Expert Commentary

Burden of Proof in Business Interruption Claims

A claim that is backed by objective, verifiable, evidentiary support can help create greater consensus among all parties and streamline the overall claim process.


Time Element
July 2012

Business interruption claims involve a variety of calculations that revolve around the question: What would have happened had the loss not occurred? For instance, "What revenues would have been realized given prevailing market conditions?" "What operating expenses would have been incurred?" The answers to these and other questions typically involve projections of future results (beginning after the date of loss) based on actual results of the past (also incorporating projections of future market conditions and numerous other factors). To the extent possible, all of these projections and calculations need to be supported by objective, verifiable, evidentiary support.

Supporting the Claim

Objective, verifiable, evidentiary support refers to information that a third party, such as the insurer and its representatives, can rely on as solid support for the calculations and projections of lost earnings and extra expenses. The burden of proof for providing this support rests with the policyholder. In light of this, the policyholder and all of its representatives need to use "due diligence" in preparing the claim.

In this context, due diligence involves using all sources available to prepare a claim that is objective and verifiable. A good question to ask is, "Will the information and supporting documentation I'm providing satisfy the scrutiny of discerning third parties, beginning with the insurer and its representatives?" A primary goal in this regard is to transform any potential "forensic skepticism" into confidence and support.

The numbers in a well-prepared and documented business interruption claim can be verified back to their sources, such as the general ledger, financial statements, tax returns, vendor statements, customer orders, letters from customers, market forecasts from external sources, and other verifiable sources. Individuals preparing a claim should ask the following kinds of questions:

  • Is the methodology reasonable and generally used for preparing this type of claim?
  • Are the assumptions reasonable, supportable, and in keeping with normal business practices for the specific policyholder and similar companies?
  • Can "actual" revenues and expenses (both past and present) be traced back to the general ledger, financial statements, tax returns, and/or other evidential sources?
  • Do projections of future revenues and expenses (had the loss not occurred) correspond in some manner to company budgets and forecasts (both before and after the date of loss) and to industry and market forecasts?
  • Does customer and/or supplier data exist to support forecasts and conclusions?
  • Can salaries, wages, and benefits be traced to payroll registers?
  • Are extra expenses supported by contracts, agreements, purchase orders, invoices, and other documentation?

Not surprisingly, disputes between insurers and policyholders relating to business interruption claims often surround the more ambiguous issues versus the "black and white" numbers. Some examples include period of loss (period of indemnity), projected revenues had the loss not occurred, and projected expenses had the loss not occurred, to name a few. The common element is that all of these items are typically based on methodology and assumptions that can be subject to interpretation.

The policyholder and its advisers are well advised to put a good deal of effort into documenting and supporting all assumptions and methodologies utilized throughout the claim. For example, a hotel claiming lost revenues might include support from third-party industry forecasts for its specific market to support projected average daily rates and lost room nights.

Other more general examples of objective, authoritative, third-party-type support might include:

  • Media reports, articles, and write-ups about the loss occurrence from local authorities and investigators
  • Damage and restoration reports by independent engineers and contractors
  • Annual reports and regulatory filings describing the nature of the business, past trends, and future forecasts
  • Customer orders and both pending and in-force contracts
  • Industry reports about the overall industry and the insured's specific market
  • Reports and information from local municipal and regulatory authorities
  • Reports from independent forensic experts, including accountants, economists, and statisticians
  • Information from competitors, customers, and suppliers

It also pays to go the extra mile in writing clear explanations about all events surrounding the loss, claim methodologies, and assumptions. Insurance company claims adjusters and their experts greatly appreciate a well-explained and documented business interruption claim. It provides greater confidence in the claim and paves the way for a more harmonious and timely review and settlement process.

Conclusion

In conclusion, the burden of proof does not have to be a "burden" when seen in a different light. By applying a standard of strong documentation and verification in all aspects of the claim, great efficiencies and effectiveness can be realized. The end result should be a claim that more accurately reflects the loss of earnings and extra expenses as defined by the policy and one that is well supported by all parties involved.


Michael C. Speer, CPA (Illinois), is an expert commentator for the www.IRMI.com business interruption series, which provides articles on practical and topical ideas on how a risk manager or insurance professional can better understand the business interruption claim process and the challenges faced with such claims. Mr. Speer is a director in the Chicago office of Grant Thornton LLP, where he manages a practice that assists policyholders with business interruption claims and assists states and subgrantees with FEMA Public Assistance grants. He has more than 30 years of experience in public accounting and consulting firms focusing on forensic accounting, insurance claims, and litigation support. For contact information, see Mr. Speer's full biography on www.IRMI.com. He can be reached at (312) 602–9180 or by e-mail at


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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