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Business Interruption - Covid 19, etc Business Interruption Valuation
Whenever a business suffers
a substantial material loss due to FIRE, FLOOD, THEFT, or other CATASTROPHE including the COVID-19 Pandemic Economic Damages, this loss is inevitably followed by a downturn in sales and increase in running costs. These consequential losses are covered by your BUSINESS INTERRUPTION POLICY. These losses are invariably complicated to present and it is therefore recommended that you utilize the expert services for the following reasons.
- As with the material loss, the responsibility of calculating and proving the Business Interruption claim rests with you. The Loss Adjusters appointed by the Insurers will employ experts in this field, but will not prepare the claim on your behalf. They cannot serve two masters.
- A Business Interruption claim represents a specialist element which requires particular knowledge and experience in order to achieve the fullest possible recovery.
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.
The latter two coverages are typically offered as extensions of the business interruption coverage, subject to additional premium for each.
Challenge:
Business interruption claims, by their very nature, present a basic challenge: How does the insured determine the "actual" loss sustained? Simply stated, the actual loss sustained is most often defined as what the company would have earned had the loss not occurred, less what it actually did earn.
Methodology: But For
The amount the company "would have earned had the loss not occurred" is essentially retroactively forecasted. This requires a methodology that looks at what would have happened in normal times and conditions during the period of loss. The methodology may incorporate many factors, including, but not limited to, the following:
- Facts surrounding the loss and its impact on the insured's business
- Company forecasts
- Historical trends
- Recent changes in capacity and product or service sales mix
- Significant contracts
- Marketing initiatives and plans
- New product or service launches
- Changes in the competitive landscape
- Changes in the economy
Following a wide-impact catastrophe - COVID 19 Economic Damages
Two prevailing lines of authority exist for measuring a policyholder’s business interruption loss following a wide-impact catastrophe such as the COVID 19 Economic Damages:
the “Economy Ignored” approach and the “Economy Considered” approach.
The Economy Ignored approach looks backward and measures the policyholder’s loss only against pre-catastrophe business levels and does not take into consideration the impact of actual post-catastrophe conditions on the economy, market or demand. Courts that apply the Economy Ignored approach typically apply this methodology to preclude a policyholder from getting a “windfall” as a result of a catastrophe.
The Economy Considered approach, on the other hand, seeks to place the policyholder in the position that it would have occupied post-catastrophe, had it been able to continue its operations, which avoids giving an insurer a “windfall.”
Reasonable and Supportable Projection of Lost Revenues
Developing a reasonable and supportable projection of lost revenues is a key to developing a solid business interruption claim.
We can prepare the reasonable and supportable damages valuation for the business interruption and business income loss.