When quantifying a business interruption for an insurance claim, many expenses are easily identified as variable or fixed. When I use the term variable, I mean that the expense changes with sales or production. As a general rule, variable expenses are usually (but not always) saved and fixed expenses are usually (but not always) continuing. Given this rule of thumb, utilities can be a unique expense in terms of a business interruption analysis.
First, utilities may be partially fixed and partially variable. There may be a monthly connection fee that is a flat rate for any amount of service provided to the property. Then there may be a variable component based upon usage.
Second, the variable portion may be at different rates for different levels of consumption. It is common to see decreasing rates for each increasing incremental level of usage. This type of expense is referred to as a “step variable” expense.
Third, utilities may vary based on seasonality. Depending on the nature of the business, utilities may be higher in the summer or winter for climate control reasons and not just vary due to production. A historical seasonality analysis, the same as would be performed for a sales analysis, should identify whether or not this is the case. If the expenses are determined to be seasonal this should be considered when projecting the expense assuming the loss had not occurred.
Finally, utilities are almost always considered as saved for preliminary business interruption calculations, but they can also ultimately be found to contain extra expense that should be allocated to the restoration portion of the claim. During reconstruction the workers may be using the outlets for tools, the buildings HVAC may be operating at two to three times its normal hours for drying of drywall and paint, or the lighting may be on around the clock for repair work. These reconstruction activities may lead to utility expenses that match, or exceed, normal utility usage in operations.
Because of the above four factors, utilities should be reviewed as a unique type of expense when performing a business interruption calculation. The expense may be saved, equal to pre-loss levels, or there may be extra expense.
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