M&A Roundtable: What You Should Know About Business Interruption Insurance in M&A

Intro (00:01):
You're listening to the Alliant M&A Roundtable, providing insights and expertise on the unique risk management needs associated with private equity firms. Here is your host, Jaclyn Frey.

Jaclyn Frey (00:21):
Welcome everyone to our next Alliant podcast. This is Jaclyn Frey of the Mergers and Acquisitions team. And here today with me, we have Hunter Williams of Imperium. Hi Hunter, how are you?

Hunter Williams (00:34):
Hi, Jaclyn, how are you?

Jaclyn Frey (00:35):
I'm good. Thank you. As you know, many businesses have gone through fluctuations over the past couple years due to COVID and other social and economic factors. And really there there's no time, like the beginning of the year to take a fresh look at your exposures. And what we're going to do today is look at business income as our topic. One of the things us brokers struggle with is putting insurance definitions into layman's terms. Hunter, how would you generally define business income for your clients?

Hunter Williams (01:06):
I'm assuming you're meaning like a business income loss situation.

Jaclyn Frey (01:10):
Yes.

Hunter Williams (01:10):
In the simplest of terms, its lost revenue, less saved expenses, and when you're dealing with the insurance claim, obviously the policy language is going to be extremely important in the simplest of terms, lost revenue, less saved expenses.

Jaclyn Frey (01:27):
Okay. So, would it make sense to say if the business income level was not adequate under your insurance policy, therefore not being able to recuperate any lost revenue that could be pretty significant to a business us in the event of a catastrophic loss, perhaps, maybe even causing the company to go out of business.

Hunter Williams (01:49):
Now, if you're talking about sort of that underwriting process where you put together a business interruption value worksheet, that's one thing. But when you're talking about going through a client's business, you really need to understand what the risk is. And I know that you guys, as brokers, do that all the time. I look at sort of that business interruption values worksheet as a static number. And we used to do something earlier in my career called an exposure value where we'd look at a company and really try to understand your business. And let's say they had 10 plants across the country, if all 10 of those plants were doing the same thing, and they're all at 50% capacity, it may be difficult to have say a business interruption loss. You might have an extra expense claim. If you need to move some production around, conversely, you may have one location where your entire production goes through. And if that one location is damaged, your entire business could be shut down.

Jaclyn Frey (02:48):
Yep. I was going to say, and that's a really good point as each business is different. They could have perhaps their own internal contingency plans, as well as contingency plans in involving third parties. It's probably a very important factor that any business needs to dig into when evaluating what their exposure is.

Hunter Williams (03:10):
And third parties can mean both suppliers and customers. Years ago, I did a claim for a large package delivery company and looking at the policy language, it just stated customers and suppliers. I'll never forget sitting in there, and the carrier was asking for their customer list. And one of the principles at the organization, this was a long time ago now reached over and grabbed the yellow pages instead here because everyone in that location was a customer or potential customer, whether it be a supplier or a delivery address.

Jaclyn Frey (03:49):
Yep. So, in that particular scenario, it looked as though that client had a good spread of customers or suppliers, but in the event, there are any key customers or suppliers for a client, definitely something that should be noted and accounted for, when they're looking at their business income values.

Hunter Williams (04:07):
Again, I'm not a broker and understanding the policy language, but my understanding is there's tier one and tier two type clients that might be distinguished within a policy you may name and individual customers and suppliers than the policy. So, I think there's several ways to handle that when you're interacting with it.

Jaclyn Frey (04:27):
You're absolutely correct, and also whether or not those key customers and suppliers are within the US or outside of the US different limits apply. So, it's important that all clients understand that exposure and disclose it to the brokers so that we can make sure we are properly ensuring everything. So, on the same note, understanding key customers and suppliers are certainly an area that need to be explored and properly ensured. What other area that we’re discussing with our clients is that of ordinary payroll and any key personnel that a client would want to retain. Should there be a major loss? Could you give us any insight in terms of the ordinary payroll aspect of the business income coverage?

Hunter Williams (05:19):
I'd be happy to, as I mentioned earlier on look at business income loss as loss revenue, less saved expenses. And from that business interruption values worksheet. There's a section there where it discusses ordinary payroll and essentially ordinary payroll are what the carrier would deem non-key executives or people that you wouldn't need should an event happen. They look at that as a variable expense, but as a company, you may have spent time training those employees. You may have a limited supply of employers in your area. It may be a tight labor market, so you don't want to lose those people in the event of loss. You're going to want to ensure that to the extent that you can on that BI value worksheet, business interrupt and value worksheet, they will deduct those costs, but you can add those back in and ensure that, and that's typically done on a daily basis, whether that be 30 days, 90 days, 180 days, sometimes even 365 days. I had a client who was in a very tight labor market in the healthcare field. And if they had an event, they did not want their people to go the hospital across the street, because then they'd have to replace all those employees. So, they paid their people and maintain their staffing levels by using the ordinary payroll coverage.

Jaclyn Frey (06:49):
That makes sense. Especially in the type of labor market that we're in right now, most companies are having a very hard time hiring and retaining their employees. So, I would think across all industries, that would be something that most companies would want to ensure and retain their employees. So, that's a very important point. So, really, just to recap, because we we've gone over a lot of important stuff here. The business coverage is something that those values should be reviewed at least on an annual basis. Looking at contingency plans, both internally, as well as externally, the business income can cover loss of revenue, not only to damage to an insured’s location, but in the event there's damage to a key supplier or a key customer. And any revenue is lost there just in terms of who should be involved with looking at the business income coverage from our perspective, Hunter, it's certainly the accounting side of things, as well as the operation side of the house. Is there anyone else that should be involved in reviewing the contingency plans and appropriate business income levels?

Hunter Williams (08:13):
I think you hit it on the head, it's finance and operations, but the other people that are going to be important are going to be business continuity people. You're going to want to understand should something happen. Are we going to be down for a week? Are we going to be down for six months? And every industry is different. I did some pharmaceutical manufacturing sites at one point. It's not just the time to rebuild, sort of your area of indemnity, but it's the time to rebuild and get re-certified at that location in order to get all the proper approvals, you may be able to rebuild the building in six months. It may take an additional six months to get re-certified at that location and make that particular product again. So, those are the kinds of things you really need to understand whether that's an operation or a business continuity question. You're going to want to have those business continuity folks in the room when you're having that discussion.

Jaclyn Frey (09:12):
Yep, and that’s an excellent point. We make sure the limit is sufficient for not just when the doors reopen, but when that business is back up and running to the level where it was prior to the loss. So, that's an excellent point as well. Well, any final thoughts that you want to leave our listeners with?

Hunter Williams (09:33):
The business interruption value worksheet really is a starting point. And I know that some clients struggle with just putting that together. I think the more work that you can do at a minimum breaking down that business interruption value worksheet by location, understanding the interrelationships within each location can be helpful. And then again, understanding the client's business, what would happen and the event of a loss. Again, as I said, it may be that if you've got 10 plants across the country, you're not going to have much of an exposure. One plant touches every piece of the product, the exposure could be enormous. So, it's really understanding that client's business as you go through this process.

Jaclyn Frey (10:16):
Yep. That all makes sense. Well, thank you, Hunter. And thank you to our listeners. This has been extremely informative. And for more information, please go to www.Alliant.com