Hurricane Katrina Damage

After a Loss:

Pursuing an Insurance Claim
The difference between some of the categories may seem somewhat indistinct, as these are just general groupings that have evolved to deal with classes of goods by function. A coil of steel, for example, could be either finished goods or raw material, depending upon the type of manufacturing plant at which it was located. The distinction is important because insurance policies often apply different rules and limitations to different categories of property. We will use the designations to understand basic terminology, not for coverage decision-making. This somewhat newer form of insurance is viewed as much more complex than property damage, both to underwrite and to measure. While it lacks property damage's tangibility, it is fundamentally straightforward. The objective is for the insurance company to pay profits and all continuing expenses so that financially it will be as though there had been no loss. To arrive at this result, one needs to calculate what revenues would have been earned had the loss not occurred. From that you subtract any actual income earned during the repair period. From that unrealized income figure, the business interruption value can be obtained by subtracting all expenses, which do not continue, leaving lost profit and continuing expense. In the final analysis, the insurance payment plus any deductible, when added to your actual income, should put you back right where you would have been at the end of the claim period.

The following formula has been developed to further your understanding of the components of a business interruption loss:
B.I. = T x Q x V
Where: B.I. = business interruption
T = the number of time units (hours, days) operations are shut down
Q = the quantify of goods normally produced, or sold, per unit of time used in "T"
V = the business interruption value of each unit of production If the facility that suffered the loss was able to recover any production or sales at another location, that value must be credited against the claim. Correspondingly, the insurance company will pay for any additional costs incurred to reduce the loss by using the other facility, so long as the amount saved exceeds the amount spent. From the insurance company's perspective, they are willing to spend a dollar to save at least a dollar. This principle is normally applied to situations where net losses can be reduced by reasonable additional expenses. Although sometimes misidentified as "Extra Expense," this cost is correctly referred to as "Expense to Avert a Loss."