When you have an insurance claim for a business loss, when a covered peril has interrupted business to a point there has been a landslide in business value or the doors are closed completely, you need to carry out a business valuation. Interestingly some of the best court cases discussing proper business valuation are not for property damage cases but other types of losses. Situations for business valuations and the methods used can come up in other types of cases and are helpful in our research.
Looking at Coastal Fuels of Puerto Rico, Inc., v. Caribbean Petroleum Corporation1—an antitrust case—we see a legal standard for business valuations that is important to note. In Coastal, the trial court had ruled that the damages for the business loss was too high because the damages included monopolization. At the second trial, only a claim for price discrimination was considered, the monopoly count was not re-tried. However, the jury awarded three times the damages of the first case. What prompted such a large verdict was the claim for the “going concern damages” or the value of the business. The turning point was looking at the value of the business as of the date the company closed its doors, not the date of the trial.
The norm for the going concern value should be the time the plaintiff goes out of business and the actual lost profits up until that date. Here, the trial took place four years after the business closed and to speculate about the lost profits for those four years is not the correct measure. This would be a speculative estimate for four years of time when the business was no longer open.
The proper measure was to look at the lost profits until the date of the shut down and then do an evaluation of the value of the business. But the plaintiff should not claim both post-trial future profits as well as the value of the business.
To do so would result in duplication (the plaintiff) would get its present value as a going concern plus its future profits, but the latter figure would be a major element in determining the former figure.2
Consideration in the measurement of the business loss and the way you explain it to the insurance company is very important and can turn a claim that is covered in red question marks to a claim that is paid and closed.
When an expert looks at business valuations they consider the purpose of the valuation. For a property damage loss, the business is being valued as a result of a loss where an interruption has caused the company to go out of business or there was a sharp decline in value. Your expert will compute the value prior to the loss and compare it a value on another date.
For the valuation date we know the numbers change over time. The date used for the value must be locked in and that date as we have learned above should not be beyond the date the company went out of business.