Business Interruption Losses for Dentists - An Introduction

You walk into your office following a long weekend, only to discover that a leaking pipe has spread several inches of water across the floor. Moisture has penetrated the walls, and mildew is beginning to appear on one of the chairs. You run to your office and begin rummaging for the contact information for your insurance broker.

Dealing with property insurance claims can be stressful. And while the property damage component of the claim (that is, the costs associated with repairing the physical damage to the office) can present its own challenges, in my experience the greatest source of confusion and frustration for dentists is dealing with the business interruption aspect. While many policies provide coverage for professional fees incurred by the dentist in order to hire a financial expert to prepare a business interruption claim, a basic understanding of how such claims  work should prove useful to all practitioners.

This article provides a brief overview of how business interruption claims are calculated, and then proceeds to discuss some of the thorny areas that are particular to business interruption losses in dental practices.

What is business interruption insurance?

Business interruption policies are typically meant to place the policyholder in the financial position he or she would have been in if not for the insured event (i.e. the flood, fire, etc.). They do so by agreeing to pay the policyholder for any billings lost during the ‘indemnity period’, less any saved costs as a result of the incident.

Consider a simplified example. Dr. Chang runs an established practice, having been at his current location for 30 years. He rarely sees new patients; most patients have been with him for a long time, and can be counted on to return every six to nine months or so. Dr. Chang averages $50,000 in billings per month. His only major expenses are supplies, which are typically equal to around 10% of billings, as well as $10,000 in wages paid to hygienists and monthly rent and office expenses of $10,000. His monthly profit is therefore $25,000, as follows:

As a result of a small fire, Dr. Chang’s practice is closed for one month. He tells his hygienists (each of whom works one day per week at the office) that they will not be needed for the month, and does not pay them any wages. However, he continues to pay rent and office expenses, as the rent abatement clause in his lease only kicks in after 3 months.

The impact of the fire on Dr. Chang is that on the one hand, he has lost $50,000 in revenue, while on the other hand he has saved on supplies and wages. Dr. Chang’s business interruption payment for his lost revenue, less his saved expenses, should therefore be as follows:

The business interruption payment of $35,000, combined with the monthly rent and other office supplies of $10,000 Dr. Chang continued to pay, result in the same monthly profit of $25,000 to which Dr. Chang was accustomed.

Other Considerations

The above example was highly simplified in order to illustrate the basics of a business interruption loss calculation. In practice, claims are rarely so straightforward. Common issues that can be encountered include:

• Potential ongoing losses if patients decide to move to another dentist.
• Potential to mitigate losses by rebooking patients
• Losses associated with revenue for associate dentists
• Situations where key staff continue to be paid

Different insurance policies will deal with these issues in different ways, but the basic concepts to be applied remain the same.