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Property and Business Interruption Claim – Large Manufacturing Company

Recovered several million dollars while suffering minimal impact to sales and customer relationships and avoiding significant threats to shareholder value

Business Interruption Claim

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Significant Business Loss from Fire 

LLM was retained by a multi-billion dollar multi-national manufacturing company to prepare a property damage and business interruption (“BI”) claim resulting from a fire at one of its manufacturing plants.  The Company took immediate steps to ensure the safety of its employees, secure the building, and mitigate the loss.  The insurance carrier was extremely responsive and helpful, and worked very closely with the Company to establish a plan to assess the damage, make repairs in order of priority, implement steps to work around the damage, and restart the production process as soon as possible.  While large, the property damage/repair issues were relatively straight forward; however, the business interruption claim was unique in several respects.

First, due to the collaborative up-front coordination and planning between the Company and the Carrier, production restarted after only 30 days.  In addition, the Company implemented extra shifts and ramped up production over and above pre-loss levels to fill delayed orders.  This included diverting some production to other “sister” facilities, and outsourcing certain functions to third-party vendors.  As a result, the Company suffered very few lost sales, but incurred significant increases in operational costs.

Second, a very unique and key piece of machinery was deemed a total loss due to the fire.  This unit is utilized at the end of the production process for virtually every part produced.  Because of its unique design, the lead time to replace it was at least 9-12 months.  As a result, the Company suffered production inefficiencies and increased operational costs for several months while it implemented a temporary but much less efficient replacement process.

Third, a significant amount of inventory was also destroyed in the fire.  While the inventory was covered under the policy, this exacerbated the difficult process of filling orders to avoid loss of sales, and created a valuation challenge because the inventory included Raw Materials, Work in Process (“WIP”), and Finished Goods ready for sale.

Lastly, as a public company, the impact of this loss threatened to have a negative effect on quarterly earnings reports, creating a significant risk to shareholder value.

Claim Approach and Financial Analysis

As with any insurance claim, LLM worked closely with key operational and accounting personnel to quantify property and BI loss, prepare the claim on behalf of the Company, and submit it to the Carrier.  In this instance, we did so while addressing these unique issues, as follows:

  1. We performed a site visit with the Carrier and its team, pulled together as much data and documentation as possible, and submitted an interim claim within approximately two weeks. We then worked closely with the Carrier’s forensic accountant to agree on an undisputed claim amount and secure an advance by the end of the quarter, avoiding any earnings or related shareholder impacts.
  1. We updated the claim each month in order to track increased operational costs on a per unit production basis, as well as any out-of-pocket expenditures related to the claim. This also allowed us to anticipate and determine the point at which production levels met pre-loss levels and all customer backorders had been filled, thereby defining the Period of Restoration/Extended Period.  Included in the analyses were cost and revenue impacts at the “sister” facilities.  We filed updated interim submissions each quarter and worked with the Carrier and its forensic accountant to secure advances to meet quarterly earnings deadlines.
  1. We worked with the Carrier’s “Clerk of the Works” to document the inventory loss, and with Company personnel to determine proper valuation of the lost inventory. While difficult, we were able to reach an agreement on valuation that was satisfactory to both parties, due largely to the up-front collaboration with the Carrier.
  1. Due to the long lead time on the replacement of the key machine, the Company would experience cost increases for several more months. However, rather than leave the claim open, we worked with the Carrier to forecast losses and settle and close the claim in mutually-satisfactory manner, thereby saving the Company significant transaction costs, including our fees, and avoiding further distraction of management time and attention from its core business.


Our Client recovered several million dollars in property damage and BI losses, the vast majority of which were increased operational costs, while suffering minimal impact to sales and customer relationships and avoiding a significant threat to shareholder value.  The claim was settled in a mutually satisfactory manner while minimizing contention with the Carrier and transactions costs for the Client.  In addition, 100% of LLM’s fees were covered under the Claim Preparation coverage provided in the Policy.

Key Take-Aways for Policyholders

  • When facing this sort of business threat, immediately tackling the safety, operational and business issues is CRITICAL. Address safety first, and then address property damages in a way that minimizes down time, and business issues in a way that minimizes loss of sales.  Get your claim team together immediately, including internal and external resources (broker, forensic accountant, and counsel, as necessary), and assign roles and responsibilities.
  • Work cooperatively and constructively with the carrier to make these business/operational decisions together — this will help minimize the claim amount, which benefits both the Insured and Insurer by avoiding surprises and reducing contention during the process.
  • Business Interruption claims are comprised of Lost Sales and Increased Costs. For manufacturing companies in particular, the increased cost calculation is likely the largest, and most complex, part of the claim.  Again, incurring costs to minimize loss of sales is the best business approach and should simultaneously minimize contention.
  • Insurers have significant resources to review and assess the value of a claim, while insureds may not. Although some claims can be effectively resolved without outside assistance, it is often in the policyholder’s best interest to utilize the services of a claim consultant to properly calculate a BI loss. Many policies provide coverage up to a separate sublimit to pay the insured’s expenses to utilize this outside assistance when preparing a well-documented claim, greatly reducing associated out-of-pocket costs. Where appropriate, insureds should request this provision when placing their coverage, and review their policies carefully to see if it is afforded if they are facing a claim.