Determining If You Need a Business Interruption Coverage Checkup

J.P. Gonzalez-Sirgo
Founder of J.P. Gonzalez-Sirgo, P.A.

Businesses periodically must undertake a risk management assessment to determine whether they have the appropriate amount of business interruption insurance coverage.  The economy and general market conditions are constantly in flux.  These changes, which often are unexpected, require a re-evaluation of your judgments, assumptions and decisions to undertake a risk assessment regarding the amount of your business interruption coverage.   This re-evaluation process serves the dual role of determining if you have adequate coverage given changes in your business, the industry and the economy, as well as confirming that you are not paying too high a premium for too much coverage.

As important as this assessment process is to mitigate the risk of loss to a business, many companies do not engage in such an analysis until it is too late.  While a loss following a harsh storm or other loss might spur a business to reconsider their business interruption coverage, the adverse economic consequences associated with failing to be proactive can be financially devastating.  During tumultuous economic times, a business interruption worksheet used to construct your business interruption coverage can be outdated within a year.

While all types of insurance coverage should periodically be reviewed and updated, the need for an insurance coverage checkup is especially acute for business interruption coverage because such coverage is predicated on assumptions about future conditions at the time the policy was written.  These assumptions are founded on past economic and company conditions and performance trends which may no longer be accurate.

Admittedly, there is no way to accurately predict every possible future scenario even if you revise your commercial policy on a regular basis.  However, a determination of the appropriate amount of coverage during a risk assessment review involves achieving the most accurate estimate possible based on an “actual loss sustained.”  This value frequently is defined as the difference between the income a business would have earned without the incident that caused a loss and what the business actually earned.

When assessing whether a policyholder has the proper amount of coverage, a careful analysis must be conducted to accurately predict future earnings based on current and future trends which may involve a review of factors that include changes like the following:

  • Sales Trends: When the initial policy was purchased, the company may have been experiencing an upward sales trend because of favorable economic conditions.  Recession or other negative economic variables can reverse this trend, so the prior forecasts are no longer accurate.
  • Change in Market Share: An improved market position may result from increased sales because competitors have gone out of business or the development of new products that are in high demand.
  • Variance in the Supply Chain or Commodity Prices: Contracts may have expired or not been renewed with suppliers, or suppliers may no longer be engaged in operations.  If a business experiences changes in its cost structure, this may justify a recalculation of potential future business interruption losses.
  • Introduction of New Product Lines: When a business markets new products, the lack of a proven sales history can make sales volume projections difficult.  Companies introducing new products might need to revise coverage based on lack of sales performance.

These are obviously just a few examples of the multitude of evolving conditions and circumstances that might make a business interruption coverage update advisable.  If you have questions about Florida commercial insurance claims, you are welcome to contact my Miami insurance claims dispute law firm.  My law firm represents policyholders in claims disputes in Miami and throughout Florida.  The Law Firm of J.P. Gonzalez-Sirgo, P.A. offers free consultations and case evaluations.  No Recovery, No Lawyer Fees.  Call 305-461-1095 or Toll Free 1-866-71-CLAIM.

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