primary recovery option. However, as an insurance specialist, my advice is: Don’t rely on insurance. Certainly, insurance coverage will be a critical component of the solution. However, an insured should always address their safety and other business issues first. In my experience, the businesses that attack the problem immediately as if they had no insurance achieve the best results both for long-term viability of the business and for procuring insurance recovery.
Teamwork in these situations is crucial. As a first step in the recovery process, assemble senior leadership and relevant personnel to implement your disaster recovery plan. If you are one of the many businesses without such a plan, this provides the impetus to create one. Together, brainstorm ways to minimize the loss of property and business income. Proactively consider every aspect of operations and identify steps to mitigate loss as quickly as possible at the impacted location, on overall production and sales, and for customer/supplier relations. Codify this into a solid response plan and clearly assign roles and responsibilities. Depending on the business/situation, your plan will likely include the following:
to ensure safety of personnel and others; and
to prevent further property damage.
Assessment/quantification of options for:
moving operations and/or production to other locations;
depleting inventory to maintain sales; and
obtaining goods or materials from competitors.
Procedures to communicate with customers, suppliers, and distributers.
Steps to begin repair process as soon as possible.
This planning should include representatives from all facets of the business: manufacturing, supply-chain, management, sales/marketing, legal, and accounting. Each will have a valuable role to play. At this stage, the accounting role is to crunch numbers to inform decision-making on questions such as:
How will moving production or operations impact sales?
How can inventory best be utilized to minimize loss or expense?
What are the costs and benefits of specific steps?
Where can we save costs?
And, last but not least, will our insurance policy pay for these recovery activities?
Working With Your Insurer
Unfortunately, insureds often discover at these crucial junctures that the insurance process may not be as they expected. On the one hand, insurance was purchased for just such circumstances, and the insurer is now a business partner and crucial member of your disaster recovery team. Insurance proceeds are often critical to funding property restoration and providing crucial cash-flow throughout the process. On the other hand, the insurer is a separate business entity, and adjusters represent the carrier, not the insured. As in any business relationship, there will be times when each party’s interests are aligned, and times when they are not. Therefore, the claim process can be cooperative, or it can be contentious, and often it is both. So what steps can insureds take to make their carrier a partner, not an adversary, in this process?
The insured and insurer carry the same significant risk, and therefore the same common interest: helping the insured recover from the disaster as quickly and cost-effectively as possible. That is why a business response without consideration of insurance is essential: by overcoming the loss through planning and operations, the insured minimizes the dollars it risks in an insurance claim, while simultaneously minimizing the carrier’s risk of shouldering that financial burden. Achieving a working partnership often makes the difference between a cooperative, successful process and a contentious, unsatisfying result.
The forensic accountant can assist in accomplishing the twin goals of minimizing risk while achieving a working partnership with its carrier as follows:
1. Understand the insured’s policy. During the planning process, someone should review the policy carefully to inform decision making. For example, if the recovery plan involves shifting production/personnel to a temporary location, you should know if the corresponding expenses are covered while planning, not learn about coverage–or denial–during the claim process. Understanding coverage, limits/sublimits, deductibles, and exclusions for property repair, extra expense, and business income allows the insured to make savvy business decisions and avoid unwelcome surprises during the claim process.
2. Communicate with the carrier. The insured best knows its business and how to overcome disaster; the carrier best knows the policy coverage. Conflict can result if an important component of the recovery plan is not covered. While the carrier won’t be included in initial planning discussions, informing the carrier of your recovery plans and confirming coverage is an extremely effective way to facilitate recovery and minimize claim issues. Also, proactive communication can prevent delays in obtaining needed proceeds to fund the restoration.
3. Submit a credible claim. A claim is a transaction; the insurer has the money and a contract (policy) obligating them to pay the insured subject to the terms and conditions of that policy. As in any transaction, the insurer will not pay unless the policy terms are met. Therefore, the insured carries the burden of proving the loss under that policy. If the insured does so, the carrier will pay; if not, it will not.
As policies state, the insurer has the right to verify coverage, loss measurement, and that funds paid are used for business recovery. The carrier will likely retain a forensic accountant to examine business records, perform interviews, and otherwise prove those facts. Inaccurate, poorlydocumented claims only serve to raise carrier suspicions and harm the insured’s credibility, undermining any goodwill. Therefore, the insured should take the following steps to make the carrier a partner in the recovery process:
Establish accounting procedures to accurately capture loss activity, including supporting documentation;
Bucket costs by coverage element and appropriately calculate and apply limits, deductibles, and exclusions;
Provide contemporaneous support for the loss and recovery activities;
Proactively address measurement issues that arise in virtually every business interruption claim: period of restoration, but-for revenue, saved expenses, market conditions, and make-up sales.
This article was authored by Jim Paskell who is the founder and president of the national consulting firm Litigation and Liability Management, LLC, based in Cleveland, Ohio.