Business interruption is a leading risk concern for many businesses, and rightfully so. While business interruption claims have always been complex, never have they been more so than in this post-pandemic world.
The COVID-19 pandemic has interrupted business operations in ways never before thought possible. Lockdowns, mask mandates, supply chain disruptions, demand changes and constantly changing capacity restrictions have had significant impacts on businesses of all shapes and sizes. Making matters more complex, there was no way for many businesses to predict what would come next or how long it would last. These challenges and changes significantly affected the operations and financial performance of countless businesses. For many, this was a negative impact, but we can’t discuss those without also considering businesses with positive impacts. Regardless of the nature of the impact, what is consistent is the financial performance for many businesses historically looks different post-COVID than it may have in the past. Further, it may continue to look different into the future.
Considering the magnitude and complexity of this worldwide event, I have seen significant changes in the way business interruption claims are being evaluated and will continue to be evaluated in the future. Thankfully, there are several steps businesses can take today to better prepare for these changes and maximize the recovery they receive as a result of a post-pandemic loss event.
For any company impacted by COVID-19, here are the three biggest changes I have seen in non-COVID-19 business interruption claims to date. I expect these will continue in the years ahead.
Going forward, business interruption claims will be much more complicated and require more time and resources to investigate. The COVID-19 pandemic impacted every business in a multitude of different ways, including shutdowns, labor shortages, supply chain issues, demand changes and more. Identifying each of these impacts, when they started, how long they lasted and their ultimate financial impact involves complex analyses.
Claims analyses traditionally included an analysis of past performance when calculating a business interruption loss. However, the pandemic has impacted the financial performance of many businesses significantly over the last two years. Some businesses were forced to restrict capacity which reduced revenue, while others saw skyrocketing demand which drove up revenue. Others saw significant labor impacts (employee layoffs, increased hiring, rising labor costs (salary and hourly rates)) which impacted the business’ overall cost structure. Due to the varied financial impacts, the financial results reported during the pandemic or during portions of the pandemic may not be indicative of future performance. This makes calculating a business interruption claim a much more complex and difficult task.
The period of restoration will also likely continue to be impacted by the COVID-19 pandemic. Supply chain issues and labor shortages experienced today may persist for years, impacting restoration time frames.
How businesses can better handle their next claim
There are a few steps all companies can take before and after a business interruption occurs to better prepare for their next claim. As the above business interruption challenges persist over the next several years, taking these steps will vastly improve a company’s chances of maximizing the recovery they receive down the line.
Before an interruption:
Businesses will be well served by proactively taking time today to fully understand how the pandemic has impacted their business and its finances so far. Whether it was a government-mandated shutdown, capacity restrictions, supply chain issue, change in demand or a shortage of labor (or all of the above and more), identifying the change as well as taking detailed notes on how it impacted financial performance will save time down the road and help companies best answer questions from carriers during the claim process.
After an interruption:
When an interruption occurs, taking detailed records will be critical when building a case for a business interruption claim. Businesses should consider preparing a timeline documenting changes to operations, tracking key business metrics, and detailing specific event-related business activity like cancellations. A business should also document any challenges or expected challenges it sees in obtaining permits, materials, contractors, etc. which would impact repair times. Bringing in business interruption claims experts with knowledge of what information carriers seek, what questions they ask and what documents they request can also help companies make a stronger case to carriers when the time comes.
Don’t go at it alone
When faced with a business interruption, business owners will need to spend their time managing the disruption and getting operations back on track instead of managing the many different challenges of filing a claim. These business leaders should lean on experienced counsel who can take care of the details and guide their team through the process while they focus on taking care of their employees and customers. At Conner Strong & Buckelew and J.A. Montgomery, our teams have decades of experience navigating business interruption claims and have helped countless companies through complex COVID-19-caused interruptions. Business owners are best served taking time today to prepare for their next business interruption to avoid being caught flat footed when the next interruption strikes.
Senior Vice President, Forensic Services Practice Leader