Abstract
Business interruption insurance often referred to as lost profit or loss income insurance is written and purchased to protect a business for when its operations are interrupted and income is reduced due to the occurrence of a covered peril. The determination of the actual economic loss can be difficult and controversial. The loss computation depends on the determination of what the sales would have been had there been no loss event and what expenses should be subtracted from the estimated sales. In this paper, we discuss the issues with business interruption claims, and theoretically correct approach to measure a firm’s loss due to an interruption in operations from a covered peril. We present an example showing calculation of economic loss due to business interruptions.
Highlights
The economic impact of major disasters such as hurricanes, wildfires, floods, earthquakes, act of terrorism, etc. are considerable
Business interruption insurance is a type of commercial insurance that provides protection to business against loss of income arising after a disaster
The intentions of the insurance contract are to restore the insured to the same position before the loss occurred. This includes tangible assets and lost profit/income. It is well established in the financial literature that cash flow is the most theoretically correct variable to measure a firm’s value
Summary
The economic impact of major disasters such as hurricanes, wildfires, floods, earthquakes, act of terrorism, etc. are considerable. The Deepwater Horizon disaster in 2010 had a strong impact on economy of Gulf states and resulted in multi-billion dollar loss for business in sectors such as tourism, commercial fishing, and oil industry. Though these calamities include lost wages, property damage, etc., Mowbray (2006) state that most of the payout for damage claims is from business interruption filings. There must be physical damage to the property located at the address specified in the policy This damage must be caused by incident or disaster covered in the policy and must cause interruption in business operations. The insurance policy may include provision to compensate business for extra expenses due to peril until it gets back to its pre-loss income level
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