Making an Insurance Claim for Economic Loss

The key point to remember when making an insurance claim for economic loss or business interruption is: whatever you claim and whatever the circumstances, your insurer cannot pay more than you claim!

If you under estimate your economic loss you cannot recoup it at a later date. So check you claim very carefully before submitting it. And even if it has been developed by a professional, your accountant for example, check it YOURSELF to be absolutely certain that it is correct. During the last 11 years we have assessed more than 5,500 economic loss claims on behalf of an international compensation fund and a surprising number have been shown to be undervalued.

The second main point is that you cannot claim a loss until it has been sustained. So if your business is flooded and you estimate that it may take 10 weeks to get it trading again, you may need to claim after the period has run its course – check with the insurer.

So what are the key steps to follow when claiming?

Estimate Your Loss of Revenue
Identify your revenue trend – if it increasing then ensure that you take this into account. Many professionals average the last three years of income to arrive at the projected loss and this is probably the main reason why claims are undervalued.
Now I do not condone increasing revenue estimates for the sake of it and falsifying accounts. What you should do however is consider, realistically and honestly, how and why your business trading levels may have increased.

Think carefully about internal changes in your business and make sure they are taken into account. Think:

• price increases,
• changes in tariff structure,
• increases in trading capacity whether due to increased space, higher staffing levels or any other reason why trade should/would have increased.

Consider external changes that could have led to increased trade:

• loss of a main competitor,
• development of a fresh income stream,
• increases in local market activity,
• improvements in access, car parking capacity or the development of further demand generators for your business.

Whatever the cause of the increase, estimate a realistic level for your revenue and subtract the actual to estimate your loss of revenue.

If possible find external data – tourism or general business statistics – that will support your claim.

Now Calculate Your Savings
One you have calculated this loss, deduct the appropriate variable costs – otherwise known as savings as you have saved this expenditure.

Variable costs are those costs that vary as a result of a change in the number of units produced. This includes product costs, other associated direct costs and an element of wage costs. For example, a restaurant should include food cost and an element of variable costs to cover say disposable items, laundry etc.

Some saving in staff costs should also be included – but generally this does not mean you apply the full wage cost percentage to the labour saving. Remember that if trade falls for a short period, management labour charges are normally fixed – the saving is only made in say service staff.

Total the savings and subtract this total from the loss of revenue. Do not include fixed costs, such as rent, rates, interest charges and insurance.

Any Other Costs or Income?
Finally consider whether you have incurred any other costs as a direct consequence of the event – increased advertising costs, increased staff costs or repairs and renewals fo example – and add these to the total claimed, before deducting any income you have received as a result of the incident. Also did you gain any income as a result of the incident that caused your loss? This may include, for example, food and drink for emergency workers, providing accommodation for displaced persons etc. The net benefits of any such revenue need to be deducted before arriving at the final claim total.