Business Interruption Loss Calculation Guidelines—Considerations of Anticipated Business Versus Rigid Adherence to Past Performance

Following up on the post, Business Interruption—What Is Speculative Versus Estimated Lost Profits, commercial policyholders and those responsible for determining the value of a business loss should always be concerned about blindly following past performance. Attempts to resolve the insured’s loss based on past history often collide with business reality.

Many businesses do not operate at a constant level. By their nature, businesses are regularly changing and adapting in order to increase sales and income. Products are improved, product lines are added and discontinued, product mixes are changed to accommodate changing market demand, and some products are seasonal or subject to seasonal price fluctuation. As a result, past production, sales, and cost experience may not be a complete nor accurate indicator of expected future performance.

Commercial policyholders routinely have plans based on competition. Competitive considerations are crucial for adapting business plans because they directly influence market dynamics and consumer preferences. In an environment where businesses constantly evolve, recognizing and responding to competitive actions can be the difference between growth and stagnation.

A Louisiana business interruption case illustrates the problem of normal and anticipated business fluctuations.1 When Hurricane Katrina struck the Louisiana coast in 2005, the insured, Safeguard Storage Properties, had plans to develop 12 to 15 new self-storage locations each year for several years. The hurricane caused more than $30 million in damage to Safeguard’s New Orleans headquarters, and Safeguard alleged that damage forced it to put its expansion plans on hold. Safeguard sought business interruption coverage for the lost revenue from the planned expansion, which the insurer denied as too speculative. In the ensuing coverage litigation, the trial court granted summary judgment for the insurer, but the Louisiana Court of Appeal reversed, holding that whether the alleged lost opportunities were too speculative was a question of fact precluding summary judgment for the insurer. The court explained that an insured is entitled to business interruption benefits for projected increases in earnings provided the projected increases are “proven with reasonable certainty.” The court held that Safeguard’s proffer of business plans for the new facilities and expert testimony on the prospects for success were sufficient to allow the case to go to the jury.

Safeguard stands for the proposition that an insured may have coverage for business opportunities it was unable to pursue. The court noted that the following policy language:

5) Experience of the Business

(a) In determining the amount of net profit, charges, and expenses covered hereunder for the purposes of ascertaining the amount of loss sustained, due consideration shall be given to the experience of the business before the date of damage or destruction and to the probable experience therefore had no loss occurred.

The Safeguard court further noted the business plans of the policyholder:

Safeguard states that it developed thirty-eight new storage facilities from 2001 to May 31, 2005. Safeguard contends that it sustained lost business opportunity income due to its alleged inability to build thirty-seven new storage facilities and should receive insurance proceeds as do plaintiffs for future lost wages. Safeguard presented market research conducted into the development of the thirty-seven future storage facilities as well as financial reports and expert opinions.

The Speculative Card – Understanding Business Interruption Claims, is a good post to review in greater detail on this point. It stated, in part:

Many insurance company adjusters like to pull the ‘speculative’ card under the consequential (or remote) loss exclusion to deny, disclaim or reduce the amount of a business interruption claim when they do not feel that a claim has been ‘adequately’ supported. The adjuster’s judgment call can, however, be called into question, depending on the facts or circumstances of the claim.

As a matter of Florida law, business interruption losses should be determined in a practical way, having regard for nature of business and methods employed in its operation, in order to give practical effect to intentions of parties and purpose of insurance as evidenced by terms, conditions, and provisions of policy. See, Travelers Indem. Co. v. Kassner, 322 So.2d 80 (Fla. 3rd DCA 1975).

The holding in Travelers does not mean that ‘anything goes’ in business interruption claims. A speculative claim will never be covered by a policy and it is always the insured’s burden to provide competent proof of an actual monetary loss as a result of the suspensions of its operations.

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In order to avoid the ‘speculative’ pitfall, small businesses should consider retaining forensic accountants to help them review their financial statements and general business objectives and prepare reports in support of their claim.

The bottom line for those preparing business interruption claims: You must analyze the anticipated plans of the business and not just rigidly follow past financial performance. Also, note the policy language. Policies vary regarding what “projected experience” may be considered.

Thought For The Day  

Some people don’t like change, but you need to embrace change if the alternative is disaster.

—Elon Musk

1 Safeguard Storage Properties, L.L.C. v. Donahue Favret Contractors, Inc., 60 So. 3d 110 (La. Ct. App. 4th Cir. 2011).