No matter what industry you’re in, there are some things that every business interruption loss has in common–the need for record keeping that will support the business interruption claim.   After a  business interruption loss, owners or corporate officers should be prepared to keep the following records:

Payroll/Employee Information

Keep a list of every single one of the employees and their activities following the loss.  Common categories are laid off, home with continuing pay, diverted to another facility or job, working on clean up or repairs, etc.  If anyone works at anything other than their normal job, it is critical that their time and activities are logged in a separate journal for easy reference when assembling the claim.  Signatures of those who supervised the activities are also helpful.

Out of Pocket Expenses

Any expenses, even remotely related to the incident, should be gathered in one location.  Set up a separate receivable account and don’t let extraordinary expenses get mixed into the profit and loss statement.  Also, begin keeping a PDF file with all invoices, receipts, purchase orders, and estimates, which relate to the expenses and will be used to support any claims.  DO NOT get stuck categorizing the items according to the policy.  That can be done later by your forensic accountant or the adjuster.

Management Daily Journal

Have mangers keep a small notebook in their pocket to record all daily activity.  Items to include are meeting attendees, topics covered, major decisions regarding repairs and recovery, progress, use of employees, difficulties or reasons for delays, etc.  All of this will be impossible to recall weeks or months after the loss.

Photographs

A picture is worth a thousand words, or, in some business interruption cases, hundreds of thousands of dollars.  Photograph the physical damage and regularly photograph the same areas to document the repair/reconstruction progress.

While there are many other things to consider following a loss, and many things that are industry specific, no one can go wrong by collecting this universal information.

If you’re in a specific industry, what records do you think that you need to add to the above list?  Leave me a comment below.

When a business suffers a business interruption loss, it needs an expert to quantify the damage, create a loss model, gather adequate supporting documentation, and defend the model and the assumptions within the calculations.  I always suggest using a trained, credentialed, and experienced professional for these types of services.

The reason I emphasized experience is because this is where many so called “experts” are sorely lacking.  How can this be?  Most financial professionals are required to attend continuing education to keep their professional licenses.  Often times these professionals will attend classes that will ultimately allow them to claim they have training in a service niche.  This type of training provides new opportunities for a generalist to expand their practice and dabble in the lucrative world of consulting.  Unfortunately, this happens all too often in the arena of damage measurement valuation.

It is very important for business owners and corporate officers to find out if the expert they are considering hiring has training and some nice alphabet soup after his name, but most importantly, you need to ask what percentage of his billable time in the past 12 months related to your specific needs.

If your accountant spends 40% of his time doing taxes, 30% of his time doing compilations and reviews, 25% of his time doing wealth management planning and 5% of his time measuring economic damages, then your accountant is not a damage valuation expert.

I encourage business owners and corporate officers to find true experts who work significantly, if not exclusively, in the area where the expertise is needed.  If you’re hiring a forensic accountant to prepare a business interruption claim, I can tell you from experience that the firms hired to oppose you by the insurance companies and, most recently by the Gulf Coast Claims Facility, are not part-timers. Insurance companies hire full-time damage valuation experts…and you need one on your side, too.

When I was in the Marine Corps there were strict regulations regarding fraternization between the officers and the enlisted men.  Even though many of these men were of similar age and similar backgrounds, they were prohibited from socializing on a regular basis outside of work.  I think this is sound advice for business owners to apply in their own lives.

How owners think:

After a business owner gets defrauded, I often hear, “They were like family. They spent holidays at my home.  They attended my child’s birthday every year.  How could this have happened?”  Well guess what.  Your employees are not your family.  They don’t belong at your home or family functions.

How fraudsters think:

After interviewing the controller who stole over $300,000 from the business owner, do you know what their side of the story is?  They say, “I built this company right next to them.  I put in as many hours and as much sweat as any of the owners.  Do you know how they repay me?  They invite me to their fancy house and on their expensive boats so I can watch their spoiled kid get presents that I can’t even afford to buy for myself.  They rub my nose right into the money I made for them.  I only took what I had coming!”

It’s human nature to compare ourselves to others–but comparison is the thief of contentment. So my advice to business owners is don’t give your employees a motive, or rationalization, for them to help themselves to your money.  The bottom line is that business owners and upper management should be cordial and friendly to employees at work only.  Find your friendships with peers in local business or professional groups, members from your church, or family members–and leave your work at work.

This post is directed to business owners who have or will submit a business interruption claim related to the BP oil spill, and who are experiencing similar results to those in this MSNBC video clip.

Visit msnbc.com for breaking news, world news, and news about the economy

What I am about to say may not sit well with some of my friends in the Gulf Coast.  However, one thing that I learned in my time in the US Marine Corps was to cut through the BS and tell it like it is.  Gulf Coast business owners need some reality therapy and I’m going to tell them what they need to hear, not what they want to hear.  Hold on.

BP is not your friend.  BP is not in the business of giving money away.  Ken Feinberg is not your friend.  Ken Feinberg will make his money (amount undisclosed thus far) whether you get paid everything you’re owed or whether you go bankrupt.  Ken Feinberg has surrounded himself with adjusters from the insurance community and forensic accountants who work for those adjusters and the insurance companies.  Again, none of these groups of people make their money by ensuring that businesses affected by the BP oil spill are made whole.

The new claims forms and guidelines from the Gulf Coast Claims Facility send the loud and clear message that Ken Feinberg’s team will deny many claims.   If your business is located more than one mile from the beach, they will say that your business is too far from the Gulf and that your losses are too far removed from the actual spill to be covered.

To date, business owners have been good little citizens by submitting reams and reams of paper to BP, and then told to wait.  Because these honest business owners believe that BP and the Gulf Coast Claims Facility will deal with them honestly, they are going right down the tubes waiting for payments that will never come.  The only thing these businesses can do is make the Gulf Coast Claims Facility do one of two things:  pay their claim or deny it.  So how can Gulf coast business owners force the claims facility to make a decision and therefore shorten the time spent waiting for payment and wondering if it will come?

1. Hire an experienced, trained, and credentialed forensic accountant to complete a thorough business interruption loss valuation. If you don’t have this done, you talk numbers until you’re blue in the face, but no one will take you seriously.
2. Submit the valuation as evidence and demand an advance payment.
3. If not payment is received within 14 days, contact an attorney and file suit.

Folks … these huge institutions, BP and your government, care about profits for big business, bureaucracy, and protecting their political future.  They do not care about paying a claim for your business.  Now is the time to fight as if your economic life depended upon it!

An associate at a law firm based in Houston, Texas, recently attended a briefing held by Mr. Feinberg, and as a result I received a summary of that meeting.  The summary contained many points of interest related to valuing business interruption claims related to the Gulf oil spill, but one issue really stood out to me.

According to Feinberg, one of the main criteria in determining the validity of a claim is “the industry’s dependence on the Gulf.”  This statement has huge ramifications if it will be applied as stated.  In the claims world, the phrase “the industry’s dependence on the Gulf” means that no contingent business interruption claims will be considered.  In the world of insurance, the idea behind “contingent” business interruption coverage is to cover the insured for a loss to a major supplier or vendor.  Contingent business interruption coverage is especially important when a business has very few suppliers, or if their suppliers provide a unique product that can’t be readily acquired in the open market.  To summarize what Feinberg seems to be saying:  If your business does not have a direct tie to the Gulf, you will not be paid even if the majority of your revenue comes from companies who do have direct ties to the Gulf.

So, how will Feinberg compensate local governments for lost tax revenue? From a forensic accounting standpoint, the exclusion of contingent business interruption claims will have a severe economic impact to local governments making claims for lost tax revenue, because local governments can claim lost taxes for only those businesses that depend directly on the Gulf. It will be especially important for local governments to properly document revenue streams related to the loss, if the government is considering litigation in order to fully recover its claim.

When it comes to the review of saved expenses, within the context of a business interruption insurance claim, insurance companies’ accountants may base their opinions on flawed assumptions. This situation regularly presents itself in the area of office supplies.  This category of expense is often the office catchall.  It usually covers items like copy paper, printer ink, notepads, pens, etc.  These are the normal everyday items used in the performance of business administrative tasks.

Often the loss scenario involves a manufacturer who had a fire in the manufacturing side of the plant and the administrative offices were unaffected.  The initial thinking of the insurance company’s expert is that since nothing is being manufactured, therefore the supplies are all saved.

My opinion is, as always, “it depends.”  If the administrative office were completely closed during the period of indemnity, I would tend to agree with this assessment.  If the offices are open and the they are processing accounts payable, accounts receivable, the marketing department is still selling orders for future product, etc. then this expense, at a bare minimum, continues at least partially if not fully.

The problem is that the items in this account are often purchased in bulk and expensed during the period they were purchased.  There is no historical mechanism to track actual usage and the expense can fluctuate wildly from month to month.  This is an item that often warrants additional scrutiny when submitting a business interruption claim and can be a point of negotiation between the insured business and the insurance company.

For businesses suffering a business interruption loss due to the BP oil spill, the economic damage to the branding of Gulf Coast businesses is more than just perception. In a June 30 appearance before congress, Kenneth Feinberg, the man in charge of distributing BP’s claims fund, was questioned by Nydia Velazquez, a Democrat from New York, and the disaster committee’s chairperson.  Ms. Velazquez asked, “What about tourism dollars lost because people don’t want to go to places they think will be coated in oil?” Mr. Feinberg replied, “If there’s no physical damage to the beaches and it’s a public perception, I venture to say that it is not compensable,” (BP claims czar: Not everyone will get paid, CNNMoney).

Any tourism-related business, such as hotels, resorts, restaurants, golf courses, souvenir shops, and individual condo owners know that public perception has a very real impact on consumers’ buying decisions, and that these perceptions are spread quickly by travel-review/social-networking sites such as tripadvisor, VRBO, and yes, Twitter.  The following video interviews American families on vacation, and why they were reluctant to spend their hard-earned vacation dollars in an area that could be covered in oil.

Anyone can see that buying decisions related to tourism are affected by public perception. So why doesn’t Mr. Feinberg seem to understand?

Just because a business isn’t physically damaged by oil (most are not) it doesn’t mean that they don’t have economic damages as a result of this disaster.  My best guess is that Mr. Feinberg’s decisions are being influenced by the company he’s hired to administer payments, a company called ESIS.  ESIS is a group of accountants owned by an insurance company.  It would seem that ESIS/Mr. Feinberg are using insurance claim logic which dictates that there must be physical damage to a property in order to trigger coverage.

The problem with that logic is that the remaining oil is buried on the beach, intermittently washes ashore, or out at sea, with no ETA.  So does that looming specter of oil, whether or not it’s physically on the beach, affect consumer’s buying decisions?  You bet it does.  And are the economic damages real and measurable?  Without doubt.

Often insured’s take out loans during a business interruption insurance claim for the purpose of covering short term operating costs and extra expenses.  Then, the inevitable question comes, “Will the insurance company reimburse my interest expense for these loans?”  I’m a forensic accountant, and so in true consultant fashion, I can say with 100% confidence, “It depends.”  The question of who should pay the interest on a loan during a business interruption insurance claim is a loaded question with lots of variables to consider.

The first issue is whether or not the loan was anticipated before the loss. If the loan was taken in the normal course of business, then the interest charges will most likely be covered as any continuing normal operating expense would be covered.  The insurance company may argue that the loan was not “necessary” due to impaired operations.

The second issue to consider is advance payments.  If the insurance company pays an insured a reasonable advance, it is very likely that any loan taken out could be deemed as unnecessary.  Each business interruption loss has a unique set of circumstances, and the advance received needs to be compared to the cash needs of the insured.  It is also important to provide the insurance company with a reasonable and supported loss estimate if a business wants to receive a reasonable advance.

Finally, there is the case where an insurance company doesn’t issue an advance, the loss takes a long time to settle, the insured does not have sufficient cash on hand to maintain operations, and a loan must be taken to continue operations.  In this case, it may be argued that the loan interest is an extra expense, because the loan would not have been incurred but for the loss, and was necessary to continue operations as normally as possible.  In this case, it’s important to document the need for the loan to cover continuing expenses or to cover other extra expenses for operations.

In all of the preceding situations, if a loan is taken following a loss, it should be documented.  I sometimes feel like a broken record, but if you’ve read my blog in the past, then you know that proper documentation is one of the foundations of a successful business interruption insurance claim. An experienced, trained, and credentialed forensic accountant can help a business get the documentation it needs to submit a successful business interruption insurance claim.

When one of my clients suffers a large business interruption loss that everyone agrees will continue for a significant amount of time, I try to help them get a reasonable advance payment. An advance on a business interruption settlement serves several purposes:

• It allows both parties (insured and insurance company) to agree that the business interruption loss exists and that it is a large compensable loss.
• It shows the insured that the insurance company is working to settle the loss, and that no one is “out to get” them.
• It prevents future arguments for losses due to restricted cash flows.

My clients often gladly accept these advance payments, without much question, even when they relate to losses in future months.  Many times, in these long tail losses, the insurer will want to negotiate a global settlement to close the loss, particularly when everyone agrees that policy limits will be reached.  When an insurance company wants to make a final payment to settle a business interruption loss before the actual loss period is complete, it’s called a “negotiated settlement.”

Problems can occur in a negotiated settlement when the insurance company wants to discount future loss payments.  Corporate officers and business owners should understand that the insurance company isn’t trying to rip them off, but that just like any other aspect of a business interruption claim, the terms of a  negotiated settlement are just that…negotiable.  I have never seen an insurance company try to apply a discounted rate to an advance payment and I have never seen it applied egregiously on a negotiated settlement.

Management needs to be aware that an insurance company will discount a final payment during a negotiated settlement and know that it is appropriate–because after all, as the cliché goes, time is money. In exchange for receiving a large, lump-sum payment, the insurance company expects a discount. Management’s job is to be aware of this possibility and then to make an argument for the most favorable rate possible.

When I work with clients who suffer a business interruption loss, one of the questions I often encounter is, “What is a coinsurance penalty and why am I not getting paid for my entire loss?”

In short, if a policy has a coinsurance clause it means that the business must maintain a minimum amount of insurance, in relation to their actual value at risk, in order to recover 100% of their losses. For example, if the insured value at risk is $1 million and there is an 80% coinsurance clause, then the insured must carry $800,000 worth of coverage to recover 100% of their losses up to $800,000. If they are insured for only $600,000, or 75% of the required value of $800,000, then they would recover only 75% of each dollar of actual loss. The 25% not recovered is a penalty for being underinsured.

The previous example illustrates why it’s so important for a business to have accurately stated business interruption values at risk. Business owners and corporate officers need to understand that it’s critical that values at risk be updated, at a minimum, on an annual basis.

If a business is in a period of growth and its insurance is based upon values from one, two, three, or more years ago, then the business may be inadvertently underinsured for a business interruption.

The best way for a business to avoid this situation is to work closely with a broker and with a forensic accountant who specializes in business interruption valuations. Together this team can come up with the right coverage for business interruption values at risk.