One of my favorite sayings related to calculating a business interruption loss is:

All variable expenses are saved, but not all saved expenses are variable.

This quote can often be applied to rent related to office or production space. Before a business interruption loss occurs, managers should review commercial leases and look for an “abatement” clause within the lease. In general, an abatement clause relieves the renter of payment obligations during the period that the building cannot be used for its intended purpose. If there is an abatement clause, rent will most likely be considered as a saved expense in a business interruption calculation.

It’s important to understand if an abatement clause is in a rental or lease agreement at the time a rental/lease agreement is executed.  For example, if management is unaware of the abatement clause, the business may inadvertently continue to make rent/lease payments that could be difficult to recover. For many businesses, the time period following a loss is one where every dollar must be utilized in the correct way, because businesses are especially vulnerable to cash flow fluctuations following a loss.

Before a loss occurs, review leases for abatement clauses and write instructions for rent payments, depending on the lease wording, in the business continuity plan so there are as few mistakes as possible in that hectic time following a disaster.

I am often asked to assist professional services firms, such as attorneys, accountants, engineers, and doctors, with estimating their business income values at risk.  My advice to professional services firms is often the same:  assume you will collect nothing for your lost business income.  I know that this advice sounds harsh and may seem shocking. But professional services firms should be aware that proving lost business income to your insurance company after an event such as a fire or natural disaster is one of the most-difficult scenarios.  So, why is supporting a business interruption insurance claim for a professional services firm so difficult?  Because the insurance company will assume that you, the professional services firm, will make up the lost time.

When I started my career, I worked for one of the biggest forensic accounting firms that prepares insurance claim calculations for the insurance company.  In other words, I worked for the “other side,” and my client was the insurance company.  During this time, when a professional services firm (a group of attorneys) submitted a lost business income claim, I was trained to ask the following:

• Please provide the names of the clients that you had at the time of the loss.  Of these clients, which ones did you refer to another attorney? Which attorney did you refer them to?  Please provide the contact information for the attorneys who are now providing services to your clients.

• Please provide the contact information for all potential clients who contacted you following the incident, that you told you could not provide services because of the incident.

You get the picture.  The attorneys didn’t send any clients away and didn’t turn away any new clients.  They may have lost some incoming phone calls before the phones were forwarded to cell phones, but that type of communications loss is often extremely difficult to support with records kept in the normal course of business.

Professional services firms often lament, “We lost the billable hours and we can’t make it up!”  But the fact of the matter is that I have heard an adjuster respond, “Work late, work on the weekends, do whatever you have to do.  You are not insured for extreme inconvenience.”

So what can professional services firms do when determining their values at risk for a lost business income scenario?  My advice is simple.  Have a strong business continuity plan and make sure you work with your broker to have adequate extra expense limits.  While it is still prudent to have business income insurance, be aware that your loss will most likely be an extra expense issue and implement procedures to make sure any losses of new clients are minimal.

Following Hurricane Katrina, I was retained to help a private school quantify its business interruption loss.  I valued the business interruption loss related to the period of restoration as well as the extended period of indemnity.

The first hurdle was getting the adjuster to understand that a school doesn’t make widgets.  What I mean is that once five weeks of school were missed, due to the physical damage, that the entire quarter was a complete loss.  A school is not a widget factory that can just add another shift or work overtime.  The students can’t go to class for 22 hours a day once repairs are done.  Do I sound a little annoyed?  Check the header of my website and note the word “passion.”  Yes, I do get worked up over my clients’ situations.

Once we moved past that issue, the adjuster said the correct valuation of the loss for the extended period of indemnity was $0.  Yes, that’s right, zero dollars.  He said that the ongoing loss was not due to the physical damage caused to the insured, but was because of the personal damage sustained by the students, such as the homes of students were so destroyed that they moved from the area.  He further said that the personal damage sustained by students was excluded under the “Loss of Market” exclusion in the policy.

In this case, the only thing the adjuster was lacking was support, because there was no definition for “Loss of Market” in the policy.  He could not identify the school’s “Market,” he had no addresses for, or direct proof of damage to students’ homes.  It was one of those theoretical defenses.  The end result was that the broker and insured were able to use my observations to negotiate an equitable settlement.

My advice to schools and universities:  Work with your broker to see if your policy contains a “Loss of Market” exclusion.  If it does, make sure that it is clearly defined or remove it from the policy so you don’t have to figure out what it means in the middle of a business interruption insurance claim.

After a fire, flood, earthquake, or other major disaster, corporate officers, risk managers, and business owners are faced with making quick decisions related to disaster recovery. When the unthinkable happens, there are many different professionals or services that a business may need to hire quickly in order to minimize a business interruption.

I’ve worked with many clients who put together a basic business continuity plan. Based on decades of experience working in this type of chaotic environment, my advice is to assemble a disaster recovery team before it is needed.

First, identify the types of assistance that you think your business might need and include them in a business continuity plan, such as:

• Smoke and water restoration
• Document cleaning and restoration
• Someone to perform emergency repairs
• On site security guards
• General contractor for physical repairs
• Commercial real estate professional to find temporary or replacement facilities
• Insurance coverage attorney
• Forensic accountant who works with insured parties
• Media expert

Research and interview appropriate firms and individuals.  Find out if a firm can be placed on retainer, in case of a catastrophic scenario such as an earthquake, which would guarantee that your firm will be served at the head of the line if you suffer a business interruption. Store your business continuity plan with the contact information for professionals on your disaster recovery team in an envelope, with a copy of the current property insurance policy, and store all of this information at an off site location, such as a bank.  Contact the professionals you’ve chosen to work with on an annual basis and let them know about any significant changes to the business that may affect their role in the event of a business interruption.

Why should a business go through all of this trouble before they even have a business interruption?

Because risk managers, corporate officers, or business owners will have very little time to interview and review the credentials of the professionals they need most in the aftermath and chaos following a business interruption.  If you’re using professionals that you assembled before the loss event, those professionals will have some existing knowledge of the business and will not have to learn everything about the business from scratch.

The chaotic time following a disaster can be a very emotional one for business owners, risk managers, and corporate officers.  When possible, critical decisions should be made when there is no pressure, rather than in the emotional aftermath following a disaster.

Which professionals do you include in your disaster recovery team? Share your advice with other readers below, in the Comments section.