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Helping an insured calculate its maximum possible business interruption (BI) loss exposure is one of the thorniest problems an insurance adviser faces, likely to occur because insureds underestimate their BI exposures.

By Jerome Trupin,CPCU,CLU | Updated on December 31, 2009

By Jerome Trupin and Arthur L. Flitner

Helping an insured calculate its maximum possible business interruption (BI) loss exposure is one of the thorniest problems an insurance adviser faces, likely to occur because insureds underestimate their BI exposures. It also involves arithmetic and accounting, two topics guaranteed to produce MEGO (my eyes glaze over) syndrome. To complicate the problem, many of the suggested methods of calculating BI exposure are defective.

One basic method assumes that sales and expenses occur evenly throughout the year. Thus, if an insured estimates 6 months are needed to restore operations, then the insured’s business interruption loss exposure is one-half of its annual net profit plus continuing expenses. This method overlooks firms whose sales fluctuate seasonally. For example, Wonderful Widgets estimates it can restore its operations in 6 months. It does 75 percent of its sales in its best 6-month period. Its maximum possible BI loss during those 6 months is much greater than half of its annual net profit.

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