Property Insurance Claims: Negotiating Unfamiliar Terrain

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If your loss includes building damages, the insurance company will likely hire a contractor to measure the damage. Your choice is either to rely upon that contractor’s opinion or to engage an expert to measure the loss on your behalf. Because there is a great deal of subjectivity in defining the scope of damages, there are often sizable discrepancies between contractors’ estimates. Keep in mind that the measurement of your loss as provided by the policy terms may be very different from a contractor’s.

For example, your policy might entitle you to collect for the cost to replace plaster, yet the insurer’s contractor recommends the installation of drywall. Even if you replace the plaster with drywall, you might choose to collect for the value of the plaster and invest the savings elsewhere in the building. This is a good example of why you should have your own expert(s) measure the damages.

Detail is crucial when substantiating a building loss, so your claim should include an itemized building estimate. You might also need to pay close attention to depreciation if you are collecting on an actual cash value. With actual cash value coverage, the estimate submitted might have to be segregated to allow for depreciation calculations. 2 In some states only materials are subject to depreciation. In others both labor and materials are subject to depreciation.

The same fundamentals apply to the damage to your furniture and equipment. This cannot be overstated: Do not rely solely on your historical records for values. Seek out current replacement estimates. Obtain all of your estimates in writing, because your claim will have to be verified as part of the negotiation process. Once again, detail is imperative — from documenting large items to detailing the contents of a desk drawer.

Business Interruption

When measuring your business interruption or loss of income, you should have your own expert prepare the claim on your behalf. The insurance carrier will usually hire a forensic accounting firm to review all your records pertaining to sales, production, costs of goods sold, operating expenses, inventory levels, etc. You should be prepared to make detailed financial, sales and production information available. On the basis of such a review, the forensic accountants will provide to the insurance company their opinion of your business interruption loss.

Business interruption losses can involve a number of issues requiring interpretation, which could have a major impact on the recovery. Consider the following scenario:

A restaurant is destroyed by fire. For each of the last three years sales have increased by 8 percent. Would sales have continued to increase at the same rate had the fire not occurred? Will the market bear an 8 percent price increase, assuming no more people eat at the restaurant? Is the capacity and turn rate of the restaurant such that 8 percent more meals can be served? Is there new competition? It is likely that the insurance company will raise these or similar issues.

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Concentrate on maintaining your operations — not on preparing claim details. Leave that to the experts.

Mitigate Your Business Interruption Loss

A fire severely damaged a unique machine that was the heart of an industrial manufacturer’s operation. On an expert’s advice, the insured made an arrangement with a competitor to produce his product for him in order to give him time to repair the machine. The company was saved and the insurance policy’s extra expense coverage paid for the added cost to the company.


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