When Catastrophe Strikes: Recovering Business Losses

By Anthony J. Allison, CPA; Jeremy C. Epstein, CPA, CFA, CAMS; and Eric L. Proctor, CPA
| 9/11/2017

When a traumatic event like a hurricane destroys a company’s assets or disrupts its earnings, management must focus on making the strategic decisions necessary to repair or replace the damaged assets and restore operations. As soon as possible after the event, management should determine if the lost or damaged assets are covered by the company’s insurance policy and, if so, what proof of claim information is required to recover the loss.

Following are some immediate steps to take to recover lost or damaged assets and restore operations:

  • Review your insurance policy to determine if the event is an insured event. Gain an understanding of policy limits.
  • Inform your insurance broker and insurance company of the potential claim.
  • Establish recordkeeping procedures to assess and document the financial effect of the event.

Reviewing the Insurance Policy

A business should review its insurance policy thoroughly to determine how the coverages apply to the specific event. When an event like a hurricane occurs, two aspects of a business typically are affected:

  1. Property is damaged. It is important to identify what assets were damaged or destroyed and how the insurance policy applies to different types of property. For example, an insurance policy typically will have separate property coverage for the building, business personal property, accounts receivable, and valuable records. Understand the types of recovery and associated costs the policy covers for each category of property.
  2. Normal business operations are interrupted. Damaged or destroyed assets can prevent a business from conducting its normal business activities. Review the policy to identify and understand the provisions related to:
    a) Business income coverage, addressing the impact of an insured event on the earnings stream
    b) Extra expenses or expenses to reduce the losses that were incurred

Analyzing the policy provisions early in the process allows a business to credibly and persuasively review the policy with its broker and carrier; then, if disagreements on coverage arise, the company will be prepared to consider consulting with counsel regarding coverage. This review also might prevent a business from making business decisions based on erroneous assumptions regarding coverage.

Contacting the Broker and Carrier

If it is determined that the event is insured, management should contact the company’s insurance broker and insurance company to notify them of the event and the business’s intentions to file a claim. During the initial discussions with the broker and insurance company, it’s important to fully describe the nature and extent of the damage as well as the current status of recovery efforts.

Early discussions with the broker and insurance carrier provide an opportunity to discuss the documentation requirements necessary for filing a claim. This also may aid in securing an advance payment, which could be critical to the business’s recovery by mitigating the effects of the loss.

Documenting the Loss

Every catastrophe has a story associated with it. Preparing a successful claim requires using accounting and business records to tell the story surrounding the event and its impact on the business.

Following are items to consider when describing and measuring how an event affected the business:

  1. Describe how the business normally operates and how the event affected the business’s assets and operation. Provide useful pre-event documents to support this narrative (such as recent financial statements, annual reports, diagrams of operations, or before and after photographs).
  2. Maintain a timeline or diary of events and business decisions that were made in order to mitigate the amount of loss.
  3. Create and maintain separate general ledger accounts to capture amounts incurred related to the individual property coverages (such as building, business personal property, accounts receivable, and valuable records) that are determined to be recoverable. These accounts will segregate the event-related disbursements from the normal disbursements related to a business’s operations and will greatly facilitate documenting and reviewing the claim.
  4. Consider maintaining separate files containing supporting documentation of costs related to the mitigation and recovery efforts, including detailed descriptions of costs incurred.

Taking early steps to record the repair, replacement, and recovery activities and associated costs of a catastrophic event will contribute significantly to filing a well-documented claim, which, in turn, should lead to a prompt and efficient recovery process.

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