Presented By Moderators: Michael Silvestro and Bill Kolb, Skarzynski - - PowerPoint PPT Presentation
Common Issues In Business Interruption & Other Time Element Claims Presented By Moderators: Michael Silvestro and Bill Kolb, Skarzynski Black, LLC Expert Panel Members: Reinhard Krestel, CPA, MDD Forensic Accountants Paula Essick, Magnan
Presented By Moderators:
Michael Silvestro and Bill Kolb, Skarzynski Black, LLC
1 Expert Panel Members:
Reinhard Krestel, CPA, MDD Forensic Accountants Paula Essick, Magnan Graizzaro & Associates CPAs, LLC Paul VanDerHeyden, L.J. Shaw & Company
Western Loss Association Fall Conference Lake Lawn Resort, Delavan, Wisconsin September 22, 2016
Provide a general understanding of business interruption coverage Discuss common pitfalls in the measurement of a business interruption
Understand common policy language and coverage concepts Review claims handling and adjustment concepts for business interruption claims Recognize the difference between fixed expenses and variable expenses Accurately measure the business interruption loss for a restaurant under various factual scenarios
FOR EDUCATIONAL PURPOSES ONLY, NOT TO BE DISTRIBUTED OR USED FOR ANY OTHER PURPOSE WITHOUT PERMISSION
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. . . and Nonna requests an advance for business interruption and extra expense. What do you do? What do you look for?
Physical Damage To Described Property By A Peril Insured Against Which Causes A Necessary Interruption Of Operations
The Policy Covers:
The Defined Loss For The Defined Indemnity Period
Is there the required “physical loss or damage?” What is the proximate cause? Involvement of covered and excluded perils?
What caused the “suspension” or “interruption”? What is the indemnity period/period of restoration? Due diligence and dispatch? Has there been a sufficient “suspension”
Generally, business interruption coverage requires a finding of “direct physical loss or damage,” which typically is understood to mean “a distinct, demonstrable, and physical alteration” of property. Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 235 (3d
A number of courts follow this general rule:
∗ Clover v. Allstate Ins. Co., 2008 U.S. Dist. LEXIS 23823 (E.D. La. Mar. 26, 2008) (physical damage required, but there was fact question as to whether the insured closed her store due to personal reasons or damage from Hurricane Katrina) ∗ Pentair, Inc. v. American Guaranty and Liability Ins. Co., 400 F.3d 613 (8th Cir. 2005) aff’g 2003 U.S. Dist. LEXIS 13521 (D. Minn. July 31, 2003) (inability of suppliers to function due to power loss does not satisfy physical loss or damage requirement for contingent business interruption) ∗ Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 235 (3d Cir. 2002) (applying NY and NJ law) (“In ordinary parlance and widely accepted definition, physical damage to property means a ‘distinct, demonstrable, and physical alteration’ of its structure”) ∗ Royal Indem. Co. v. Retail Brand Alliance, Inc., 822 N.Y.S.2d 268, 269, 33 A.D.3d 392, 392-93 (1st Dep’t 2006) (the suspension of operations “‘must be caused by direct physical loss of or damage to property’”) ∗ Arcy Plastic Laminates v. Travelers Indem. Co., 787 N.Y.S.2d 675, (N.Y. Sup. Ct. 2004) (no business interruption coverage where the insured failed to show that any reduction in its business was caused by property damage) ∗ Harry’s Cadillac-Pontiac-GMC Truck Co., Inc. v. Motors Ins. Corp., 126 N.C. App. 698, 486 S.E.2d 249 (N.C. 1997) (lack of access to car dealership due to snowstorm does not equal physical loss or damage) ∗ Ramada Inn Ramogreen, Inc. v. Travelers Indem. Co., 835 F.2d 812 (11th Cir. 1988) (applying Fla. Law) (upholding denial of BI coverage where physical damage did not occur to covered premises, but only to non-covered premises)
However, some courts have interpreted “physical loss or damage” more favorably to insureds by holding or suggesting that a loss of function constitutes property damage:
∗ Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524, 968 A.2d 724 (N.J. Ct. App. 2009), cert. denied, 200 N.J. 209, 976 A.2d 385 (2009) (“physical damage” is ambiguous and could include food spoilage from a blackout) ∗ Pepsico, Inc. v. Winterthur Int’l Am. Ins. Co., 806 N.Y.S.2d 709 (2d Dep’t 2005) (holding that where faulty raw ingredients caused soft drinks to lose function and value by making them unmerchantable, the soft drinks were physically damaged) ∗
with an unapproved chemical were physically damaged, even if safe for human consumption) ∗ Dundee Mut. Ins. Co. v. Marifjeren, 587 N.W.2d 191 (N.D. 1998) (holding that loss of function of a potato storage facility due to an electrical outage constituted physical damage) ∗ Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52 (Colo. 1968) (finding physical loss or damage where church was closed by fire department due to presence of gasoline vapors) ∗ Hughes v. Potomac Ins. Co., 18 Cal. Rptr. 650 (Cal. Ct. App. 1962) (where house on a hillside became precariously perched on a cliff after a landslide, the court held it was physically damaged because it was unsafe to occupy the house) ∗ Widdows v. State Farm Ins. Co., 920 So. 2d 149 (5th Dist. Fla. 2006) (holding that pipe abnormality, being “backpitched” from an unknown cause, constituted physical loss or damage)
∗ Dents from hail impacts ∗ Cosmetic damage only – no change in performance ∗ Insured claims they had to replace, resulting in a few days of suspended operations
Basic concept: Make the insured whole. No more. No less.
This raises two basic questions: 1) How much revenue would the insured have generated had there been no loss? 2) How much would it have cost the insured to generate the revenue? Calculation:
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What, when & how? Business contingency/mitigation plan? Proximity of other locations Alternative production sites Property damage loss amount Identify any duplications, such as cleanup payroll & additional expense What other experts are needed?
What do they do? How long have they been in business? Number of locations? Number of employees? Understand payroll: salary, hourly, etc. Production schedule? Manufacturing process?
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Stock Property Damage Business Int. Extra Expense Financial Cond.
Copies of all leases & contracts
Budgets, plans and forecasts
X Depreciation schedules Federal and state income tax returns X X X X X X X X
Stock Property Damage Business Int. Extra Expense Financial Cond.
Maintenance records / planned turnarounds Flow charts and diagrams X Production records Monthly financial statements (balance sheet and income statement) X X X X X X X X
Physical inventories / perpetual inventories Operating schedules State sales tax returns (monthly)
Stock Property Damage Business Int. Extra Expense Financial Cond.
X X X X X
∗ Tax returns
∗ Federal, state, payroll, and sales & use
∗ Monthly Financial Statements
∗ Income Statement - Reflects Profit & Loss Over Time ∗ Balance Sheet - Assets & Liabilities at a Point in Time
∗ Monthly Bank Statements ∗ Specific Analytical Reports (Sales, Orders, Production, Inventory, Rent Rolls, etc.) ∗ Sales Invoices/Purchase Invoices ∗ Payroll Register ∗ Fixed Asset Register ∗ Copies of Lease Agreement(s)
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Description Amount
Gross Sales $10,000 Less Cost of-Goods Sold 5,000 Less Variable Costs 1,000 Less Payroll 1,000 Less Fixed Costs and Charges 2,000 Net Income $1,000
Net Profit Net Profit Net Profit Cost of Goods Sold Cost of Goods Sold Discontinuing Expenses Discontinuing Expenses Net Profit Continuing Expenses Continuing Expenses Continuing Expenses Continuing Expenses
Net Profit + Continuing Expenses =
Business Interruption
Revenue _ =
Business Interruption
Discontinuing Expenses
Description Amount
Gross Sales $10,000 Less Cost of-Goods Sold 5,000 Less Variable Costs 1,000 Less Ordinary Payroll Not Covered Annual Business Interruption Value $4,000
Top-Down Method Bottom-Up Method
Description Amount
Net Profit $1,000 Plus Fixed Costs and Charges 2,000 Subtotal 3,000 Plus Ordinary Payroll Covered 1,000 Annual Business Interruption Value $4,000
Determined by the adjuster, based on the terms and conditions of the policy in force at time of loss The insured should be aware that she is entitled to collect for only such length of time as is necessary to repair or replace the damaged or destroyed property, with the exercise of due diligence and dispatch
consideration all factors which may have affected the insured’s business during the loss period
certain overhead elements, such as maintenance, depreciation, utilities,
∗ Catlin Syndicate Ltd. v. Imperial Palace of Miss., Inc., 600 F.3d 511 (5th Cir. 2010) (no consideration given to post-loss profit
∗ Finger Furniture Co. v. Commonwealth Ins. Co., 404 F.3d 312 (5th Cir.2005) (“In determining the amount of gross earnings covered hereunder for the purposes of ascertaining the amount of loss sustained, due consideration shall be given to the experience of the business before the date of the damage or destruction and to the probable experience thereafter had no loss
∗ Prudential LMI Commercial Ins. Co. v. Colleton Enterprises, Inc., 976 F.2d 727 (4th Cir. 1992) (insured hotel denied coverage for profits it would have earned from increased demand for rooms following Hurricane Hugo) ∗ American Automobile Ins. Co. v. Fisherman's Paradise Boats, Inc., 1994 WL 1720238 (S.D.Fla. Oct. 3, 1994) (insured boat and marine supplier denied recovery for increased demand following Hurricane Andrew) ∗ Levitz Furniture Corp. v. Houston Cas. Co., 1997 WL 218256 (E.D.La. Apr. 28, 1997) (interpreting significantly different policy language -allowing recovery of income the insured would have earned “had no interruption of production or suspension of business operations or services occurred”-to create coverage for lost profit opportunities due to increased demand following flood) ∗ Stamen v. Cigna Prop. & Cas. Ins. Co., 1994 U.S. Dist. LEXIS 21905 (S.D. Fla. June 10, 1994) (considering greater profits available if store had been open after hurricane) ∗ Consolidated Cos., Inc. v. Lexington Ins. Co., 616 F.3d 422 (5th Cir. 2010) (no consideration given to Katrina’s effect on insured’s market) ∗ Fireman’s Fund Ins. Co. v. Holland America Line-Westours, Inc., 25 Fed. Appx. 602 (9th Cir. 2002) (taking into account subsequent “make up” reservations) ∗ Pennbarr Corp. v. Ins. Co. of N. America, 976 F.2d 145 (3d Cir. 1992), (where the insured stretched its inventory to meet sales demand for the full period required to repair earthquake damage at its plant, it was denied recovery for loss of sales, occurring after this period, equal to the production it lost as a consequence of the earthquake damage)
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“Nonna’s Kitchen” (Storefront)
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“Nonna’s Kitchen” (Storefront)
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“Nonna’s Kitchen” (Storefront)
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“Nonna’s Kitchen” (Storefront)
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Insurance Terms Materials & Supplies Consumed Profit Continuing Expense Non- Continuing Expense Ordinary Payroll Unincurred Selling Continuing Expense Sales Expense Profit Direct Labor Fixed Overhead Variable Mfg. Expense Materials, Chemicals & Supplies Fixed Mfg Expense Accounting Terms
INSURED UNINSURED
Under business interruption coverage, the insured recovers all fixed and/or continuing costs, but not variable and/or noncontinuing costs. Although “fixed” expenses generally continue while “variable” expenses do not, it is important to remember this is not always the case, especially in a total shutdown situation. Kohler’s Dictionary for Accountants defines fixed expenses as “…operating expenses that do not vary with business volume” and “costs…or obligations which have already been incurred and hence cannot be changed.” Variable expenses “vary directly, sometimes proportionately, with sales or production volume…or other measure of activity.” Some costs are called semi-variable or semi-fixed and include variable and fixed
gas, electric and water.
Fixed Expenses Variable Expenses