Financial Forensics Blog

Business Interruption Claims & Implications for Loss Calculations
January 1, 2022

bi and loss calculations

By David Gardiner, CPA
Original Publish Date: January/February 2022, Claims Magazine

Where have all the workers gone? According to the Bureau of Labor Statistics, the unemployment rate in October was just 1.1 % higher than it was before the pandemic, at 4.6%. Still, the supply of workers remains shockingly low. The Conference Board calls today’s labor shortage unprecedented and says, “If left unchecked it could easily develop into one of the worst labor shortages of the last 50 years.”

Even as the reopening of schools and businesses, initially delayed by the Delta variant of the coronavirus, continues to progress, labor shortages are expected to persist. In addition to the far-reaching impacts on the global economy, it is becoming more common to see labor shortages play a role in commercial property claims. Many aspects of the claims process are being impacted and the labor shortage is forcing claims professionals and forensic accountants to adjust their approach including the questions they might ask, the different types of documentation to review and the timeframes of the financial records used to calculate a loss.

As a result, an increasingly common question among claims professionals and forensic accountants when evaluating a commercial property claim is how do we account for the impact of the labor shortage both in our business interruption and extra expense loss calculations?

Today’s labor shortage is impacting the claims process in multiple ways and no industry appears to be immune. However, some sectors appear to be hit harder than others. We are seeing that many of the industries that were heavily impacted or closed due to COVID-19 are struggling to bring their workforce back to pre-pandemic levels. That would include restaurants, retail, grocery stores, entertainment venues, and smaller “mom and pop” businesses. We are also seeing significant impacts in the manufacturing, professional service, medical and shipping/hauling sectors.

In accounting for workforce shortages, claims professionals and forensic accountants should look at the insured’s pre-loss and post-loss financial results, the insured’s website, industry reports, relevant articles on the industry or geographic areas and any other relevant data to assist them in understanding the business’s current operations immediately preceding the date of loss.

Here are a few sample scenarios that illustrate the types of issues carriers are wrestling with:


A typical business interruption calculation following a covered loss in the restaurant or retail industry can be fairly straightforward. A common approach would be to look at the insured’s historical financial results over a reasonable timeframe to project how the business would have performed during the period of restoration had the loss not occurred. Today, we must consider that before the event, the insured was also impacted by, among other things, a shortage of workers. In the case of a restaurant, the shortfall in workers might lead to a restaurant shutting down its indoor dining, moving to a limited menu, or having to pay higher wages to secure the appropriate level of staffing.

With all the issues impacting an insured’s normal operations over the last few years, including the recent spike in workforce shortages, claims professionals must identify and segregate the negative impacts to the insured’s normal operations related to the workforce shortage from what was sustained due to the covered event which triggered the insurance policy. The most effective way to isolate the workforce shortage impacts would be to review the insured’s website and discuss how the insured’s operations have been impacted by COVID-19, the social unrest and the current workforce shortages.

Did they close and, if so, for how long? Have they changed their business model or the way they operate? How did these changes impact revenues and operating expenses? Once you have gained an understanding of how the insured has
been impacted during the pre-loss period you can compare those impacts to the financial results over that same timeframe. This information and, if necessary, relevant industry data and articles, should allow the claims professional to properly segregate the impacts from these events.

Another area to address in these types of claims is the continuation of paying hourly positions during the period of restoration. The claims professional should ask whether the insured intends on paying their workforce through the interruption period to keep employees so that when the period of restoration ends and operations resume, the workforce they previously had is still available.

Can this be considered a necessary and continuing expense to maintain a ‘skilled’ workforce? If continuing payroll expense is not considered as reasonable and necessary for restaurant employees, and the insured reopens and cannot find enough workers to resume full operation, business interruption losses may continue as the insured is not back where they would have been before the loss occurrence. Will this be considered as a continuing business interruption loss under an extended period of indemnity coverage?

These issues continue to pop up and can cause headaches in the settlement process. It is suggested that claims professionals work with the insured regarding these labor issues while the property damage is being restored to create a plan that all sides can agree on.


Consider the loss scenario of a medical practice recently sustaining a covered loss. The practice generates income through the billing of the professionals’ time and services rendered. Upon looking at the insured’s books and records it is apparent that a number of the medical professionals left the insured over the prior three months due to a variety of reasons including a refusal to receive a COVID-19 vaccine, wage disputes, taking a leave of absence due to homeschooling, and COVID-19 health issues.

A typical approach to evaluating this type of loss includes looking at historical billings by each professional and reducing the historical projections by what each professional was able to generate during the loss period. However, the calculated loss should represent what the practice would have earned but for the covered loss. In this scenario, if the covered peril did not occur, the insured still would not have generated any revenues from the absent employees. As such, the professionals who were taking a leave of absence or left the practice need to be adjusted out of the analysis.

You may identify a professional leaving a firm or practice by reviewing billing records and noting a period with zero billable hours or services rendered. Then follow up with the insured to seek an explanation. For professional services, especially in larger geographical markets, this can easily result in a material adjustment for each professional identified.


Another growing area of change is in the manufacturing sector. Most manufacturers have been impacted by COVID-19, supply chain and labor shortage issues. In this sector, the claims professional and the forensic accountant need to look at historical information, but they also need to gain a strong understanding of the insured’s business shortly before the date of loss. Has the insured changed the number of shifts or added shifts to keep their employees socially distant? Have they been impacted by supply chain issues and if so, how has it impacted their operations? Are they having difficulty finding and keeping employees? All of these factors need to be considered to evaluate the insured’s business and determine what the insured would have done during the period of restoration.

All the above-mentioned factors can lead to a higher or lower selling price and a change in the cost of making the manufactured product. Supply and demand significantly impact the manufacturing sector.

With the recent spike in workforce issues, the insured may want to consider the continuation of paying hourly and unskilled positions during the period of restoration to maintain their workforce post-loss. Having ordinary payroll coverage places the insured at a significant advantage in this current market. This would enable the insured to continue paying the workforce during the period of restoration that typically leads to a quicker recovery of the business post-loss.


In general, when it comes to projecting the financial results of a business during a loss, claims professionals should consider the insured’s operations that existed immediately preceding the loss and whether they were at a diminished capacity from the business’s historical data due to the shortage in workers. But for the loss, the insured would have been operating at a diminished capacity during the period of restoration, not necessarily how they were operating in a prior period that was not impacted by this issue. It may be necessary to analyze post-loss financials and industry data to provide additional base period information for the loss period projections.

If the period of restoration is for an extended time (e.g., 12 months), the claims professional should consider the potential rebound of the workforce over time and how that would have impacted operations had the insured been operating during the period of restoration. It may be a slow progression returning to “normal,” but industry research may assist with supporting the position taken relative to the rebound of the workforce.

Between the COVID-19 pandemic, recent social unrest, supply chain interruptions and now the workforce shortage, there have been some very interesting issues thrown into the claims process. Labor shortages are expected to impact the economy and, as a result, the claims process well into 2022 and possibly beyond. Knowing how to deal with it and how to account for its impact on the claims process is critical to weathering this storm.


Reprinted with permission from the January/February 2022 issue of Claims Magazine. © 2022 ALM. Further duplication without permission is prohibited. All rights reserved.

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