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.

John was recently interviewed by CNNMoney.com reporter Catherine Clifford. In her article Florida: BP’s next big mess, John comments about business interruption issues and the impact that the BP oil spill will have on tourism dollars to the hotel and resort industries in Florida and all along the Gulf coast.

The Importance of Proper Record Keeping

As a follow up to that article, John wants corporate officers, risk managers, and business owners to understand that the most important thing to do, starting right now, is to keep detailed financial records. The records you keep right now can affect the outcome of your settlement, even if that settlement occurs months or years from now.

It doesn’t matter if your business will recover financial damages from the BP oil spill fund being administered by Kenneth Feinberg, an Oil Pollution Act claim through the National Pollution Funds Center, or by filing suit against BP.  You must have the correct records to support your claim and define your business interruption loss.

Many times, business owners and corporate officers don’t understand which records to keep in order to maximize the settlement of a business interruption claim.  It matters.  The good news is that we can help.  For more information, visit our Oil Spill Services page.

For more information about business interruption issues related to the BP oil spill, visit our blog here:  BP Oil Spill.

One word: policy. For BP oil spill claims, there is no policy.

For almost two decades, the vast majority of my experience has been in calculating business interruption losses for insurance claim purposes.  Because the amount that a business recovers for a business interruption loss is limited by the provisions within the insurance policy, a business may experience damages beyond what is actually covered in the policy.  When this situation occurs, it can be very frustrating to the business owner or corporate officers.

What makes the BP oil spill claim process different is that there is no policy that limits the damages that can be claimed against BP.  All damages that can be supported, with a reasonable degree of accounting/valuation certainty, should be presented and considered for reimbursement by BP and Mr. Feinberg’s team. 

As a matter of fact, until very recently, it has been the position of both BP and Mr. Feinberg that all “legitimate claims” would be paid.  This sounds very reasonable to me as a damage valuation expert.  Businesses should have to quantify, support, and defend their damage measurements.  However, in recent public statements, Mr. Feinberg has revised his position.  He now states that not everyone will be paid and that physical damage, in other words, oil on the beach, is a prerequisite for recovering damages.  My question is, “Why did this change in his thinking occur?”

I’ve recently learned that BP has engaged ESIS to administer the claims related to the $20 billion fund for BP claims.  ESIS is a third party administrator with the technical abilities to handle a large volume of damage claims. Sounds like a good idea, right? It does, until you look a little closer at who’s really involved. 

ESIS is owned by ACE.  ACE is a property insurance company.  A company well versed in both limiting their liability by verbiage in their insurance contract and then hiring teams of experts to minimize payments on claims made against them. 

In other words, a property insurance company has now become involved and all of a sudden businesses must prove “physical damage” in order to be reimbursed for financial damages.  It’s not hard to connect the dots. 

Here’s my prediction: at some point, you will hear Mr. Feinberg talk about limiting the damages to a specific time frame following the actual oil cleanup.  The insurance term for limiting a time frame related to damages is the “extended period of indemnity.” 

The powers that be are trying to, and will continue to, apply insurance policy theory to a situation where no insurance policy exists, in order to limit the amount of damages BP will have to pay. The situation is supremely unfair to Gulf coast residents, who never entered into a contractual agreement with BP, but are now seemingly subject to rules they never agreed to.

Does anyone really know how long the damage due to the oil spill in the Gulf of Mexico will be around? How long will business owners and residents be affected–months, years, or decades?  Hopefully, Mr. Feinberg will have compassion for the people of the Gulf coast when evaluating these claims, rather than listening to only his new insurance company friends.

I recently watched the following video on CNN.  While I have a lot of empathy for the business owner in the story, I think that the angle that the reporter takes in the story shows the reporter’s lack of research into the subject matter by attempting to equate the term “forensic accounting” with “death” for Gulf coast business owners.

The term “forensic” means that which is subject to public debate (think legal setting).  The definition of a debate is  a “discussion, involving opposing viewpoints.”  In other words, there are always two sides to a debate. It’s true that forensic accounting is adversarial in nature because the numbers generated by a forensic accountant are used to support a specific position in a debate.  The problem with the BP oil spill claims process is that right now, many business owners are experiencing only one side of the debate–BP’s side.  Businesses need to understand the most basic rules of the claims process, including:

1. These claims are a debate and therefore they’re subject to negotiation.  Businesses do not have to simply accept what BP’s forensic accountants tell them.
2. Businesses need to hire their own forensic accountants, to get the tools they need to identify, quantify, present, support, and defend their oil spill claim.

While business owners or corporate officers are the definitive subject matter experts of their business, they are not economic damage valuation experts. They do not know how to identify, quantify, present, support, and defend their damage measurements. By hiring a forensic accountant who is an expert in business interruption claim preparation, businesses can get paid both fairly and faster.

Some business owners are choosing to trust BP to “do the right thing” later on and are not immediately hiring a forensic accountant to calculate preliminary estimates of a business interruption loss related to the Gulf coast oil spill.  A business owner or corporate officer could be rationalizing that:  a) BP will pay these losses because they said they would; b) If BP doesn’t pay, we can get reimbursed through the federal fund; or c) Our attorney will have us hire someone to quantify our damages before a trial, in the event we sue BP for our business interruption. The mistake in this logic is omitting the urgency of the business interruption claims process.

All of the forecasters are predicting an active 2010 hurricane season.  While the ultimate effect of a hurricane on the spill situation is unknown, one thing is certain.  A business that has not effectively supported its damages from the oil spill, prior to a hurricane, will have serious issues in presenting loss estimates after a hurricane.

Business owners or officers may wonder, “Why?  What’s the difference?”  Here’s what they need to realize: once a hurricane hits, businesses may be further damaged, and it may be very difficult to segregate damages from the economics of the oil spill and damages from the hurricane. Businesses will be in the unenviable position of trying to be reimbursed by either BP or the insurance company, as both BP and the insurance company point their fingers at one another, fight over who should have to pay what proportion of the losses, and the entire process grinds to a halt, negatively affecting the cash flow of the very business they should be helping.

Alternatively, if a business immediately hires a forensic accountant who specializes in business interruption calculations, the business can provide BP with strong and defensible business interruption models before the hurricane hits. In other words, a business will be “on record,” having properly quantified and documented their damages related to the oil spill. Then, incremental damages that occur in the event of a hurricane will be easier to segregate and will have more merit than business interruption damages that are arbitrarily allocated after the fact.

Now is the time to calculate a business interruption loss due to the oil spill and document these losses, before the waters get muddied as well as oiled.

From the time you notify your insurer about  business interruption loss, and you have your first conversation with the insurance adjuster or their consultants, you are being deposed. Of course no one has sworn you in and no one told you that “everything you say can be used against you.” But this is the essence of all communications between you and the insurance company from this point forward.

Please understand that I am not saying that you shouldn’t talk to your insurance company, but I am suggesting that you be guarded in your conversations. Every estimate, guess, maybe, and possibility that comes out of your mouth is being recorded in someone’s notebook. For example, you may have said that a competitor, with whom you have a friendly relationship, may be able to produce products for you to offset your losses. If this “deal” between you and your competitor doesn’t work out for whatever reason, you may have to explain to the adjuster who you contacted, what was said, what were the potential terms, why the deal wasn’t struck, what is the contact information for the person from the other company, can the insurance company call and question them, etc. You will be treated as if you did something wrong when you just tried to mitigate your loss.

My advice on this issue is simple. Answer questions truthfully, directly, and as succinctly as possible. Do not elaborate on your answers and do not guess or estimate. If someone is asking questions you do not feel comfortable answering immediately, ask them to put the questions in writing and tell them you will respond after researching the issue. You will need to answer their questions, but I think you should do submit an answer on your own terms, with time to think about it.

Putting your answers in writing also helps you with the documentation burden you’re tasked with throughout the business interruption claim process.

I contacted the Bristish Petroleum claims hotline today and asked them the following question: If a business retains a forensic accountant to quantify, support, and create a claim for their economic damages related to the oil spill, will the forensic accountant’s fees be reimbursed?

I think this is a reasonable question given that this is an expense that the business owner would not have incurred but for the oil spill. In typical corporate fashion, the response from the BP representative was that the business owner should file their claim and then an adjuster would decide whether or not these fees could be recovered. I asked if there was any objective basis in the adjuster’s determination and I was told “no.” The adjuster has the authority to make a subjective decision on whether or not a professional fees incurred by the business will be reimbursed.

It’s interesting that BP has said publicly that it wants legitimate and supported claims, but won’t commit to reimburse businesses for professional help until after they incur the cost.

So, how will Mr. Feinberg’s involvement change the claim practices related to this loss? I guess we’ll all find out together in the coming weeks. If you have some insights to the situation, please let me a comment below.

I recently read a story in the New York Times that discusses the lack of payment to business owners affected by the Gulf Coast oil spill. I think that the general public is amazed, and outraged, that payments are slow if they come at all. As someone who values large commercial insurance claims, I am not surprised in the least.  So how can corporate officers and business owners expedite a business interruption or business income claim related to the BP oil spill?  Here’s how:

Step 1 – Get Over It

I make no apologies for insurance companies, or in this case, British Petroleum. The events that have unfolded in the Gulf are a human and environmental tragedy. However, what a business owner needs to understand and accept is that in order to collect on a business interruption or business income loss from Mr. Feinberg (the person who is in charge of administering the BP damage fund), a business must quantify, support, and defend their losses. You can’t simply write a six figure number on the back of a cocktail napkin and slide it across the table–that effort does not create a legitimate damage claim, and it’s not going to cut it in this case.

Will it require work to put your claim together?  Yes.  Is it fair that you have this additional burden of work as a result of the oil spill, which is clearly BP’s fault?  No.  Even though it isn’t fair, will you still have to put together a proper business interruption or business income claim? Yes.  Do I and your fellow Americans think that you’ve been dealt a raw deal by British Petroleum? You bet we do.

Now let’s get started on expediting your claim.

Step 2 – Get On With It

The best business interruption or business income claims, and the ones that will be paid in a timely manner will be those with the following characteristics:

1. The claim should be formatted in a manner recognized by the claim auditors. Why? A well-formatted claim does the following:
   • Instantly provides a level of comfort to the person reviewing it, making it easier to understand.
   • Prevents the auditor from having to figure out what is being asserted.
   • Expedites the auditor’s review
2. The claim should be calculated using a method that is recognized by courts and the loss valuation community. Why?
   • If the methodology is exotic, it may be denied because it won’t hold up in court.
   • Methods used by loss valuation experts are recognized by other professionals and easily accepted as tried and true.
3. The claim needs to be fully documented and supported.  Why?
   • Supporting documentation relates to facts underlying the valuation schedules.
   • These may be historical financial statements, payroll records, invoices, receipts, industry data, etc.
   • These items need to be catalogued and referenced within the loss schedules.

Putting together a business interruption or business income claim is a lot of work and is most efficiently performed by a loss valuation professional who specializes in business interruptions. The right forensic accountant can explain the options and methods as well as guide a business to the right accounting model and presentation for the claim.

The issue of whether or not to continue paying employees during a business interruption loss is one of the most difficult for my clients.  On the one hand, many of my clients have real empathy for their employees, and treat them like family. When their business experiences a loss, they don’t want to see their employees suffer through a suspension of wages. On the other hand, these same employers seldom want to see their employees sitting around, collecting a paycheck, but doing nothing.  “Ordinary payroll” coverage can help, but there are issues that business owners should be aware of.  Let’s look at the following scenario:

Let’s say, for example, that you have a retail operation with multiple locations.  One of the locations is damaged and has to be closed for several months.  You have ordinary payroll coverage in the business interruption portion of your policy. You decide to send the employees to the other stores because you don’t like the idea of paying someone to sit around on their behind.  Even if they add no value to the other location, it’s OK because you have coverage for their wages.  No problem.  What could possibly go wrong?

A lot! You have just opened a Pandora’s box with valuing and supporting you business interruption loss. Had you sent the employees home, and continued their pay, you would simply have to show that you have no sales, who was paid, and how much they were paid. Since you didn’t do that, the insurance company will usually assume that your received economic benefit for utilizing the employees at the other locations. You may still be able to recover their wages, but you will most likely have to prove to the adjuster:

1. There was no increase in sales at the other location due to the presence of the employees from the damaged store.
2. No employees at the undamaged store had reduced hours as a result of the presence of the employees from the damaged store.
3. No planned “new hires” at the undamaged store were delayed as a result of the presence of the employees from the damaged store.

The documentation to support the items listed above adds another layer to the loss valuation and more headaches for management. While you may be able to successfully deploy these individuals to the other stores, the decision, and the necessary record keeping should be discussed with an educated, experienced, and credentialed forensic accountant and your insurance adjuster.

Everyone knows that tourists and locals on the Gulf Coast eat seafood and lots of it! After I spend a day on the beach with my wife’s family, one of my favorite places to eat is Lulu’s in Gulf Shores. I’ve many memories of relaxed family meals, the grownups sitting around peeling those shrimp and enjoying a margarita while the kids play in the enormous sand area at the front of the restaurant. The shrimp are a main attraction for us. They are those incomparable white shrimp…we get only tiger prawns around here, which are not the same thing at all.

Restaurant owners along the Gulf Coast are lucky to have a plentiful resource that provides a great margin on Gulf Coast staples such as their white shrimp.  But because of the oil spill,  fishing grounds normally used by local suppliers have closed.   Basic economics teaches us that as quantity supplied decreases, price increases.

This type of price change on fish such as white shrimp could drastically increase the restaurant’s cost of goods sold and therefore create a loss of business income. For restaurants, the price changes in the wholesale fish market immediately decrease profit margins and lead to an economic loss. In other words, these changes can happen so quickly that restaurants are unable to pass the price increases to their customers, before menus can be reprinted! In addition, if patrons perceive that seafood may be unsafe, they may choose other items on the menu that have a lower margin than the local, plentiful seafood.

In either scenario, although there may not be an identifiable loss of revenue to the restaurant, the restaurant may still suffer from a loss of business income due to decreased profit margins as a result of the oil spill. The decreased profit margins are an important point, because although there may not be a loss of “sales” there can certainly still be a loss of “profits.”

For restaurants along the Gulf coast who think that they have a business interruption or loss of business income due to the BP oil spill, I suggest that they retain a forensic accountant with specific expertise in economic damage measurement to assess the possible impact to the restaurant’s bottom line. A forensic accountant can help restaurant owners get paid more quickly when a claim is made and help owners understand when a claim will not be paid because it is unsupported.

In the meantime, until the mess is cleaned up, I encourage everyone to frequent local restaurants along the Gulf Coast and support them through this crisis. I know that our family will certainly head back to Lulu’s…