Every year, you pay for insurance to cover your business if disaster strikes, but are you sure that your values are accurate?
Gerald Kim, Partner, Valuations, Forensics & Litigation Support at MNP works with oil and gas companies and sees how businesses consistently underestimate their insurance needs – and warns of the risks.
“Inadequate coverage is common, and leaves organizations footing a bill they can’t pay,” Kim explains. “It can lead to intense financial distress in the event of a loss.”
But how can you be sure your company has adequate insurance coverage? Only after an unexpected loss does it becomes clear the company did not have adequate coverage. Alternatively, you may have too much coverage and therefore may be paying too much premium.
To understand if your policy is enough, you need to test your policy against the realities of a loss scenario. Insurance brokers have tools and template forms to help you determine what you need, but they’re not a silver bullet.
“In our experience, companies are better at estimating the values to place on property damage. However, the values placed on business interruption exposure – the loss of income while their assets are out – are often wrong and sometimes very wrong,” Kim says.
What makes accurate estimates so difficult? Kim says there’s a variety of reasons. Oil and gas is a volatile industry and the uncertainty can lead to a wide range of income loss exposures for your business.
It is important to understand that an insured event could happen on the last day of your 12-month policy. If you have a 12-month indemnity period, the resulting business interruption could potentially occur two years from the date you set your insurance values. Asking business owners to predict what will happen two years in the future is a difficult task.
But there’s one key pitfall at the core of inaccurate evaluations: businesses are getting their values from the wrong department and often getting an incomplete picture of the impact of a loss.
“We see companies go to their accounting department to get their insurance coverage numbers, but they need to involve people who understand operations too,” Kim explains. “The operations team can describe what will happen during a business interruption and how this impacts the bottom line.”
Some examples of operational questions to ask include: what will you do with your staff? How will you service your customers? Is there capacity at any of your other plants? Are there interdependencies between this plant and others?
The answers to these questions provide business owners with a starting point to develop a clearer picture of the impact of a business interruption. But understanding exactly what will happen can be complicated.
You can create a strategic advantage by seeking advice from professionals who have seen many business interruption cases and know what organizations miss in their evaluations.
Learn more by contacting Gerald Kim, CPA, CA, CBV, CIP, Partner, Valuations, Forensics & Litigation Support, at 587.702.5995 or Gerald.kim@mnp.ca