Coronavirus has impacted all industries including construction projects, owners. Supply chain has been disrupted for many, government’s civil authority orders have stopped work, workers quarantine has caused delays and increased project costs. Many such construction delays and disputes may involve a claim for lost profits. Specific policy terms can vary significantly by policy, but common insurance coverage in the construction industry that owners and contractors have, include business interruption insurance, civil authority coverage, builders risk insurance, and delayed completion coverage. In this blog, we will cover methodologies for business income calculation for construction projects experiencing lost profits.
Business income and extra expense endorsements are generally designed to compensate an insured for losses due to the suspension of operations or delay in start-up (DSU) caused by a “covered cause of loss” that results in direct physical loss of or damage to insured properties. Business income loss generally means net income that would have been earned or incurred if no physical loss or damage had occurred. Policyholders bear the burden of financial evidence and documentation for the likely net income and the reasonable period of restoration.
Common approaches to measuring losses include the before and after method and the yardstick method. The before and after method is based on historical information and compares what profits were before the damaging event, to profits after the damaging event. The yardstick or benchmark method is used to estimate lost revenue by comparing the business to similar businesses, industry averages or some other relevant guidelines. If it’s related to a new construction rather than an established construction, these two methods may not be as applicable, and higher reasonable certainty standard in calculations may be required in the absence of a track record for historical financials.
The owners, contractors, and other participants in the construction industry face many challenges during the pandemic. A&C’s qualified and experienced professionals are here to assist businesses & insurance companies in reaching a supportable lost profit analysis. If you have questions regarding this topic, please reach out to us at (469) 467-4660, or info@ahujaclark.com.
