A major health care services company with billions in sales was facing increasing insurance premiums as well as internal issues related to the allocation of premiums to its hundreds of locations.
 

The Recovery Challenge

 This company had been purchasing business interruption limits in excess of $3 billion. However, this long-standing client of Marsh’s was not comfortable with these limits, as it could not determine the accuracy of the limits provided by its numerous locations. Furthermore, approximately 33 percent of its locations were not even providing sales figures.

Marsh was able to obtain an agreement with the insurer that the business interruption values could be amended during the policy term. However, the insurer required “upfront” analysis and supporting documentation.
 

The MRC Solution

 Based on the advice of Marsh, the client retained MRC’s FACS Practice to determine the accuracy of the business interruption limits being sought.

Due to the client’s cost concerns, the FACS team initially analyzed the financial statements for approximately 20 locations. After applying its extensive knowledge of business interruption loss and values, the FACS team’s detailed analysis of each location indicated that the values being reported were overstated. Therefore, the client requested that FACS review an additional 20 locations, making the sample 40 locations or 10 percent of the location population. The additional sample also indicated that the business interruption limits were overstated.

The client asked FACS to provide an explanation for the significant differences between the business interruption values calculated by FACS and the amounts reported by the locations. FACS determined that the locations were using a generic business interruption worksheet and were unable to properly correlate the amounts from their financial statements to the requested amounts required on the worksheets. As a result, some locations were not providing the business interruption values. Instead, these locations were erroneously providing other amounts such as sales, gross profit, or net profit.

FACS analyzed earnings amounts provided by the client per the financial statements for all locations and compared them to the limits provided by each location. FACS also constructed a template that each location could use to estimate its values. The template included instructions and related the financial statement terms to the terminology used on the business interruption worksheet. In addition, FACS estimated the average business interruption percentage for the client based on the sample of locations analyzed (to allow for future reasonableness checks).
 

The Result

Based on the in-depth analysis of the client’s financial statements, FACS determined that the business interruption values should be reduced by approximately 50 percent. The Marsh team was able to use these calculations and supporting documentation to obtain a credit on the premiums of more than $1 million from the insurer for the current year. Had the client not obtained this data from FACS, it might have overpaid on its premiums for years.

In addition, the client now has a template and a simple way of confirming the accuracy of the limit amounts provided by its locations. The client also has the tools to explain each location’s allocated share of the premium.