2022 Outlook for Business Interruption Claims

As insurance claims increase, many apartment owners are wondering, why?

By DAVID E. MOORE, Jansen/Adjusters International

Business interruptions aren't isolated to pandemics and global shutdowns. Natural disasters, fires, flooding and vandalism continue to interfere with operations and prompt the filing of claims.

Companies that survived the last two years are hoping to return to some sense of normalcy in 2022. Being able to count on the commercial insurance they invest in when times are difficult is part of that desired scenario.

Here is the outlook for business interruption claims in 2022 and why you should get a headstart on your disaster planning by having insurance professionals you can count on should you have to file a claim.

Unpredictable Weather Events

In 2020 and 2021, our nation dealt with the devastating impact of back-to-back hurricanes followed by Hurricane Ida for Louisiana residents. Then, an arctic freeze blast brought havoc to much of the country, including Texas. This historical data will undoubtedly influence how your business interruption claims get calculated in 2022.

When Hurricane Laura made landfall in Cameron, Louisiana in August 2020, nearly one million residents lost power. Many tenants were displaced, leaving the multifamily industry with serious business interruption issues. Six weeks later, Hurricane Delta made landfall near the vicinity of Hurricane Laura, making it difficult for insurance companies to know where Hurricane Laura’s damage stopped and where Hurricane Delta’s damage began.

While claims related to Winter Storm Uri backed up major insurance companies, Hurricane Ida further strained insurance companies’ resources, leading to several complaints, primarily with the Louisiana Department of Insurance.

For that reason, even with extended business interruption coverage, it took far longer than the extension period for many multifamily owners to recover. Without a public adjuster or attorney on speed dial, several property owners could not agree to the scope of damage before the next disaster hit. Unfortunately, that meant that their insurance policy did not get reinstated in time to receive compensation for “loss of rents” from both storms. However, if a storm hits in 2022, it is possible to have your policy reinstated — as long as you and your carrier can agree on the scope of damage before a second potential major event hits.

A Pandemic Economy

The pandemic caused businesses to have to make adjustments virtually overnight. Supply chain issues brought a halt to some industries, such as construction. Restaurants and event venues couldn't remain open because of limits placed on seating.

The economic disruption due to COVID-19 led many companies with business interruption insurance to submit claims to their insurers. Fearing that covering such claims would put too much financial strain on individual companies, the insurance industry argued that BI claims were limited to disruption due to physical damage. Litigation ensued.

Rising Risk Awareness

Business revenue is never linear. There are peak seasons as well as slow periods, and just one brief interruption in operations can be incredibly costly for an organization. BI insurance provides coverage for income that would have been earned had the interruption not occurred.

P&L margins were low for 2020-2021, and Americans are bracing themselves for ongoing uncertainties in 2022. Businesses that did not have BI insurance policies before the pandemic are now more aware that coverage is needed and actively looking for a way to mitigate risk.

Looking Ahead

The business outlook for 2022 is much better than 2021. For example, lumber prices are unlikely to increase in the year ahead because the issue was never with the lumber itself or the raw materials. The problem occurred because there was a shortage of labor needed to process raw materials into usable lumber. Business has changed and will continue to do so at a fast pace.

At the end of last year, A.M. Best revised its outlook for the commercial property insurance market from negative to stable. While uncertainty over climate-driven losses, the long-term impact of COVID-19, and the omicron strain continue to pose challenges, appropriate rate and pricing actions by commercial property insurers should mitigate the effect of higher prices over time.

Based on ongoing rate increases by insurers and an overall decline in business interruption claims at the end of 2021, the future for BI claims looks good.

Filing Business Interruption Claims in 2022

To prevent issues that may arise during the claims process, the insured should be aware of and distinguish between losses that arose because of the shutdown and those that are due to other causes, like a hurricane. Determining whether resulting changes are permanent or temporary will ensure proper accounting of the event. Also, make sure the insurance adjuster is using the bottom-up approach to calculate expenses. Historical revenue may be a problem if the top-down method is used to project revenue.

I also recommend tracking costs for business metrics. Even though your business is profitable, the cost per job will help you determine which jobs, products, or services are worth keeping and which should be discontinued. When you can successfully track all your expenses, you will be able to fine-tune your business and grow it in the right direction for increased profitability. To arrive at accurate figures, remember that seasonal business must be factored in for extended periods of restoration.

David E. Moore is a principal and Chief Operating Officer at Jansen/Adjusters International. David helps multifamily owners recover financially after devastating property losses caused by natural and man-made disasters. For more information, visit jansenai.com.