The first step in determining the value of business interruption economic damages is to review the insurance policy under which the business interruption claim is based. The insurance policy will likely state the events that give rise to a business interruption claim and general guidance as to the calculation of a loss of business income.

The goal in determining business interruption economic damages is to determine the amount of damages that the insured incurred, due to the event that caused the business interruption. Simply put, damages are calculated by subtracting actual income during the period of restoration from income that would have been earned, but for the event that caused the business interruption. In many cases, the way to determine the income that would have been earned during the period of restoration is to look at historical levels of revenues and expenses. However, often a business may generate revenues and earnings that are different from historical levels. This may happen due to industry or market changes (external factors) or changes within the company itself (internal factors). For instance, a company may be generating revenues of $10 million and net profits of $1 million per year, but during the period of restoration a reduction in the cost of materials used to produce revenues causes a boost in earnings to $2 million per year. In this case, it would be unfair to the insured to assume that its earnings would be $1 million per year during the period of restoration when an external factor (lower costs of materials) would have caused it to generate higher net income.  

Although factors that cause income to deviate from historical levels should be considered, a boost in income that is caused by the event that also caused the business interruption should not be considered. For example, a bottled water company is flooded, causing it to shut down operations for awhile, but the flood also caused tap water to be contaminated, causing a higher demand for bottled water. Since the goal is to determine the income that would have been earned but for the event that caused the business interruption, the higher earnings due to the flood should not be considered.  

Conclusion

The methods used to estimate the revenues and earnings that would have been generated, had the event that caused the business interruption not occurred, vary greatly and depend on the circumstances of each case. However, a reasonable result can be readily obtained by keeping in mind the ultimate question: How much, if any, income was lost during the period of restoration that resulted from the event that caused the business interruption?  

• Heckerman v. U.S. (filed 7/27/09)
  
  
• Pierre v. Commissioner (filed 8/24/09)
  
  
• Sabella v. Scantek Medical (filed 9/21/09)
  
  

• "Discounts in Business Valuations After Cannon v. Bertrand", by Steven G. Durio, 57 LA Bar Jnl. 24, June/July, 2009
  
  
• "A Method for Adjusting Public Companies' Multiples for Firm-Specific Risk”, by Daniel McConaughy and Vicentiu Covrig, Business Valuation Review, July 2009
  
  
• "Getting it All-for-Less: An In-Depth Study of Remaining Stake Acquisitions”, by Dan Branch and Emily O'Malley, Business Valuation Review, July 2009