In the Wake of Catastrophe: Navigating Business Income Losses

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1 In the Wake of Catastrophe: Navigating Business Income Losses Todd Burchett, CPA/ABV, ASA, CFF, CFE Partner Keith Seiffert, CPA, CFE Managing Consultant October 11,

2 To Receive CPE Credit Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificates within 15 business days of live webinar What Should You Do Following a Loss Event? Notify insurance company of event Insurance company to determine if event is covered & thereby causes coverage to be triggered Obtain insurance policy & review business interruption (time element) language Engage an experienced forensic accountant Begin gathering documentation Set up or identify a separate account in accounting system 2

3 What Should You Do Following a Loss Event? Defined in insurance policy & typically includes Take all steps to protect property & prevent further loss, i.e., duty to minimize the loss Set aside any potential damaged insured property for inspection by insurance company Provide written notice to the insurance company Submit a sworn proof of loss Produce upon request all accounting & other business records Documentation to Gather Financial documentation Profit & loss statements Tax returns Budgets Sales reports Payroll reports Inventory reports Asset ledgers Lease/rental agreements 3

4 Insurance Coverage Business Interruption Discuss coverage with adjuster involve forensic accountant Waiting periods? Deductibles? Other limitations or exclusions? Determine if there is coverage prior to incurring Extra expenses Period of restoration Extended coverage Professional fees Insurance Coverage Business Interruption Purpose = restore net income But for calculation comparison of expected & actual Two common methods Business income (bottom-up) Net income (loss) but for loss event plus continuing normal operating expenses Gross earnings (top-down) Lost sales less noncontinuing (averted) expenses 4

5 What Does this Mean? Gross earnings vs. business income Sales expenses = net income Sales variable expenses fixed expenses = net income Sales variable expenses = net income + fixed expenses Gross earnings = business income What Does this Mean? BUSINESS INTERRUPTION ILLUSTRATION Total Suspension of Operations Pre-Loss Operations Restoration Period Projected Actual Loss Sales $100,000 $100,000 $0 $100,000 Food and Supplies (18%) 18,000 18,000-18,000 Payroll 40,000 40,000 40,000 - Operating Expenses 36,000 36,000 36,000 - Total Expenses 94,000 94,000 76,000 18,000 Net Profit or (Loss) $6,000 $6,000 ($76,000) $82,000 Partial Suspension of Operations Pre-Loss Operations Restoration Period Projected Actual Loss Sales $100,000 $100,000 $85,000 $15,000 Food and Supplies (18%) 18,000 18,000 15,300 2,700 Payroll 40,000 40,000 40,000 - Operating Expenses 36,000 36,000 36,000 - Total Expenses 94,000 94,000 91,300 2,700 Net Profit or (Loss) $6,000 $6,000 ($6,300) $12,300 5

6 Why an Experienced Forensic Accountant Understand accounting implications of coverage Keep everyone working towards common goal Understand the process Know what questions to ask & things to consider Independent & unbiased voice Ability to simplify calculations How to Work Towards Common Goal Managing expectations through constant communication Distractions can be caused by Period of restoration Inability to document losses being claimed Sales projections Extra expenses Helps to review coverage prior to a loss event 6

7 Process It is a process actual loss sustained 1. Insurance company is notified 2. Insurance company estimates total exposure sets reserves 3. Business interruption claim is presented 4. Business interruption claim is evaluated by insurance company 5. Update business interruption claim on a monthly basis throughout period of restoration 6. Finalize & settle business interruption claim What Are Some Things to Consider? Sales projections Seasonality monthly basis or day of week basis Growth/downtrends Business environment/economic impacts Net sales vs. gross sales Expense projections Contractual obligations Fixed vs. variable Policy restrictions, i.e., ordinary payroll 7

8 Help Before Disaster Strikes Identify values at risk related to business interruption & extra expense Assess current amount of coverage Understand risk tolerances Assist with determining values at risk Work with risk management team, insurance agent/ broker Need to evaluate at least annually at renewal QUESTIONS? Todd Burchett Keith Seiffert

9 BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered CPE Credit CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at training@bkd.com 9

10 THANK YOU 10