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Business Interruption Cost

To do so, the following need to be considered:
Pre-loss history: This is the key predictor of what the business would have done during the claim period. The months just prior to the incident are the most logical indicators, but sometimes they are not representative. If the business is seasonal, several years of experience may be needed to establish a cyclical profile. (Charting is a useful tool for this task.) Business forecasts: These should be examined to establish what management anticipated for the period in question. If available, it is useful to see how accurate prior forecasts have been in order to determine if the current forecast should be adjusted by some factor to make it more exact. External economic predictors: Available trade association data, related industry information, or Department of Commerce statistics should be gathered and factored into the model. Once the mathematical model has been established, any sales or production during the indemnity period, or make up afterward, should be subtracted, the difference being the actual loss. Sometimes, when substantial economic swings occur, new products or services are introduced, the market undergoes changes or limited historical data are available, reaching an agreement with the adjuster's consulting accountant can require numerous exchanges of data and follow-up discussions. It is better to identify potential problems at the outset and devote the time and resources to supporting your assumptions, rather than to rush the process and experience the frustration of having to go back and develop corroborating arguments, thereby reducing credibility and extending the review period by many months. Value: Once the total output loss during the indemnity period has been determined, there remains only to calculate how much of the unearned gross revenue is actually out-of-pocket. Obviously, net profit has been lost, and so have all expenses that continued over the duration of the shutdown. A caution here: continuing expense during the claim period is not the same as the accounting category of fixed expense, although they have much in common. It is recommended that you examine your fixed expenses to determine which of them continued during the restoration. A lot will depend on the severity of the damage and duration of the interruption. Some examples are: Depreciation on destroyed buildings and equipment ceases until money is expended on their replacement.

Utility costs are usually more a function of production than building occupancy, so they will decrease unless there is a fixed utility demand charge, but even that may discontinue if production will be interrupted for several months. Salaries plus their associated fringes are usually continuing expenses. Labor payroll is not. Of course, labor expended on repairs will be paid as a property damage cost. However, insurance companies can reimburse for first line supervisors as an extension of fixed expenses, if they are key personnel and if they are actually kept on the payroll during the outage. However, it is best to discuss this with the adjuster first to avoid the chance of disputes later on. Many union contracts provide that if employees are not notified a specified amount of time prior to their shift to stay home, they must be paid for a minimum number of hours. Insurance companies will generally cover this cost, as long you provide them with a copy of the union contract. Actually, there are very few hard and fast rules, except that an expense must continue during the period to be claimable. Logic and reason are usually the best guides. One cost which insurers still do not routinely pay is interest on the cash you expend for repair costs. They may, however, make advance payments against property and business interruption claims, which have been reasonably demonstrated and are undisputed. A bit of negotiating skill will come in handy here.

Additional considerations:
There are a few additional aspects of the business interruption claim calculation to keep in mind. In the event you have incurred expenses to speed the repairs, those costs are claimable under the B.I. policy, as long as they reduce the claim by at least a like amount. These can be in the form of overtime labor premiums, expedited shipping charges, premiums to suppliers, and sometimes bonuses to contractors for early completion. If you anticipate spending sums that will exceed the amount of any potential business interruption savings, you will need coverage in your policy for extra expense. This type of expenditure is most commonly incurred by companies, which rely on competitors to manufacture goods for them when they suffer a large loss. By spending more than might make economic sense at the moment, they avoid having a long-term contract cancelled or losing market share that might take years, after he loss is over, to recover.

In the event your hourly labor force is comprised of especially skilled individuals, who might be difficult to replace after a prolonged layoff, you should consider including their payroll costs in your business interruption coverage. This would allow you to continue paying all, or a part of their wages, while they are idled during the repair period. This is often referred to as ordinary payroll coverage. A final point to keep in mind is that if your claim includes finished goods, any profit and continuing expense you receive under a property claim must be credited against the business interruption claim. In effect, the items in inventory that were sold to the insurer, as discussed earlier, are considered sales during the indemnity period. However, depending on the nature of the business, it may be necessary to rebuild the finished goods inventory to pre loss levels before shipments can resume. If so, the indemnity period is extended until that point is reached. The same is true for work in process. Normal operations do not commence until the production pipeline is filled and finished goods are coming out the end.
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