As noted before in To Consider the Economy, or Not To? ‘That is the Question’ — Understanding Business Interruption Claims, Part 9 and What’s Good for the Goose is Good for the Gander – Post-Loss Market Conduct Ignored in Louisiana – Understanding Business Interruption Claims, Part 36, there are two diverging views on whether post-loss market conduct should be considered to determine the value of a business interruption loss.
Experts have coined the phrases “economy ignored” and “economy considered” for the cases that debate between the views:
The “Economy Ignored” cases stick to the more traditional coverage analysis where courts measure the business interruption loss by comparing the actual past business experience against the probable experience during the period of restoration had the peril not occurred. This type of analysis, however, does not consider the impact a catastrophic peril could have had on the economy, market, or demand for the insured’s particular goods or services.
Conversely, under the “Economy Considered” line of cases, courts use a different approach to place the business in the position it would have occupied had it been operating in the actual, post-catastrophe environment, but only allowing losses that directly flow from the insured damages. This method considers the changes in the post-catastrophe economy without regard to whether the insured would have performed better or worse after the catastrophe.
An article published by IRMI, (International Risk Management Institute), Business Interruption Losses in Economic Downturn, presents a few real-life examples of key questions that claim professionals should ask of their clients in order to present business income loss claims that are well supported and reflect the reality of the insured’s business, the market, and the economy–especially in a downturn.
1. Has the specific market for the insured’s products or services changed?
While the company’s trends may have been going in a particular direction prior to the loss, current market conditions could have materially changed that trend.
2. Does the insured have any contracts that help to support the forecasted level of sales despite changes in the economy?
For example, a distributor that can document purchase commitments from customers prior to the date of loss could support a forecast of increased sales, even in a market where the competitors’ sales were decreasing.
3. What makes the insured’s product or service unique so that sales would have been less affected by (or even benefitted from) a downturn in the economy in contrast to the rest of the market?
This might be supported by looking at how the sales of the insured’s products or services compared to its competitors prior to the loss. An example might be an electronics component that possesses specifications and reliability that far outweigh its competition. In this example, a decline in the rest of the market could have less of an impact on the insured.
4. Has the insured recently introduced any new products or services for which no significant sales history exists?
This may require looking at how similar products or services are performing in the current market and building a forecast around that, taking into account any unique advantages, including marketing, promotion, contracts, and advance orders that can be documented and supported.
5. Did the insured make any recent changes to operations or facilities that would have supported increased sales, despite the economic downturn?
The recent addition of a new machine or process at a manufacturer, for example, could well support a forecast of increased revenue, given a strong demand for that product, even with a decline in the economy.
6. Have there been any significant changes in the competitive landscape as a result of the economy?
For example, challenging economic conditions may have caused a major competitor to go out business, thereby creating a positive impact on the insured’s business.
7. Have there been significant changes in the supply chain or commodity prices due to economic conditions that could have impacted the insured’s price structure, necessitating an increase in sales prices, which in turn creates an impact on sales volume?
For instance, let’s say that economic conditions caused the closure of a metal fabricator that provided key components to a manufacturing company that recently experienced a loss. Had the loss not occurred, the manufacturer would have needed to find an alternate supplier, which as it happens, would have increased the cost of materials by 20 percent. The manufacturer would have in turn needed to increase the product’s sales price in order to maintain a normal profit margin. It is projected that, in the insured’s specific market, the resultant increase in sales price would have created a decrease in the volume of units sold.