Sirius Solutions is not a CPA firm
HOUSTON · DALLAS · DENVER · LOS ANGELES · NEW YORK · LONDON
Taking the Mystery Out of Business
Interruption Claims
March 12, 2009 The Houston City Club
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2Sirius Solutions is not a CPA firm. March 2009
What is Business Interruption? The Chain Rule – Typical Policy Language• We will pay for the actual business
income loss you incur due to the actual impairment of your operations during the period of restoration not to exceed the applicable Limit of Insurance for Business Income shown in the Declarations.
• This actual impairment of operations must be caused by or result from direct physical loss or damage by a covered period to property, unless otherwise stated.
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3Sirius Solutions is not a CPA firm. March 2009
Applying the Chain Rule to BI Situations• Direct damage to your manufacturing
line• Key production line machine breaks
• Contingent Business Interruption• Customer or supplier damaged
• Service Interruption• Loss of utilities or
• Consequential• Increase in loss due to suspension, lapse or
cancellation of any license lease or contract
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4Sirius Solutions is not a CPA firm. March 2009
Understanding the Claim/Adjustment Process
• Read your policy and report the event• Assemble and meet with recovery team• Meet with insurance adjuster and set
reserves• Prepare a preliminary claim estimate• Analyze impact to the business• Prepare initial and supplemental claims• Negotiation and settlement
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5Sirius Solutions is not a CPA firm. March 2009
Understanding Your Coverage
• Read the policy• Are you covered?• Is there a waiting period or
deductable?• Is there coverage for extended periods
of indemnity?• Do you have claims prep coverage?• What about extra expenses?
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6Sirius Solutions is not a CPA firm. March 2009
Assemble your Recovery Team
Inside the Company:
• Chief Financial Officer• General Counsel• VP of Operations• VP of Marketing• Risk Manager• Sales Manager• Manufacturing line
supervisors• Maintenance
personnel
• Potential team members may include:
Outside the Company:
• Insurance Broker• Claim Advisor/Preparer• Engineers and
Architects• Construction
Management Advisors• General Contractor• Coverage Counsel• Accident investigators
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7Sirius Solutions is not a CPA firm. March 2009
Setting the Reserve Estimate
• The insurance company’s best estimate of the cost to settle your claim
• This is cash set aside at the beginning of the adjustment process
• Do your best to ensure it is as accurate as possible
• More difficult to increase as time goes on
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8Sirius Solutions is not a CPA firm. March 2009
Preparing a Preliminary Claim Estimate• Calculation is based on your income
statement• There are two general forms for
quantifying business interruption losses:• Gross Profits form:
•Gross margin – discontinuing expenses = lost profits
• Net Profits form (also known as European or business income):•Net Profit + continuing expenses = lost
profits
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9Sirius Solutions is not a CPA firm. March 2009
Before You Analyze Your Operations• Track your Costs
• Set up a separate loss accounting system
• Make an extra photocopy of invoices• Track everything! You can’t include it
if you can’t find it.
• Make sure that your financial statements are not tainted with costs related to property damage or extra expense recovery amounts
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10Sirius Solutions is not a CPA firm. March 2009
Calculating Your Claim – Big Picture• Three Column Format to calculate
business interruption claims• Expected – Actual = Loss
• Expected is projected or forecasted income statement over the period of indemnity
• Actual income statement over period of indemnity (no loss related costs)
• The Goal is to make you whole• Replace the net profit you would have
earned had no loss occurred
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11Sirius Solutions is not a CPA firm. March 2009
Simplified Three Column CalculationDescription
SalesCost of SalesGross MarginFreight OutLaborSG&ADepreciationAmortization
Net Profits
Expected$ 1,200,000 (400,000)$ 800,000
45,000250,000300,000
50,000 25,000$ 130,000
Actual$ 400,000 (250,000)$ 150,000
25,000100,000150,000
50,000 25,000$ (200,000)
Loss$ 800,000 (150,000)$ 650,000
20,000150,000150,000
0 0$ 330,000
_=
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12Sirius Solutions is not a CPA firm. March 2009
Gathering Information for Your Claim• Historical Information
• Assemble 3 to 5 years of monthly financial statements
• Assemble 3 to 5 years of scheduled maintenance records
• Assemble 3 to 5 years of monthly sales and supply agreements and records
• Make a list of business nuances•Seasonality•Cyclicality•Production lead times
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13Sirius Solutions is not a CPA firm. March 2009
Calculate Expected Results• Analyze 3 to 5 years of historical
operational data by month• Note seasonal and cyclical variations• Note equipment turnarounds and
scheduled maintenance
• Analyze and forecast monthly operational data during the disruption period
• Compare expected to operational data after recovery
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14Sirius Solutions is not a CPA firm. March 2009
Analyzing Expected Sales• Go to the sales people in your
organization• Document a thorough understanding of
the sales cycle• What information does your sales
department look at when budgeting sales• Analyze meaningful relationships in data
• Backlog to sales• Orders to production out put• Inventory turnover
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15Sirius Solutions is not a CPA firm. March 2009
Presenting the Claim• The claim should read like a book
• It should “stand on its own”• Summary schedules should
summarize the loss at a high level• Subsequent schedules should provide
greater detail• Property damage should be
separate from business interruption• Include calculations for deductibles
and co-insurance
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16Sirius Solutions is not a CPA firm. March 2009
Defend the Claim at Settlement
• Compare your model to the adjuster’s model• Note differences or adjustments in
historical information• Note differences in forecast assumptions• Note any missing extra expense items
• Ask for an explanation of the adjuster’s model
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17Sirius Solutions is not a CPA firm. March 2009
Defend the Claim – The Settlement Meeting• Address differences one at a time
• Try to work through as many differences before the settlement meeting as you can
• Be prepared to document your positions at the meeting with additional information if necessary
• Be as fact based as possible• Logical and rational methods with
good data is very compelling• Thoroughly document all assumptions
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18Sirius Solutions is not a CPA firm. March 2009
Defend the Claim – The Settlement Meeting• Be willing to modify some
assumptions within reason• This is a process of negotiation, be
open to reasonable arguments from the adjuster
• Analyze the issues in your claim and decide witch are worth fighting
• Settlement meetings should be conducted in a spirit of negotiation
• Always remain professional but firm
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19Sirius Solutions is not a CPA firm. March 2009
With the End in Mind – Fair Settlement• The goal of the this process is
• Fair settlement amount• Minimize the interruption to your
staff preparing your claim• Continue the business relationship
with your adjuster• Made whole with business
interruption coverage
Sirius Solutions is not a CPA firm
HOUSTON · DALLAS · DENVER · LOS ANGELES · NEW YORK · LONDON
Time for Questions
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21Sirius Solutions is not a CPA firm. March 2009
Sirius ResourcesDirector, Litigation & Dispute ConsultingAssociate Director, Navigant ConsultingManager, Deloitte LLP
Andrew has over 14 years of experience in dispute consulting, with significant experience in the energy, financial services and healthcare industries. His commercial dispute and internal investigations experiences include expert testimony, quantification of damages and design and execution of complex international investigations. Andrew’s consulting expertise is enhanced by his practical industry experience in both financial and operations roles.
BS Business – Lewis and Clark CollegeMBA, Owen School of Management, Vanderbilt UniversitySeries 7 & 63 Securities [email protected] 713-888-7284
Scott BushnellDirector, Litigation & Dispute ConsultingManager, Ernst & Young, LLP – Fraud Investigation & Dispute ServicesSenior Accountant, Deloitte, LLP – Dispute Advisory Services
Scott‘s primary focus is commercial disputes including financial and economic damages, business interruption and lost profits claims, and quantification of catastrophic event damages. He brings more than 13 years of litigation support and expert testimony experience in claims, litigation, mediation, arbitration, appraisal, and other alternative dispute resolution settings. Furthermore, Scott has assisted in international governmental disputes in Central America and the Middle East.
BBA, Accounting, Cox School of Business – Southern Methodist UniversityCertified Public [email protected] 713-888-7277
Andrew Sall
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