Effect of Post-Loss Economic Factors in Measuring Business Interruption Losses

Effect of Post-Loss Economic Factors in Measuring Business Interruption Losses

By: Gregory D. Miller and Joseph D. Jean

Excerpt: 2011 Emerging Issues 5918

Effect of Post-Loss Economic Factors in Measuring Business Interruption Losses: Insured's and Insurer's Perspectives

Summary: This commentary discusses the developing body of case law analyzing how to measure business interruption losses where the insured's loss is affected by post-loss economic factors. In addition to discussing the two competing approaches, i.e., the Economy Considered and the Economy Ignored lines of authority, this commentary also analyzes several hypothetical scenarios from both an insured and an insurer perspective.


Article: I. Introduction

Business interruption insurance, at its core, is intended to place the insured in the position it would have been in had it not suffered a loss. 1 Although an insured's loss may not have a far reaching economic impact, there are circumstances from which a loss to a single insured location can impact a region, or even a national economic marketplace. And, whereas a single location loss can, but usually does not, have a wide-impact on the surrounding economic landscape, hurricanes, earthquakes, wild fires, terrorist attacks, and even man-made environmental disasters that often cause significant, widespread physical loss and damage will typically have an effect on the regional, or even national, economy.

The significance of post-loss economic factors has become all the more important in recent years. Indeed, during the past 20 years, wide-impact catastrophes have been responsible for causing more than $1.1 trillion in damages worldwide. 2 Hurricane Katrina, the costliest natural disaster in United States' history on record was singularly responsible for causing more than $45 billion in insured damage. 3 And, the oil spill in the Gulf of Mexico, which is already the largest environmental disaster in United States' history, has the potential to cause far-reaching physical and economic damages to businesses and individuals all along the Gulf Coast and likely elsewhere.

Under ordinary, non-catastrophic circumstances, a business's performance prior to the loss can be an accurate measurement for how that business would have performed if the loss had not occurred. But the same may not be true following a wide-impact catastrophe. For example, wide-impact catastrophes can cause major population shifts and changes in market forces such as supply and demand which in turn can have profound and long-lasting effects on businesses and their income stream. Companies that rely upon shipping and rail systems might find themselves unable to transport or receive goods. Likewise, an influx of temporary rescue workers could cause local hospitality businesses to boom, while mass population shifts might put others out of business.

Whether a single location loss or a wide-impact catastrophe, a loss that changes the economic landscape presents insurers and insureds with unique issues in determining how to measure insured business interruption. For the most part, courts that have addressed these issues either consider the post-loss economic conditions or they ignore them. The decisions, therefore, generally fall into either what has previously been coined the "Economy Considered" or the "Economy Ignored" lines of authority. 4

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Gregory D. Miller is a director/shareholder at Podvey, Meanor, Catenacci, Hildner, Cocoziello & Chattman, P.C. in Newark, New Jersey. A substantial part of his practice is devoted to representing insurance carriers in complex first party property coverage and environmental disputes, including extensive experience with business interruption claims. Joseph D. Jean, Member of the Firm, practices in Lowenstein Sandler PC's insurance coverage group. Based in the firm's New York office, he represents policyholders in litigations and alternative dispute resolutions involving insurance coverage and complex commercial matters. This commentary is intended as a scholarly discussion of the issues presented and does not necessarily reflect the views of the authors. The authors thank Rachel M. Wrightson and Paulina Stamatelos for their research contributed in support of this commentary.