In a prior blog post, we discussed the Dictiomatic case, which illustrated a number of principles and occurrences that often arise when calculating business interruption loss claims. Today, we will narrow in on one of the more common hurdles faced when performing loss calculations: what to do when multiple factors, not solely the covered loss event, contribute to a loss in profits.
An obvious example of this currently? Businesses for which we are performing business interruption loss claims for fires, floods, theft, and other disasters and damaging events are also being impacted by loss of business due to COVID-19 and related mandates and restrictions. As a result, it is imperative that we isolate the lost profits attributable to the named damaging event covered by the insurance policy and separate this from effects on income caused by other influencing factors.
Allow me to illustrate with an example. We previously worked on a claim for a restaurant that was damaged by fire in January of this year. When the claim came in shortly after, the business was expected to reopen by October 2020. However, before the calculation was complete and submitted, COVID hit in March, meaning this restaurant would likely have either closed or gone to 25% of 50% capacity at varying times throughout its restoration period, the time between the damaging event and the business resuming operations. Occurrences like this alter the way
experts perform a calculation of lost profits because, rather than relying on 2019 financial data for projecting lost revenue, as would be commonly done, we have to isolate the impact of COVID-19 and the influence that it would have on business revenue had the fire not occurred. Other examples of multiple factors impacting lost profits include theft or burglary during an economic recession or peak unemployment, a breach of contract during a time of poor operating performance for a business, or, as we saw in the previous blog post discussing Dictiomatic, a natural disaster such as a hurricane negatively affecting an already struggling business.
These sorts of occurrences, where multiple factors impact lost profits, while not the norm, are not uncommon. Therefore, it is imperative that the expert perform due diligence through examining historical financial records and documents, researching and understanding the state of the industry and economy within which the business operates at the time of the damaging event, and having discussions with management and other key business personnel in order to establish a baseline for business operations.
Here at Ahuja & Clark, our seasoned professionals are equipped with the knowledge and experience needed to assist with such business interruption loss claim calculations and complexities. If you are interested in a consultation or retaining us and our services, give us a call at (469) 467-4660.