Insurance Claim
Generally, there are three types of business interruption insurance typically encountered:
- Business interruption insurance is intended to compensate the insured for the income lost during the period of restoration or the time necessary to repair or restore the physical damage to the covered property.
- Extended business interruption provides coverage, typically limited by a period of time, for the income lost after the property is repaired but before the income returns to its pre-loss level.
- Contingent business interruption provides coverage for the insured's loss of income resulting from physical damage, not to its property, but to the property of providers or suppliers on the one hand or consumers of its product or services on the other.
Business interruption insurance typically pays for income that is lost and expenses that are incurred while operations are suspended. A business interruption insurance policy typically covers expenses including:
- Profits that would have been earned if it were not for the loss (usually limited to 12 months).
- Continuing costs - Operating expenses and other fixed costs still being incurred by the business (these expenses must be ordinary and necessary such as salaries and related payroll costs during the interruption period).
- Replacement of inventory and machinery.
- Temporary location - The extra expenses for moving to, and operating from, a temporary location may be covered. (The expenses for permanent relocation, if necessary, may also be included),
- Other expenses - Businesses are reimbursed for reasonable expenses (beyond the continuing costs) that allow the business to continue operating while the damage is being repaired.
Oxburgh Row provides quality independent valuations and will work closely with the client's legal counsel to recover the damages that are warranted under the subject policy.
Insurance Policy Valuation
Life Insurance
Oxburgh Row values two types of life insurance policies for gift/estate or income tax purposes. The two kinds of Life Insurance Assignments are as follows.
Life Insurance Policies
The life insurance policy provides two benefits: (1) the death benefit and (2) the cash surrender value. These are mutually exclusive benefits. If the heirs collect the death benefit they can no longer surrender the policy. Likewise, if the policy is surrendered then heirs cannot collect a death benefit; therefore, the valuation requires an actuarial calculation using mortality factors.
The fair market value of the policy cannot be less than the cash surrender value because a policy owner is free to surrender the policy right away and collect cash from the insurance company; therefore, the cash surrender value is the floor value.
Collateral Assignment Split Dollar Receivables
The Sponsor enters into a split dollar insurance agreement with the Trust. The terms of the Agreement create a receivable that is due to the Sponsor from the Trust which is equal to the greater (or lesser) of the cash surrender value of the Policy or the amount of premiums paid. This receivable is called the Collateral Assignment Split Dollar Receivable (CASDR).
The receivable is due when the Insured dies or the Agreement is terminated; however, the Sponsor is not able to unilaterally surrender the policy, so the liquidity is triggered by the death of the insured. Therefore, there is no minimum value here (as opposed to the valuation of life insurance policies). The fair market value of the CASDR is much lower than the Cash Surrender Value.
The valuation requires an actuarial calculation using mortality factors. This lowers the valuation since the insured typically has a 40 year life expectancy. The risks of the Collateral Assignment Split Dollar Receivable are high and can be compared to Viatical Settlements or Life Settlements. Therefore, the fair market value of the CASDR is greatly reduced. This is a great vehicle for the sponsor to lower the estate by gifting more during natural life.