May 31, 2018 Articles

Proving Lost Business Income for Manufacturers Without Clearly Identifiable Lost Sales

A manufacturer unable to identify lost sales with precision should consider whether it might be able to rely on other factors identified by courts

by Christina Arnone and Christopher Sevedge

Property damage to a manufacturing facility often forces a suspension or slowdown of operations. Commercial property policies typically contain business interruption coverage for a company’s lost income resulting from physical loss or damage to covered property. This coverage should provide the policyholder with the amount of net income the policyholder would have earned had there been no interruption or suspension of operations. The coverage is ordinarily available for the length of time it takes to repair the damaged property or to get the business running again, known as the “period of restoration.” In some cases, however, courts have permitted recovery for business income losses during the “period of restoration” that manifest afterwards.[1]

The insurer typically agrees to pay for the “actual loss of Business Income you sustain.”[2] For manufacturers, lost profits may be established with proof of existing or anticipated sales opportunities not realized as a result of the loss. But lost sales may be difficult to establish, and manufacturers also suffer lost production regardless of the existence of lost sales during the period of restoration. For manufacturers, then, can the loss of profits be presumed from the fact that production ceased or slowed? After all, manufacturers do not produce goods that they do not intend to sell. Standard ISO definitions of “business income” also contain a special provision for manufacturers that alters the definition of “net income” to include “the net sales value of production.” Does this language allow a manufacturer to recover the value of lost production as an alternative to establishing proof of particular sales contracts or business opportunities lost because of the property damage?

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