Many companies, especially those that operate in areas prone to natural disasters, should consider business interruption insurance. Unlike a commercial property policy, which may cover certain repairs of damaged property, this coverage generally provides the cash flow to cover revenues lost and expenses incurred while normal operations are suspended because of an applicable event.

But be warned: Business interruption insurance is arguably among the most complicated types of coverage on the market today. Submitting a claim can be time-consuming and requires careful preparation. Here are some best practices to keep in mind:

Notify your insurer immediately. Contact your insurance rep by phone as soon as possible to describe the damage. If your policy has been water-damaged or destroyed, ask him or her to send you a copy.

Review your policy. Read your policy in its entirety to determine how to best present your claim. It’s important to understand the policy’s limits and deductibles before spending time documenting losses that may not be covered.

A business can suffer economic damages arising from a variety of illegal conduct. Common examples include breach of contract, patent infringement and commercial negligence. If your company finds itself headed to court looking to recover lost profits, diminished business value or both, it’s important to know how the damages might be determined.

What methods are commonly used?

The goal of any economic damages case is to make your company, the plaintiff, “whole” again. In other words, one critical question must be answered: Where would your business be today “but for” the defendant’s alleged wrongdoing? When financial experts calculate economic damages, they generally rely on the following methods:

Before-and-after. Here, the expert assumes that, if it hadn’t been for the breach or other tortious act, the company’s operating trends would have continued in pace with past performance. In other words, damages equal the difference between expected and actual performance. A similar approach quantifies damages as the difference between the company’s value before and after the alleged “tort” (damaging incident) occurred.

Yardstick. Under this technique, the expert benchmarks a damaged company’s performance to external sources, such as publicly traded comparables or industry guidelines. The presumption is that the company’s performance would have mimicked that of its competitors if not for the tortious act.

To guard against natural disasters and other calamities, many companies buy business interruption insurance. These policies provide cash flow to cover revenues lost and expenses incurred while normal operations are limited or suspended.

But buying coverage is one thing — making a claim and receiving the funds is quite another. Depending on the scope of your loss, the insurer may enlist its own specialists to audit and reduce your claim. Fortunately, you can enlist a CPA to help you prepare a claim, quantify business interruption losses and anticipate your insurer’s challenges.

Major roles

There are two major roles your accountant can play in managing the claims process:

1. Point person. He or she can be the primary contact with the insurer, dealing with the typical onslaught of document requests. This leaves you free to run your business and bring it back up to speed.

Your CPA can also keep the claims process on track by informing the insurer about your actions and dealing with requests to inspect the damaged property. It’s possible that your accountant may already have an established relationship with the insurer and knows how its claims department works.

2. Damage estimator. Most policies define losses based on the earnings a company would have made if the interruption hadn’t occurred. To project lost profits, a CPA can analyze, identify and segregate revenues and expenses. The insurer will cover only losses that are directly attributable to the damage, as opposed to macroeconomic or other external causes, such as an economic downturn.

What could stop your company from operating for a day, a month or a year? A flood or fire? Perhaps a key supplier shuts down temporarily or permanently. Or maybe a hacker or technical problem crashes your website or you suddenly lose power. Whatever the potential cause might be, every business needs a disaster recovery plan.

Distinctive threats

Get started by brainstorming as many scenarios as possible that could devastate your business. The operative word there is “your.” Every company faces distinctive threats related to its size, location(s), and products or services.

There are some constants to consider, however. Seek out alternative suppliers who could fill in for your current ones if necessary. Moreover, identify a strong IT consulting firm with disaster recovery capabilities and have them a phone call away.

The right voice

Another critical factor during and after a crisis is communication, both internal and external. You and most of your management team will need to concentrate on restoring operations, so appoint one manager or other employee with the necessary skills to keep stakeholders abreast of your recovery progress. These parties include:

• Staff members and their families,
• Customers,
• Suppliers,
• Banks and other financial stakeholders, and
• Local authorities and community leaders (as appropriate).

It’s been a year like no other. The sudden impact of the COVID-19 pandemic in March forced every business owner — ready or not — to execute his or her disaster response plan.

So, how did yours do? Although it may still be a little early to do a complete assessment of what went right and wrong during the crisis, you can take a quick look back right now while the experience is still fresh in your mind.

Get specific

When devising a disaster response plan, brainstorm as many scenarios as possible that could affect your company. What weather-related, environmental and socio-political threats do you face? Obviously, you can now add “pandemic” to the list.

The operative word, however, is “your.” Every company faces distinctive threats related to its industry, size, location(s), and products or services. Identify these as specifically as possible, based on what you’ve learned.

There are some constants for nearly every plan. Seek out alternative suppliers who could fill in for your current ones if necessary. Fortify your IT assets and functionality with enhanced recovery and security capabilities.