A business interruption loss claim is a covered event under a commercial insurance policy that includes business interruption coverage. Under such a policy, should the business experience a qualified damaging event, the insurer will pay for the actual loss of business income sustained from the necessary suspension of operations due to the event per the insurance policy.
Meaning, business interruption insurance covers the loss of income sustained by a business after a physical damaging event in order to compensate the policyholder for the financial loss suffered as a result of the event, per the policy. While there are commonly-accepted and widely-used standards and procedures for calculating such a loss claim, there is room for judgement, and, thus, room for discrepancy. When loss claim disputes turn litigious, new parameters are cast over the loss claim, one being the standard of proof required for legally substantiating a claim.
There are two standards that come into play during court proceedings which have been recognized in business interruption loss claim litigations by the courts: reasonable standard and lesser standard. The “reasonable certainty” standard is the threshold for determining if the damages or damaging event occurred; there must be a reasonable basis for the damages put forward. But once that is established, a lesser standard can be applied to measuring the actual level and amount of those damages.
This is distinguished well in the Story Parchment Co. v. Paterson Parchment Paper Co. case. While this was an antitrust violation case, the findings put forth by the court apply to business interruption cases as well, since those are also a type of economic damages. An issue that arose in this case was the difficulty in calculating with “exactness and precision” the amount of damages sustained by the plaintiff with the same level of certainty used to establish that the damaging event occurred in the first place. Basically, the court realized the difficulty in
measuring damages and found that, if it was clear that the damaging event occurred and was the reason for the resulting damages sustained by the plaintiff, then the standard for calculating those damages can and should be lower, as “there can rarely be good reason for refusing, on account of such uncertainty, any damages [whatsoever].” So, when it comes to the calculation of lost profits, the courts have gone to a lesser standard because they recognize that experts cannot say with certainty what did not occur or did not happen. We can do our best to reasonably estimate the amount of loss, but the courts have reduced the standards because damages are difficult to measure. While there is more grace allowed in calculating lost profits since it can be difficult to measure, there is still a need for a reasonable, rational, evidentiary basis for calculating those damages, and presenting such evidence is the burden of the damaged party, or here, the policyholder.
Avoiding litigation is desirable, but should it become necessary, trusting competent forensic accounting professionals with business interruption loss claim calculations is imperative. Here at Ahuja & Clark, our seasoned accounting experts are equipped with the knowledge and experience needed to assist with business interruption loss claim calculations. If you are interested in a consultation or retaining us and our services, give us a call at (469) 467-4660.
