I hear it all the time: we were busy. We were in a period of growth! How could we stop our work in the middle of this booming period to evaluate our business income values at risk? Besides, we don’t really want to talk to the insurance broker again–they’re always trying to upsell us, right?
I am not an insurance broker and I am not on the payroll of any insurance broker. As an independent source, a forensic accountant who’s life work it is to settle business interruption insurance claims on behalf of the insured, I’m telling you that it’s important for a business to regularly adjust its values at risk and policy limits–and to work with your broker to do so.
Many business interruption policies contain a coinsurance clause. A coinsurance clause means that the business is carrying a specific, minimum amount of insurance. Let me show you how the coinsurance clause + values at risk number can affect the outcome of a business interruption settlement.
In year 1, a business does a million dollars worth of business. The business interruption policy states that the coinsurance percentage is 80%. Between year 1 and year 2, the business experiences growth, so the required business interruption insurance limits change, as required by the coinsurance clause.
As you’ll see in the following example, the reimbursement percentage is directly affected by the required business interruption insurance limits–and this is the reason why a business should evaluate its values at risk regularly:
The business still has not revised its values at risk number, which directly affects its reimbursement percentage in the event of a business interruption loss. If the business were to suffer a $400,00 business interruption loss, here’s how those two different reimbursement percentages dramatically affect the settlement a business would receive from its insurance company:
The example I’ve created above is a simplified version of what can happen to a business during a business interruption settlement if its values at risk are incorrect. I can think of numerous examples of businesses I’ve worked with who’ve missed out on collecting hundreds of thousands of dollars because of misplaced values.
Many businesses make the mistake of using only historical information without regard for future business income values at risk. Values at risk should always reflect the anticipated values in the coming year, in other words, the year during which the policy will apply.
In the end, it is a business’ responsibility to ensure that its values at risk are correct. If your business is complex, I suggest that you work with a forensic accountant so that you can understand your values at risk and in order to make fully-informed business decisions.
If your business has not recently updated its values at risk, I encourage you to talk to your broker and get on the path to correcting the situation. Take the time now–unless, of course, you can see into the future and therefore know when the fire is going to happen.
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