What You Need to Know About a Business Interruption Worksheet

What is a Business Interruption Worksheet?

A business interruption worksheet is used by businesses to organize financial data in the event of a claim under a business interruption policy. In other words, a business interruption worksheet is a handy-dandy form that helps businesses figure out how much money they lost after a covered event (like a flood or fire) that interrupted its operations.
Most businesses may feel the crunch of financial loss if an insured peril befalls them. Business interruption insurance helps compensate businesses for their lost income. The policy usually covers both direct losses arising from physical property damage as well as indirect losses arising from the results of the direct loss (such as the loss of income). Most commercial property insurance policies cover business interruption losses.
It is essential for a business to know how to fill out a business interruption worksheet in a way that maximizes its business interruption coverage and helps to bring its business back to normalcy.
In some cases , businesses face financial calamity resulting from a worldwide pandemic. For example, it is likely that the COVID-19 pandemic will lead to widespread business interruption claims. The businesses that are most likely to be successful in their claims are those that take the time to fill out a business interruption worksheet carefully.

A Business Interruption Worksheet Includes

As we have previously specified, the business interruption worksheet is not a full proof format. It does, however, provide a good starting point for both financial consultants and accountants. The business interruption worksheet presents a summary of income and expenses and is designed to yield valuable information. In most business life cycles, the three major components are: income analysis; expense analysis; and additional expenses analysis. The income analysis will provide information on the net sales after considering returns, allowances and discounts. A comparison of the pre-loss and post-loss period will show if any growth or increase in sales would be expected in the post-loss period. The expense analysis will provide information on what the expenses were during a particular year. A comparison of the pre-loss expenses with what the insured is claiming after the loss should shed light on any increases that may have occurred due to circumstances such as business expansion, or the purchase of new equipment. The additional expenses analysis section will provide information on what operating expenses were being incurred during the period of restoration. Whether these expenses are related to overtime and temporary labor to meet a contractual agreement, rental of replacement equipment, the lease of additional space in order to carry on business as usual; all need to be assessed. This will provide a guideline for the insured to provide evidence supporting the expenses that are being claimed in the claim submission.

How to Calculate Loss Incurred

Beyond determining the need for recovery and the amount of insurance available, most business owners quickly become absorbed by the task of restoring operations and dealing with staff that is often impacted by the same loss. Neither the impacted business nor the insurance company appreciates having to retain legal assistance to calculate the potential or actual losses at issue. However, especially in a devastating event, a worksheet to quickly sketch business income losses may prove useful and will at least provide a reasonable starting point for the business and its insurance company to consider.
A business interruption worksheet can be used to assist both the insured and the insurer in calculating the potential amount of business losses by separating the losses into the categories of: (1) direct losses (increased expenses often referred to as extra expense losses); and (2) indirect losses (loss of income/indirect losses). The worksheet can also show when in the loss period each of these losses were incurred.
The direct losses are usually front-loaded into the worksheet as the insured typically incurs most of the indirect losses at the beginning of the interruption as it struggles to maintain its business. Thereafter, as the month’s progress, the direct losses will end. Indirect losses will continue for the duration of the time it takes to repair the physical damage to the business.

Your Steps To Filling In The Business Interruption Worksheet

Determine ‘Normal’ Operating Income: The worksheet should indicate how much money the business normally makes over a given timeframe. This is typically calculated as gross revenues minus the cost of goods sold. Normally, if your business sells a product, the cost of goods sold is pretty easy to determine (as you know what you buy it for). If you have a business that sells time, like an attorney or architect or professional services firm, it is a little more difficult. For that business, you should note your total sales for the past two years so that the insurance company has a good indication of the amount of money your business would typically earn.
Less ‘Extra Expenses: ‘Extra expenses are those things you spend money on in order to mitigate (or prevent) a business interruption. When properly calculated and documented, extra expenses are normally covered at 100%. You can add these extra expenses to your worksheet. Again, keep in mind that any extra expenses are evaluated not only on their reasonableness, but also by balancing the impact they have on the business to ensure they are truly ‘extra’ and necessary.
Determine ‘Lost Net Profits: The next thing you want to add to your worksheet is the lost net profits. Lost net profits are typically based on gross income minus normal operating expenses and the cost of goods sold (similar to what you did above for normal income). Moving and storage for your own benefit would also be included in this section. This is not the time to check expenses that are unrelated to the business interruption you are currently experiencing. For example, don’t include policies (like keyman insurance) or debt service.

Using your worksheet, you should be able to effectively calculate the damage that your business has sustained as a result of the interruption. You also have laid out the work that must be completed to reopen the business in its normal location.

Common Errors And How To Avoid Them

The main mistakes I see in the business interruption worksheet are:

Dating: The worksheet is dated before the start of loss. The worksheet cannot be completed until after the interruption has started. Most policies have a waiting period before business interruption coverage kicks in, and the worksheet must follow the terms of the policy. The waiting period is applied against the time period to restore, so it must be accounted for properly.
Incorrect nature of business: The nature of the business accounts for the loss of profit; the worksheet asks for the correct nature of the business that financially impacted – not all the businesses in the operation. Examples are: oil well appraisal, crane rentals, title/abstract, and pre-leased areas.
Correct policy period: A frequently missing element on the worksheet is the date of the incident. Many clients do not locate the correct policy year of the loss. Often, the windfall provisions of a policy change from year to year. The worksheet should require the dates and policy number to eliminate any confusion.
Correct time period: The next error is the use of incomplete records. In some industries, like oil and gas, databases exist that allow confirmation of sales and revenues, due to the rigidity of all the paperwork needed to document the transaction and industry practices. Production and sales are entered on one line with the selling price on another line.
The lack of a complete record: Completion of the coverage year for business is always a risk. Every loss is different. The last year of a policy could be two months or 24 months after the start of the loss. The last 12-month record may not be enough to capture a trend. Not accounting for the elapsed time also could allow a subtraction from the business interruption coverage.
The collection of base payroll: The complete process of collecting payroll files is often missed by the client. Insurance policies require full documentation of how people were paid at the time of the incident. The basic payroll is a factor in limiting the loss. I have frequently seen understanding of payroll by the company change and the next staff may not be as familiar with the payroll practices of the company.

Worksheets And Insurance Claims

When a business experiences a loss, the most common method used to determine the amount of lost income is the Worksheet or Loss Computation Form. The Worksheet is used to compute, verify, prove and document the amount of lost income. The expenses for the period of recovery are deducted from the gross sales and ordinary business expenses for the same period. If the income from gross sales exceeded the business’ expenses , insurance becomes responsible for the difference. Obviously, the more thorough the Worksheet, the better supported the claim will be. More often than not, the Worksheet reveals missing expenses that should be paid by the insurance company as necessary operating expenses. Some Worksheets include handwritten notes or comments that describe the coverage at issue. These comments could be important for establishing what parties and what types of damages the policy will cover.

Real Examples Of Business Interruption Worksheets

The following are examples of how business interruption worksheets were utilized.
Case Study 1: Retail Clothing Store in Massachusetts
In the early 1990s, a clothing store in the Boston area suffered a substantial fire loss. The business operated a retail store and a separate, but small, manufacturing division that produced garments on a made-to-order basis. The fire damaged the manufacturing facility, but did not significantly impact the retail store’s operations. The return period for the loss was nearly 18 months. Through its counsel, the insured submitted a claim for business interruption losses, seeking loss of business income for the 18-month period following the fire. The insurance company understood that all of the insured’s facilities were located within one yard of each other and that only the manufacturing facility was impacted by the fire. The insurer denied the insured’s claim on the grounds that the two facilities had separate risk of loss features; for example, the insured maintained separate policies for employment practices liability, data processing security, and voluntary parting. The resources of the manufacturing facility were used to support the insured’s primary business of retail sales, and therefore, all resources at the manufacturing facility should not be considered in their entirety for purposes of claims against business interruption coverage.
Case Study 2: Hotel in the Caribbean
In 1997, a hotel in the Caribbean was severely damaged by winds of Hurricane Luis, followed by flooding from Tropical Storm Mary. The hotel sustained significant wind damage to its roofs and exterior walls, and the hotel’s barge supplies were lost to the sea, further compounding the loss. The hotel recovered the cost of repairing the wind damage because it formed a separate insurable risk per its intellectual property program and obtained a substantial recovery for the cost of cleaning up the fuel spill.
Case Study 3: Container Terminal in Italy
In 1999, a container terminal in Italy was hit by severe storm surge, resulting in the flooding of the storage and loading areas. The Italian waters remain very low at all times and are normally very shallow. The Port Authority promptly hired an engineering firm to quantify its losses, but the insurance company disputed the claim on the ground that high tide could be considered a flood, which was excluded under the insured’s policy.

Worksheet Benefits To Regularly Review

We recommend that entities update the worksheet regularly, and at least annually, if not quarterly. In addition, when the business continuity team evaluates a potential new purchase, merger or acquisition, the team members need to update the worksheet during due diligence for the potential transaction. For example, if a company is acquiring another company, the purchasing company should compare the buying entity’s business interruption worksheet to the selling entity’s business interruption worksheet. Such an analysis should be performed both from the buyer’s perspective in order to assess potential business interruption exposure against the target company’s risk appetite and also from the seller’s perspective in order to compare the target company’s exposure to its risk appetite. How the two compare will help the buying company as it establishes both its own and the target company’s risk appetite and risk tolerance. In today’s rapidly changing environment, new exposure opportunities arise frequently. For example, many good moves made by management can result in business interruption exposures. For example, suppose a bank purchases a new data center or engages in re-architecture of their existing data center. Those types of moves will certainly increase the bank’s business interruption exposure and potentially require coverage limits. Similarly, rearranging a furniture showroom or restructuring a manufacturing process can also result in a new business interruption exposures. If, for example, a furniture manufacturer changes the layout of its showroom and has a comprehensive coverage review during the same year, that rearrangement could easily trigger a coverage question unless the coverage review addresses that very recent arrangement. At a minimum, during the course of a comprehensive coverage review, it would be wise to provide notice to the carriers of any such proposed changes. That way, the carrier will have an opportunity to evaluate what the new arrangement may mean for coverage purposes. For the business personal property on premises or in transit coverages, on the business personal property covered locations worksheet, it is critical to do this work as property schedules are frequently amended, additions are acquired and dispositions take place. In addition, these schedules should be reviewed at least once a year in order to confirm that the values are as needed. As these periodic reviews occur, the business interruption worksheet should be reviewed as well. While the business interruption worksheet is not to function as a budgetary tool, it will become a tool toward both internal budgeting and toward developing pricing for coverage on a risk-controlled basis rather than pricing on the basis of high risk only.

Ways To Manage Your Worksheet For Greater Efficiency

There are several tools and resources that can assist businesses in managing the business interruption worksheet efficiently.
Software:
There are a variety of software solutions for tracking outages and repairs, and for general enterprise resource planning. Software that includes a built-in business interruption worksheet can streamline the process of managing and tracking the data used to create the worksheet.
Spreadsheet programs like Microsoft Excel and Google Sheets have various tools and templates available for free. Even with basic tools, a program like Excel can be set up to track the data for the worksheet, and once the data is in the spreadsheet, it is easy to calculate your losses, create a graph or chart to visualize the impact of the outage, and customize the look so the chart is appropriate for your audience. Follow these steps:
Apps:
For those who want to track the data used to complete a business interruption worksheet on the go or from multiple devices , it may make sense to use an app. Several time-keeping apps are available for both iOS and Android. Many include a widget that lets you record hours of downtime in real time, as they occur. Other options let you add data in the aftermath of an outage from multiple devices, enabling more than one person to enter data into the app.
Paper and Pencils:
If you are reading this, you are probably not the type of person who relies on pen and paper for much of anything, but a notebook for quick notes may be better for some. The easy access from a phone or tablet may also be a big benefit to setting yourself up to track downtime with paper and pencil. Having a constant record of how downtime is impacting your operations can help you determine whether a full business interruption worksheet is needed after the outage ends.