In September 2019, Hurricane Dorian, classified as a category 2 hurricane, caused widespread damage across the Maritimes. Over 450,000 residential and commercial properties incurred property damage and lost power in Nova Scotia, New Brunswick and Prince Edward Island.
Many of the affected business owners likely accessed their insurance policies to see if they had business interruption coverage that could help them recover any losses during the period of interruption.
Given the complexity of insurance policy wording and the range of coverages available, it may not be easy for a business owner to know the extent of coverage available or even if it makes sense to submit a claim. In some cases, losses for a short duration can be significant to the overall profitability of a company and investigating whether to make an insurance claim is a worthwhile endeavour.
As climate-related business interruptions — such as the ones described above, as well as fires and floods — may become more prevalent, this article aims to help showcase what lawyers need to know to help their clients navigate the world of business interruption insurance, with the support of a forensic accountant.
Outside assistance
Clients may have concerns around the costs associated with bringing in outside legal or accounting expertise to help support the claim. Many business interruption policies include coverage for professional fees, which allows a policyholder to engage their own expert to assist with measurement of their claim for business interruption, stock loss, extra expense and other covered losses.
When choosing a forensic accountant, clients should look for a professional who has experience in quantifying business interruption losses and has a track record of preparing defensible reports for the industry in which your client’s business operates.
In general, engaging a forensic accountant early in the claim is ideal so they can assist with gathering and organizing information to file a claim, and can act as a supporting liaison with the insurance carrier’s forensic accountant.
Profits, losses calculated
The insurance policy will dictate the appropriate measurement of the loss. The steps typically involve:
- Determining the loss period;
- Projecting sales during the loss period that would have occurred but for the incident;
- Deducting the actual sales in the loss period, if any, to determine the sales shortfall;
- Determining the rate of gross profit earned on the sales shortfall;
- Adding any increase in the cost of working (costs incurred to reduce/mitigate the loss); and
- Deducting any saved expenses.
Business interruption case law
Several cases have shed light on various issues that may arise in the business interruption claims process. A few highlights are listed below for further reference:
- Boyce v. Co-operators Insurance 2013 ONCA 298: Limitation period for business interruption claims.
- J.I.L.M. Enterprises & Investments Limited v. Intact Insurance 2017 ONSC 357: Insurance carrier’s delay in paying out a building loss claim.
- Pereira v. Hamilton Township Farmers Mutual Fire Insurance Company 2006 12284 (ON CA): Arson allegation by insurer with various allegations of denial including material misrepresentation as to status of business activities.
- Le Treport Wedding & Convention Centre Ltd. v. Co-operators General Insurance Co. [2019]
- O.J. No. 2595: Claim denial due to interpretation of Trial Judge; decision is under appeal. Fletcher v. Manitoba Public Insurance Co. [1990] S.C.J. No. 121: Insurance broker’s negligence.
- Walsh v. Nicholls (2004), 273 N.B.R.(2d) 203 (CA): Potential personal liability of adjuster as a consequence of breach.
Experiencing a business interruption, with a consequent loss of income and unexpected expenses, can be a stressful time for any business owner or manager. Having to deal with business interruption insurance can add to that stress — so it helps to have a qualified professional, who is experienced in this area, to help clients get back to normal.
