Quantifying Business Interruption Losses and COVID-19

By: Eli C. Neal

It remains to be seen how long COVID-19 will shut down small businesses in Oregon, but even a shutdown of just a few weeks could have a devastating impact on business owners.

Small businesses in the Portland Metro area, and across the State of Oregon may have an opportunity to file business interruption claims with their insurance company, the state government, and/or federal government.

To calculate your business interruption losses, consider the following categories:

  1. Lost business income for the interruption period
  2. Lost inventory, unpaid receivables, and other assets
  3. Restart costs
  4. Lost business value

Lost business income for a business interruption claim is calculated as lost sales less avoided costs. To estimate lost monthly sales, most small businesses in Oregon will be able to look at the few months before the shutdown. Seasonal businesses could look to the previous year’s sales during the same month and adjust for any changes to the overall business trend.

Avoided costs are the variable costs that were not incurred because of the business interruption and lost business. Avoided costs are a little trickier to calculate. These will typically be inventory that was not purchased or wages that were not paid to employees. There can be many other costs that were avoided depending on the type of business. Again, comparing the company’s recent history to the loss period will be the best place to start to identify these types of costs.

The next thing to consider are assets that were lost due to the business interruption. These lost assets could include inventory that expired or is now obsolete. Another lost asset could be receivables that your customer would have paid but can no longer pay. Depending on your business, there could be many more.

The third category of claims are costs that will be incurred to restart your operations. Your business may incur significant costs re-hiring the same or different workforce. There may be deposits incurred to set up relationships with new suppliers. If your lease was terminated as a result of COVID-19, you may be able to claim moving costs to reopen. These are just some examples of possible costs associated with restarting your small business.

Lastly, to claim a total business loss, have an independent, third party, value your business before the coronavirus impact. This is a worst-case scenario claim for lost business value because your business is forced to close permanently.

Consulting with an attorney is a smart place to start because insurance agents and brokers may be directed to deny all claims by the insurance companies. Every insurance policy is different. Michael Farnell of Parsons, Farnell & Grein is an experienced, local, Portland-area attorney specializing in insurance recovery. He will quickly review your policy to determine your best course of action and whether there is a possibility of recovering business interruption losses as a result of COVID-19.

If you need any assistance quantifying your business interruption losses for any of the categories above or valuing your business, Cogence Group would be happy to assist! We are all CPAs with decades of experience as damages experts! Please give us a call at 503-467-7903!