Many commercial property insurance policies require that policyholders submit a Sworn Statement in a Proof of Loss (also referred to as “Proof of Loss”) in order to receive benefits under the policy. A Proof of Loss provides the insurer with specific information about the incident giving rise to the claim, such as the cause, the nature of any damage sustained, and the financial impact to the business, if any. In the event a policyholder suffers a financial loss as a result of an insured event, it is essential that the policyholder understands how to calculate business income losses covered under its policy so it can attest to that amount in the Proof of Loss. Ultimately, the specific language in the policy will dictate the policyholder’s approach for calculating business income losses, but there are two general approaches typically used by insurance industry experts.
Top-Down or Gross Receipts Method
The first approach is referred to as the “Top-Down or Gross Receipts Method”. Under this approach, the policyholder must (1) calculate the lost sales resulting from covered property damage and then (2) subtract expenses that were saved as a result of not achieving those sales.
(1) Projected Sales – Actual Sales = Lost Sales
(2) Lost Sales – Saved Expenses = Business Income Losses
- Projected Sales
“Projected Sales” (also referred to as “but for revenue”) is the revenue the policyholder would have earned between the date covered property damage forced the policyholder to suspend its operations and the date when the policyholder resumed, or reasonably could have resumed, normal operations (the “Period of Restoration”) if the insured event had not occurred. To develop a foundation for Projected Sales, the policyholder may consider:
(a) the history of sales in the years leading up to the incident;
(b) the pre-loss average monthly sales achieved in those years;
(c) actual purchase orders and/or contracts that could not be fulfilled/satisfied due to the covered event;
(d) the rate of inflation; and
(e) any other factors that could influence the expected sales volume or price offered for impacted products
These other factors may include seasonality, growth, industry trends, and other outside factors (e.g., political changes, changes in industry regulations, competition, economic forecasts and conditions, etc.).Continue Reading Calculating business income losses for a business interruption claim