“Due to the economic crisis…”
This is the current preamble of choice for adjusters to inform a risk manager, corporate officer, or business owner that a business interruption loss will not be paid or will be extremely reduced. Do I sound a little angry as you read this? I’ll admit that this current approach by many adjusters gets my dander up, because I think that it’s one of the most abused and unsupported arguments I’ve seen during my career. Yes, it is absolutely true that we are living in a time when economic forces affect many businesses. However, the current economic climate does not affect all, or even most, business interruption claims.
So, what should a risk manager, corporate officer, or business owner do when the adjuster tells them that their claim is heavily discounted because of the economic crisis? The silver bullet to combat this argument consists of two simple words … “prove it!” Here’s how to do that:
- Request evidence that the current economic conditions have not already been considered in any sales, order, or production projections.
- Ask for the sources of all information the adjuster wants to introduce as evidence. The headline of a USA Today is not “evidence.”
- Review the data to ensure that the evidence is related to the general industry, the specific products, and comparable sized firms. For example, a company that makes 185 foot luxury yachts is not comparable to a company that makes 8 foot aluminum fishing boats.
- Ask to see the historical tests of this data being applied to non-loss periods. If the relationship they are proposing is true, then one should see a significant correlation between the data that is proposed to be used and the historical operations of the subject business. A typical analysis of this nature would be to calculate the correlation coefficient. For those who are not familiar with this type of analysis, I will discuss it in greater detail, and the application of its results, in a subsequent posting.
- Consider the source of the information. It should come from a reliable industry report, governmental report, private research firm, or similar recognized source.
The bottom line is that no one should blindly accept the assertion that the current economy is negatively affecting a business interruption insurance claim. There should be proof and that proof should be published and come from a reliable and recognized source. The data should be tested and appropriately applied in the analysis. By following these procedures, it’s possible to assess the affect of the economy on a business and appropriately assess when the effects are negative, positive, or non-existent.
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