BY SAMANTHA MILLARD
Automotive dealerships operate in a dynamic environment where unforeseen events, such as natural disasters, data breaches, or other disruptions, can significantly affect operations. Business interruption insurance is designed to provide financial relief in these situations. For example, the recent CDK outage was covered under most dealers' business interruption policies. However, successfully filing a claim and recovering losses can be complex, particularly if you do not understand the nuances of your insurance policy. If your dealership sustains an unforeseen loss, this article will provide you with a guideline of where to start in determining the legitimacy of your claim, the coverage amount, and necessary documentation.
Understanding Business Interruption Insurance
Business interruption insurance typically covers the loss of income a business suffers due to an unforeseen event or disaster that temporarily halts operations. It is not a standalone policy but is often included as an endorsement to a commercial property policy or a comprehensive business owner’s policy. For dealerships, this coverage can be critical for offsetting revenue losses while repairs are made, or operations are restored.
Step 1: Analyze Your Insurance Policy
The first step in determining whether an event qualifies for business interruption coverage is to carefully review your insurance policy.
For dealerships, common risks might include theft, weather-related damage, or even cyberattacks on dealership management systems.
Many policies have a waiting period before coverage begins. This period acts as a deductible in time rather than money and typically ranges between 24 and 72 hours.
Check the policy limits, which dictate the maximum payout for your claim.
Determine the type of qualifying event, sometimes there may be similarities between defining events and definitions that appear to overlap. If unsure which category your circumstance falls within, consult your insurance company.
Step 2: File a Business Interruption Claim
After reviewing your policy and determining that the event is covered, you can proceed to file a claim. Here is a step-by-step approach:
Notify Your Insurer Immediately. Contact your insurance provider as soon as the event occurs. Delays in reporting could result in claim denial.
Document the Damage:
In the event of physical damage causing the interruption take photographs and videos of all affected areas, including your showroom, service bays, and vehicle inventory.
Maintain a record of any repairs, clean-up costs, or temporary measures you implement to continue operations. For example, scan and save any receipts or invoices applicable.
Collect Financial Records. Compile your dealership’s financial documents, such as profit and loss statements, tax returns, payroll records, and related assets or inventory schedules. These records are critical for proving lost income.
Work with an Insurance Adjuster. The insurance company will assign an adjuster to evaluate the claim. Be prepared to provide them with all requested documentation and work collaboratively to expedite the process. Be ready to supply documents as far back as two years prior to the interruption.
Consult a Professional. Engage third-party insurance experts to review your claim and ensure all aspects are appropriately addressed. This typically involves retaining legal counsel and a forensic accountant.
Step 3: Determine Business Losses
Calculating losses for a dealership can be particularly complex, given the variety of revenue streams, including vehicle sales, service, parts, body shop, and finance and insurance income. A forensic accountant can help document and quantify losses to present a strong case to your insurer. If you have consulted a professional, as suggested, they will be able to assist you with the following:
1. Calculate Lost Revenue
Compare your revenue during the disruption period to the trailing twelve months prior to the interruption to establish a baseline.
It is important to communicate any underlying causes for significant financial statement fluctuations to your accountant so they may exclude anomalies or time periods from the claim or adjust for current profitability that maybe be higher due to operating changes within your dealership.
2. Account for Extra Expenses
Include any additional costs incurred to keep the business running, such as:
Leasing temporary office space
Renting equipment
Feeding staff
Temporary pay increases
3. Include Ongoing Expenses
Fixed costs are often covered, provided they are incurred during the interruption period. These costs may include:
Payroll
Rent
Utilities
Insurance premiums
Common Pitfalls in Business Interruption Claims:
Inadequate Documentation. Without clear records, your claim may be delayed or denied. Maintain meticulous records before, during, and after the event.
Misinterpretation of Policy Language. Insurance policies are often filled with legal and technical jargon. Seek expert advice if you’re unsure about any terms or conditions.
Underinsurance. Regularly review and update your policy to ensure your coverage limits reflect your dealership’s growth and current valuation.
Delays in Filing. Many policies have strict deadlines for filing claims. Act promptly to avoid missing these deadlines.
Conclusion
Business interruption insurance is a lifeline for automotive dealerships facing unexpected disruptions. By thoroughly understanding your policy, recognizing qualifying events, and following best practices for filing a claim, you can maximize your chances of recovering losses. The key to a successful claim lies in preparation—maintaining accurate records, seeking professional guidance, and understanding your policy’s intricacies.
For automotive dealerships, resilience often means anticipating the unexpected. Equip yourself with the knowledge and tools to navigate the claims process effectively, ensuring that your dealership can weather any disruption and emerge stronger on the other side.
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