When calculating a business income loss, it is important to look at the company as a whole and to look at individual segments of the business. Under a standard loss calculation where the projected “but for” revenues were considered by deducting the revenues from sales of substitute products and applying a profit factor to the loss incremental revenue, the business revenue may not show a numerical decrease. At first blush, one could argue that there was not a loss, because the gross profits were higher pre-loss than post loss. However, a true loss can be masked in instances where a loss impacts one portion of the business but sales or business income in another segment of the business increases.
One example would be a flooring warehouse that had carpet rolls damaged by water but had an increase in laminate flooring sales because a new product line had become popular. The business still had the carpet loss but total revenues looked like the business was not affected by the loss. However, if the carpet loss had not happened the business would have truly been prospering and profits would have been higher.
Policyholders and public adjusters should look at commercial losses to see if the records show that a product line and or a business segment fell after the interruption or the loss. An important tip for this type of claim is to be ready to show the breakdowns for the different segments of the business. In one case,1 a business was damaged impacting truck winch revenue but there were significant increases in revenue relating to the truck beds and trailers. Here, the court looked at a few factors:
- Diversion of resources that were previously used for the winches that were subject to the loss.
- Successes in an aspect of the business unrelated to the expenditure of resources that were freed up from not having to devote time and money to the line of the business that was the subject of the loss (the winches).
- A combination of the income from both sources.
The court also explained that lost sales and revenue after the loss had to be supported by evidence and not just speculative or made up of reliance on assumptions. The lesson to be learned is to always look at how the policy addresses business income losses and to evaluate with a separate statistical analysis of the relationship between the business segments and their causal factors.