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Business Interruption Claims: To Be or Not To Be


The Covid-19 pandemic has forced many nonessential businesses to close or modify their operations at the recommendation of the Centers for Disease Control and Prevention (CDC) and the White House.  These restrictions were issued in an effort to fight the spread of the coronavirus and are a top priority for the health of the nation; however, they have caused many businesses to suffer financial losses. Government restrictions such as limiting gatherings and the prohibiting of restaurants and bars from providing dine-in service have impacted thousands of other businesses. Fortunately, it may be possible for those business affected by the restrictions to file an insurance claim for business interruption.

How Does Filing an Insurance Claim for a Business Interruption Work?

The ability of the business to file a business interruption claim will depend on the coverage contained in the insurance policy. Ultimately, this will be a legal issue. The wording in the policies and the legal interpretation must be analyzed in order to determine whether or not a business impacted by a shutdown issued by the federal government would qualify for a business interruption claim.  To be, or not to be a business interruption claim: that is the question. But regardless of how or if a claim can be filed under an insurance policy, business interruption claims can be quantified by a financial expert as lost profits and/or increased expenses.

A business interruption claim will require the financial expert to determine the amount of profit the insured would have earned had there not been an interruption of the business.  The financial expert, with assistance from the business’ management, will need to quantify the lost profits and increased expenses by considering the following items in their analysis:

Historical Results of Operations

This analysis will indicate the historical revenue and profit trends of the business leading up to the claim.  As an example, a restaurant will provide its historical results of operations under its normal hours of operations leading up to the government request for shut down.

Comparison of Financial Projections or Budgets to Actual Performance

This step will assist in comparing the business’ actual performance to the budgets prepared in the ordinary course of business.

Analyze the Potential Causes for Other Declines in Sales and Increases in Expenses

This analysis will indicate any other potential causes, other than those resulting from COVID-19 that may result in a decline in sales or increase in expenses.  In the example of the restaurant, was a competing restaurant recently opened in a nearby location that may be drawing away existing customers?

Industry Analysis

An analysis of the industry performance or expectations should be used as a comparison to the business making the claim.  Was the business historically outperforming or underperforming the overall industry?

Mitigation Efforts

An analysis of the steps the business has implemented or put in place to mitigate or reduce the overall loss that it is claiming will need to be completed.  Did the restaurant, in the example noted above, ultimately reopen with a limited carry out menu and reduced hours in an effort to reduce its losses?  Did the whiskey distillery convert its machines to manufacture hand sanitizer but at a much lower profit margin?

Additional Expenses

As a result of the claim that is filed, the business may be required to incur additional expenses in an effort to reduce or mitigate its losses.  With the restaurant opening back up for carry out, did the business incur additional expenses such as purchasing masks and gloves for their employees, or did they incur additional costs associated with increased cleaning and decontamination services?  Did the grocery store incur additional expenses related the protective shields between the cashier and the customer or for the additional signage reminding customers to maintain social distancing and flow up and down aisles?

All of the above considerations – and then some – would be taken into account in the financial expert’s analysis.  Whether or not a business will be granted coverage on a claim of business interruption under its existing insurance policy is yet to be determined.  However, these points of examination provide the business with the steps and information required for the financial expert to assist in determining the amount of the business interruption claim.

Please contact us should you have a business interruption claim or if you need a referral for legal advice regarding your insurance policy.

Ellin & Tucker’s Forensic and Valuation Services Group extensively works with the Mid-Atlantic regions most prominent professional law practices, offering a wide-range of solutions and opinions for complex of litigation matters. For more information, please visit the Forensic and Valuation services section of our website.

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