Assessing business interruption claims for real estate owners
Here are the key details adjusters should collect and the questions they should ask when handling these types of claims.
The COVID-19 pandemic has certainly created difficulties and presented obstacles for every man, woman and child. Perseverance, determination and innovation are the abilities that have kept us all afloat, especially businesses, over the last 15 months. The pandemic has affected all industries undoubtedly, and some select niches for the better.
Take the real estate market, for instance. While some landlords have continued to collect their rent without fail, others have had to create ways to hopefully collect all rent due before the tenant moves out, usually offering additional consideration/discounts for renewals and tacking on the prior unpayable rent due/foregone to the end of the lease.
For restaurants, delivery and expansion of square footage became an absolute necessity. Many cities enforced sweeping capacity restrictions, leaving the most resourceful businesses to figure out how to take up sidewalk and parking lot space for the sake of increasing square feet.
The pandemic, however, did not stop fires, floods, looting and other physical property damage, as well as an increase in cyberattacks from impacting the businesses that were able to hold it together during the past year. As such, the operational post-pandemic history is very important to consider when assessing a business interruption or business income (BI) claim.
A few scenarios with some contrasting considerations:
- Simple & traditional loss of rent claims are being paid as if COVID-19 did not exist — the lease indemnifies the landlord. Thus the contract should sustain (through to the insurance contract indemnification, which is usually 12 months plus some consideration of an extended or “ramp-up” period).
- However, if the insured/landlord provided rent abatements during the pandemic without a definitively documented end date, there may be justifiable reasons to consider reducing the gross rental income loss for a commensurately applicable amount.
- Some businesses, such as buffets, moved to “per plate” pricing resulting in nearly double historical profit margins;
- Others have turned to and become critically dependent on delivery (e.g., Uber Eats, GrubHub, etc.).
- Movement such as this has financially resulted in lower in-house payroll but a similar expense for the delivery fees.
- Others have expanded their seating areas and respective capacity by absorbing sidewalk and/or parking lot space.
- While others only made 50% of what they did pre-COVID-19, especially due to the capacity restrictions.
- We note Miami’s restrictions have been much more lenient than New York City and Los Angeles.
- Others have turned to and become critically dependent on delivery (e.g., Uber Eats, GrubHub, etc.).
- Hotels, especially in NYC and other tourist-dependent locations, are in dire straits;
- While others managed to sustain by accepting COVID_19-quarantined occupants.
- Manufacturers will need to document high utilization (minimal capacity) at the time of loss, to support the claimed lack of sales revenue.
- Key customers and support for purchases via sales orders will be important documentation to have available.
When assessing a BI claim, traditionally, the financial history over a 12-24-month period would be assessed. However, due to COVID-19, many deviations from historically “normal” operations exist across industries, as alluded to earlier.
Even further:
- The timing of the loss event is very important as well. Less certainty exists around the timing of a loss that happened in March 2020, as opposed to the one that occurred in September (six months later). Simply, more post-COVID financial information exists to be considered.
- A detailed analysis of the pre-and post-COVID operational history will indicate the more likely of outcomes;
- Additionally, depending on the industry, there may be third-party market reports that can also provide insight and allow a more in-depth understanding of the impact of the pandemic on a particular business, industry and geography.
Another key consideration should be the extent of damage and was the entire location affected by the loss event or only a portion (e.g., hospitality, real estate, restaurants)? If only a portion, we assert the need for careful and reasonable consideration of the remaining operation, post-loss and post-COVID.
For instance, we suspect a restaurant that lost half of its seating capacity would make roughly double what they would “had the loss not occurred.” The next issue that would need to be considered at this point is capacity or occupancy, both post-loss and post-pandemic On the other hand, the potential for loss mitigation needs to be assessed, if less than 100% of capacity is maintained by the remaining portion of the business.
Another complication is the delay in repairs. What may typically have taken six to eight weeks to repair may now take months due to material supplies in high demand and other logistics issues being introduced by COVID.
What questions should adjusters ask? Here are a few to consider:
- How has COVID-19 impacted your business model and respective revenue?
- Are there any opportunities to mitigate the loss by opening a supplemental location?
- Will expediting fees for repairs be covered under extra expense?
Having a clear understanding of how the business was affected by the ensuing peril will help to ensure that an investigator has the full financial picture for the claim.
Anthony Natole, CPA, (anatole@riskaccountants.com) is the managing principal of Risk Accountants LLC and has over a decade of experience in risk accounting and claims investigation. He has examined hundreds of claims for insurance carriers and served as an expert witness.
Related: