After the storm: a peek inside the claims process

By now you know that this is not legal advice and I don't want you to rely only on this article when you make decisions – so be prudent and get local specific help as well.

As I write this, the USA Gulf Coast is inundated. Flooded in almost Biblical proportions. If the sheer human suffering we are witnessing daily hasn't touched your heart, then you better check into the local coronary unit for exploratory surgery to see if you actually have one. With some luck and the grace of God, most of us will never experience the horrible devastation that our fellow citizens are going through right now.

I apologize in advance. I just could not find a good way to transition from this tragedy into what I write about and do for a living – insurance. So, I'm just going to jump into it – here goes:

The insurance mechanism we all rely on is going to be severely tested by this tragedy – again. I've seen some interesting estimates regarding the loss amounts – insured and un-insured and the concerns about the solvency of the insurers being hit the hardest (see sidebar). I'll leave that one for another time. What I want to do here is look at the claims process. What happens after the storm and what you can expect?

How the process works:

Let's set up the example: A hurricane hits your area. Winds are a major factor, so is the rain. There are downed trees, wires, buildings etc. Your place is damaged, so you call your agent or company and you give them your particulars. Now what? I'm making the assumption that #1 – you have insurance and #2 – it covers the damage to your property. Quick note: Most policies will cover hurricane damage even so called "basic form" policies. The thing that's almost always excluded is flood. To get flood coverage you must buy flood insurance.

Danger warning: The flood insurance that's available to most small business owners (National Flood Insurance Program) does not cover business interruption. If the damage is wide spread, you are going to have to wait. After Hurricane Andrew hit Florida, some folks waited months before they saw any money from insurance. In the interim, you have rights and responsibilities under most insurance policies. You can't "abandon" your property. You have the responsibility to protect the property from further damage. Example: if the roof is ripped off – you have to cover it. If the windows are blown out – you have to board them up. If the door is bashed in – you have to secure the building. You can't sit back and let the situation get worse. You must do all you can to prevent further damage.

Now, the insurance company will reimburse you for these temporary measures. But, you'd better keep detailed records. That means receipts for materials and any labor (including your own!) to affect the temporary repairs. Get estimates for the permanent repairs ASAP. Do not wait for the insurance company's people to get there. If you do, you will only delay the process. Once you get the estimates give a copy to the insurance company's rep. Keep the original for yourself. You may need to make copies later on. Are you with me so far? Good. If you got this far you are on the road to recovery. NOTE: You do not have to get three estimates – get an estimate from the people you want to do the work. Let the company rep deal with those people. In the end the trust and faith you have in the repairman really matters.

For this part of the loss. . .

What about the interruption of your business? Here we need to look at the policy you bought. If you bought what is commonly known as a "Business Owners Policy" you should be in good shape. This type of policy usually includes coverage for "Business Interruption." If you bought any other kind of policy, start looking now. It may be covered, or, may not be covered. If you don't have this coverage, stop reading now – go fix this. Come back later. I'll wait. . .

Ok, now that you have the insurance, let's talk about what you can expect after a loss. Once again, the first thing to be determined is "is the loss covered"? Translated: is the thing that caused the business interruption covered by your policy? Example: The place burned down. Is fire covered by your policy? In most cases, yes. So, the business interruption that results from the fire is covered too.

Now, different policies cover this in different ways. The really good ones pay for up to 12 consecutive months with no stated limit in the policy. The basic ones will include some top end limit and maybe even some monthly limitation as well.

Example: $120,000 policy limit with a 1/6th monthly limitation. That means that they will pay no more than $20,000 in any one month, and, no more than $120,000 for the entire term of the policy. What if your busy season needs something more like $50,000 in that one special month? The short answer: tough luck! No matter what the policy form, you will be made to prove your losses. Sorry, but you can't just say, "Ok, give me the money." You will have to provide documentation for what you claim.
Typical losses are proved by documents that include:

  • Income tax returns
  • Bank records
  • Sales tax returns
  • Purchase records

Don't even THINK about doing this alone. Get your CPA involved in this FAST. If your CPA begs off – FIRE HIM! This is the time you need strong reliable help most.

Once the company rep agrees with your estimate of the loss, you will be required to execute a form called a "proof of loss." This form does two important things:

  1. It defines the claim you both agree to. It is the definitive document of your claim under your policy.
  2. It is the actual legal document of your claim. Until the Proof of Loss is finalized, it's all just talk and negotiation.

So now the paperwork is done. What happens? How and when do you actually get some money? Important point: Maybe you should have gotten some money before this! You may be eligible for an advance payment on a claim that is not finalized. Remember that any advance will be deducted from the final claim amount. Let me give you a real life example. One of my customers had a fire on Christmas Eve (my hand to God, the truth). The fire was not that bad but it could have crippled his holiday business if not dealt with quickly. I did some world-class arm-twisting and got a company rep there on Christmas Day. (Ok, the guy they sent didn't celebrate Christmas anyway). We knew several things:

  1. The fire was a covered loss
  2. My customer had one of the "good policies"
  3. We were going to pay a "healthy" claim

What I did was get the company rep to approve a payment for about half of what he thought the claim would finally be. This gave my customer some hard cash to get the repairs started with and allowed room for error/course correction later on. The company rep was no fool. He actually saved his boss money on the "business interruption claim" by getting the recovery process on the fast track. And my customer was really happy to get back into the swing of things for the holiday season.
Good deal for all concerned.

I'll go out on a limb and say that at least 50% of the time there should be some kind of advance payment. But it should be no surprise. If you don't ask, you don't get. So, do your homework and open your mouth. Speak up for your self and ask for an advance.

Ok, now, let's go back to the flood thing. Sorry to say this, but flood insurance is tough to sell. Statistically, you folks just don't want to buy it. And funny enough, where it's really needed, it's pricey and then you really don't want to buy it! So, just be aware. If you don't buy flood insurance, you won't get paid for flood damage. And for the ones who actually buy flood insurance, remember that the kind most small businesses can get will not cover business interruption.

So back to the hurricane scenario: the roof blows off – covered. Then floodwaters demolish the rest of the building – not covered. The business interruption caused by the roof blowing off – covered. The month long outage until the flood waters recede – not covered. No doubt about it, this will be one messy situation and there will be very few happy campers when it plays out.

Unfortunately there is precious little you can do as one small purchaser of business insurance. What you can do is make sure before the problems come, you take a good hard look at your circumstances with the help of an insurance agent that knows your industry and your financial team (CPA and lawyer).

Disclosure: I am prejudiced. I favor using an independent agent instead of someone that works for an insurance company. Those guys have only one thing to sell, and they will sell it. Independents have choices, which gives you choices. Review your insurance, make some choices and get your documentation in order. It won't stop a hurricane, but it will let you handle the aftermath in an orderly manner.

Note: I did a "disaster preparedness quick & dirty checklist" for the Pizza Trade Association. If you'd like a copy, send an e-mail with "check list" in the subject line to Info@PizzaTrade.Org or call them at 866.749.9287.

My standing offer: If you have any questions, call me (201.945.3100).  I'll do my best to help you out and I'll put you in touch with a PizzaSure.Com representative in your state.