Blog Layout
Time Element Claim Essentials
Jeff Esper
What is Time Element coverage?
A property insurance term referring to coverage for loss resulting from the inability to put damaged property to its normal use. This type of coverage is called "time element" insurance because the amount of loss depends on how long it takes to repair or replace the damaged property. The best-known types of time element insurance are business interruption and extra expense coverage.
Time Element coverage is intended to reimburse the policyholder for the income lost or incremental increase of expenses experienced during the loss period. To trigger this coverage a policy must have suffered physical damage as a result of a covered peril or another trigger defined in the property policy such as Civil Authority, Ingress/Egress or Service Interruption.
Though the application of this coverage may appear simple on the surface, measuring a time element claim is far from black and white. There are various methods of calculating business interruption and other intervening factors such as property damage decisions that give these claims a shade of grey.
Calculating Time Element - Gross Earnings vs Gross Profits
At a high level, the two primary approaches to quantifying business interruption involve very different information. Gross Earnings offers two methods of measuring the loss, net sales value of lost production
or total net lost sales, minus any saved expenses such as raw materials, material parts, supplies, utilities, and ordinary payroll during shutdown (with some exceptions). Gross Profit measures the loss simply by applying the business’ historical gross margin
to the total loss of sales. Each option must be backed by supporting documentation and the rational behind it’s use.
It is common for forensic accountants to run calculations using two or three methods and evaluate the results. This technique avoids surprises from the audit process and reveals the best representation of the loss. Sophisticated Excel macros are used to build the schedules customized to the policy terms and the policyholders financial documentation.
Documenting Business Interruption
The following list will be necessary to document and support a time element loss.
- Estimated period of interruption for any site shut down due to the event, inaccessible due to ingress/egress blockage, civil authority orders, or service interruption.
- For any warehouses, distribution centers, store locations or other sites reporting potentially lost sales, provide:
- Twenty-four months of actual sales history by location (or as close as is available).
- Twenty-four months of income/P&L statement or profit contribution for each location (or as close as possible).
- Twelve months budgeted or forecasted sales prepared before the loss to depict anticipated sales and/or production (E.g., a plan projection prepared for the previous year and projecting sales for throughout that year and extending at least through 2Q of the next year if available).
- Track Actual Post-Event Sales from the start of the loss event through period of full recovery of operations and for a period of at least 6 months AFTER full recovery to look for any “make up” sales bump.
- Any affected Manufacturing Facility should provide similar documentation for production loss (i.e., 2-years historical production levels; most recent projected production estimates prepared prior to the loss event; and actual production from the start of the loss event until 6 months after full recovery).
Insights Worth Sharing
Happy Holidays from RWH Myers & Company
Making a business interruption claim is more than just an accounting exercise. It requires a good strategy, a thoughtful process and perhaps most of all, patience. These lessons come from experience and the team at RWH Myers has earned it from decades of preparing BI claims. Though this topic is of the philosophical nature, it is just as important as the details behind a business interruption calculation. So let’s dive in and see what you really need to make a BI claim. Strategy Every loss is different. You can’t apply the same game plan and the same approach to every claim. You have to assess the situation and all its parts to devise a specific workable strategy. Experience will help ensure your strategy is appropriate for the situation, but the claim will take on a life of its own. The initial loss assessment is derived from the loss information such as what happened, the timeline of events, the impact to operations and how long it will take to get back to normal. As forensic accountants, we will look at the entirety of the situation and dissect it from every angle to figure out the full scope of loss and then determine the best approach to measuring and supporting the claim. We will also anticipate how the claim will be adjusted and plan for arguments against the claim. Taking the time to develop a proper strategy will pay off at every stage of the claim process. Process Once you understand the situation and have designed an effective strategy, you can lay out a process to get to the desired result. The process starts off with identifying and assembling the team to execute the plan. The claim will require data from various sources and input from key internal experts to provide insights as to the impact on operations, both upstream and downstream. The process also includes managing claim adjustment, from setting the timeline to handling requests for information. During the process, your claim preparer will work to keep all phases of the claim moving forward whether with data gathering or insurer feedback. Claims tend to start out with a high level of attention, but it is common to lose momentum. Simply put, a well-defined process will keep the claim moving, limiting distractions and roadblocks. Patience Patience doesn’t equate to conceding to a lengthy and arduous process. It’s just the opposite. By definition, it means, “quietly and steadily persevering or being diligent, especially in detail or exactness.” It is important to understand that certain parts of the claim take time to develop, and that time is critical to ensuring a thorough and well thought out claim presentation. For example, taking your time in the beginning of the process to lay out the foundational elements of the claim will avoid obstacles that may delay claim settlement and the amount recovered. It’s best to set expectations early and commit to the process. Again, practicing patience will expedite the claim process and improve the outcome. You can rely on the experience of your forensic accounting team to lead that effort. So, you see, it’s not all about the numbers. There is more to the intangibles than you may have thought. Every claim has its own unique challenges. You should be prepared for anything and everything. Again, preparing a claim is just as much strategy, process, and patience as it is the technical elements of claim preparation.
Property damage insurance claims are among the most infrequent for corporate policyholders, but this year Louisiana has suffered through a record number of Hurricanes. When catastrophe strikes, recovering insured losses essential to rebuild and resume operations. Effected policyholders will need expert help to evaluate, organize and document their claim to present to insurers. Forensic accountants that devote their practice to preparing claims for policyholders have every day experience just as adjusters and auditors do, so it is certainly to your advantage to hire a firm of experts to represent your interests throughout the property damage and time element claim process. Though the specific insurance claims and the policyholders may change, the vital steps to recovery remain the same. One thing both sides agree on is that the claim process goes smoother when the policyholder is well prepared for demands of a claim from start to finish. The partners at RWH Myers prepared a detailed guide to assist policyholders in preparation for claim recovery. It is designed to serve as a resource and a framework for the claim process and includes the following sections: Establish Appropriate Accounting Methodology: Provides guidance and an organizational framework for post-loss activities, establishing specific accounts to capture the loss. Property Damage Expense Categories: Explains the types of expenses that may be included in each category of coverage and the documentation required for these costs. Claim Preparation Objectives and Overview: Identifies objectives for the claim preparation process, and provides a conceptual framework for achieving them. What is Covered: Examines the direct and indirect exposures to loss that are typically encountered, and provides guidelines for determining whether specific types of property damage losses are covered under the policy. Claim Preparation Procedures: Suggests timetables for the submission of inventory, property damage, and discusses the format and content of standard claim submissions. Audit and Settlement Guidelines: Discusses the procedures undertaken by the insurers adjusters and experts, and provides an overview of the settlement process. Click here to download the full guide.
Questions?
Give us a call or send us an email.
Phone: 412-498-2802
Email: ChrisHess@rwhMyers.com
© Copyright 2023 | All Rights Reserved | Sigma7 RWH Myers