Business Income Cases

A retailer of high-end eye wear experienced flood damage. The store was closed for a few weeks and subsequently moved to a new building located approximately 4 miles away. The company claimed the move confused customers and asserted a claim for business income loss exceeding $1 million. The claim was largely based on a sales growth comparison between the subject store and the company’s other stores located within a 10 mile radius.

We determined that the claimed sales growth was not related to an increase in demand. Instead, the apparent sales increase was due to a consolidation of stores. Several neighboring locations were closed and customers from those locations migrated to the next closest store. Therefore, we determined that claimed sales growth at the subject location was not appropriate. In fact, we determined that sales were expected to decline due to an increase in the number of vision correction surgeries performed in the area. We calculated a combined business income and extra expense loss of around $150,000, which became the basis for the settlement of the matter.

A retailer was only in business for four days when a fire destroyed the building and its contents. The business would be closed for seven months to rebuild. Without an established track record, how could the business income loss be determined? How long would it have taken to ramp-up? What level of sales would have been earned over the seven months? Would the cost structure change in the first few months of operating?

We have studied the operating results of literally thousands of companies. Therefore, we knew where to look to find the answers. We reviewed the insured’s pre-opening advertising expenses, local economic and demographic conditions, the insured’s inventory levels and the inventory turnovers for similar type businesses. In addition, we interviewed owners from other similar businesses to understand the ramp-up cycle in the industry. We prepared a seven month projected income statement, which was used as the basis for the business income loss calculation.

A manufacturing company was closed for several months as a result of a fire. The company submitted a business income loss claim of over $500,000.

We were hired by the company’s insurance carrier to evaluate the accuracy of the claim. We reviewed the company’s manufacturing cost records and found a mathematical error in the claim and the accounting system pertaining to an allocation of overhead costs and a complex raw material conversion formula. The error caused a nearly 15% understatement of the claim. The accurate settlement of the claim is only part of the story. In addition, the company used our findings to revamp their cost accounting procedures.