The basics of business interruption: what professional services firms should know­­

September 11, 2023

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Business interruption (BI) is a significant concern for professional services firms — whether it be lawyers, accountants, medical professionals or consulting agencies. Any disruption, whether due to physical damages or technology downtime, can have a profound impact on their operations, productivity and financial stability.

Factors that contribute to business interruption

It’s important for professional services firms to understand how their operations might be impacted by an incident and how their insurance policies might respond. Some of the common impacts we see in professional service firm losses are outlined below:

  1. Loss of use: Professional services firms rely heavily on their premises and technology infrastructure. Damage to physical premises, such as fire, flood or structural damage, can render them inaccessible — leading to significant operational and productivity challenges. Similarly, technology downtime, particularly in the case of cyber incidents like ransomware attacks, can paralyse operations by limiting access to critical systems and data.
  2. Timing and duration: Shorter interruptions may cause a temporary inconvenience but can be quickly recovered from, while longer disruptions can result in substantial financial losses and potential client dissatisfaction.
  3. Loss of new and/or existing clients: During an interruption, professional services firms may struggle to meet client deadlines or provide the expected level of service. This can lead to dissatisfied clients, damaged relationships, and potential loss of future business opportunities.
  4. Billing: Professional services firms typically bill their clients hourly, based on the time spent on a particular engagement, as opposed to a fixed rate. In the event of a business interruption, understanding the billing structure of the firm as well as staff utilisation and recoverability of chargeable hours is crucial to evaluating the financial impact of an interruption on revenue.
  5. Staffing: Business interruptions can impact the productivity and efficiency of staff. If the interruption causes a backlog of work, staff may struggle to catch up during ordinary work hours. Additionally, understanding the staffing structure, including whether employees are salaried or casual, is important to identify whether there may be any savings in payroll costs and/or increased overtime costs resulting from the interruption.

The role of the insurance policy

A comprehensive understanding of the policy terms is critical in correctly assessing the business interruption for professional services firms. Key policy issues to consider include:

  • Loss of productivity vs. loss of revenue: Loss of productivity, such as reduced efficiency or increased operational challenges, may not automatically trigger a business interruption loss. It is crucial to assess the impact on revenue during the indemnity period to determine if there is a crystallised revenue loss as required by an insurance policy.
  • Increased costs: Business interruptions can result in additional expenses, such as outsourcing work or implementing temporary measures to maintain operations. Understanding if these increased costs are covered under the insurance policy ensures accurate claims assessment.
  • Indemnity period: The indemnity period defines the duration for which the insurance policy provides coverage. Professional services firms should confirm that the indemnity period aligns with their potential recovery time and allows for a reasonable assessment of the financial impact.

Business interruption in action

Sedgwick recently assessed a business interruption claim in which the cloud service provider of a healthcare firm experienced a ransomware attack, leading to server outages. As a result, the firm was unable to access its patient management software and clinical appointments (charged on an hourly basis) were not completed.

The key issue on this claim was whether the appointments missed during the outage period could be delayed and made up later. By analysing profit and loss statements and staff utilisation reports, we established that the business had limited capacity to catch up lost appointments, as its staff were fully utilised. Our review ultimately supported a reduction of $450,000 in billable time due to the outages which could not be delayed and made up later.

This claim highlights the importance of assessing the impact on revenue over the full indemnity period. While initially it may have seemed like the missed appointments would simply be delayed rather than lost altogether, the firm was able to provide support for a genuine loss of income during the interruption period due to a lack of capacity to make up the lost hours.

This claim illustrates the importance of thoroughly evaluating the financial impact of a business interruption for professional services firms. It showcases the need to assess the performance of the business before, during, and after the interruption to determine if there is an actual revenue loss.

Insurance considerations and early engagement with insurers

To ensure a smooth claims process and accurate assessment of coverage, it is crucial for professional services firms to engage with their insurers early. By partnering at an early stage, firms can establish mutual agreement on terms and conditions, ensuring a transparent claims process. This proactive approach minimises the likelihood of disputes and facilitates a more efficient resolution in the event of a business interruption.

Sedgwick’s experts play a vital role in assisting professional service firms and insurers with business interruption claims. To learn more, contact [email protected] or [email protected].

Tags: Business interruption, Healthcare, Policies, Policy