Business Interruption Expenses-Expert witness
Business interruption is a form of commercial damage coverage that includes but is not limited to various torts and contract issues.
Business interruption occurs when the event affects revenue and/or cost. Profit is lost by the business due to factors such as:
- Fire
- Natural disasters
- Movement from temporary sites to a permanent site, and/or
- Government actions causing it to cease operations.
Analysis
In all of the events mentioned above, one thing is common. That is, while business is being interrupted or halted, expenses are mounting. In this scenario, the company bears the initial burden of the expenses. But insurance or litigation can help them get through this and also help in staying profitable. If the interruption to the business was caused by a third party, litigation would be carried out through subrogation to recover the losses. This could mean the insurer pays the claim initially then goes after the utility or other party who caused the loss.
Whether it is insurance, litigation, arbitration or settlement, covering your business interruption expenses can be challenging. We have handled the expert/calculation side of these type of engagements in valuing the losses/lost profits.
Many losses fall into three areas:
- Business interruption expenses were a result of a service interruption. This could be direct damage, physical loss, destruction to utilities, services, telephone, transmission lines, substations, equipment of suppliers of such services as well as related plants.
- These expenses were as a result of contingent business interruption. Here, the property damage to the receivers or suppliers is typically covered by the insurance policy.
- Business interruption expenses were as a result of restoration periods. This is based on the expenses incurred during the length of time that is required to replace, repair, or rebuild the damaged property, starting from the point the damage occurred.
How Business Interruption Is Calculated — My Method for
Insurance and Litigation
Business interruption = Lost Profits + Extra Expenses to
mitigate + Civil Authority losses. In California, measured under CACI 3903 with
reasonable certainty, not speculation. For insurance, measured under ISO form
CP 00 30.
Formula:
Lost Revenue (but-for) — Saved Expenses (variable) + Extra Expenses +
Prejudgment Interest
1. Lost Revenue — But-For
I build but-for revenue 3 ways, whichever has data:
- Historical
trend: 24-36 months pre-loss, seasonally adjusted. Example: restaurant
$100k/mo pre-fire, growing 5% year — but-for $105k/mo. - Contracts
/ bookings: Hotel had 80% occupancy booked for next 6 months via
OpenTable/Resy — lost those bookings. - Yardstick:
Comparable location of same chain not impacted.
I verify via POS, bank deposits, sales tax — three-way
match, Bates-stamped. No projection without history — excluded under Sargon.
2. Saved / Avoided Expenses
Only variable costs saved because you didn’t operate: COGS
30%, hourly labor 40%, credit card fees 3%, linen, etc. Fixed costs NOT
deducted: rent, insurance, base salaries, loan payments — you still paid them
during closure. This is where insurers underpay — they deduct rent as saved,
it’s not.
3. Extra Expenses — The Part Most Missed
Costs to mitigate loss and get back faster, covered under
Extra Expense coverage:
- Temporary
location rent, generator rental, expedited shipping to get equipment - Overtime
to catch up production - Marketing
to re-acquire customers who went to competitor - Payroll
of key employees you kept to retain — under ISO, if you keep payroll, it’s
covered to preserve workforce.
Example: Fire in kitchen, restaurant closed 4 months. Lost
profits $400k, extra expenses: temporary kitchen rental $60k, overtime $20k,
customer re-acquisition mailer $10k = $90k extra. Total $490k + interest.
4. Three Types Attorneys Search For
- Direct
BI: Your property damaged — fire, flood, equipment failure. Period is
from damage to restoration, plus extended period (30-60 days) to ramp back
to but-for. - Contingent
BI (CBI): Your supplier/receiver damaged. Example: Your manufacturer
in Taiwan hit by earthquake, you can’t get inventory. Need to prove
supplier damage and your dependency — supply contract, 70%+ purchases from
that supplier. - Civil
Authority / Ingress-Egress: Government closes road, no physical damage
to you, but customers can’t get in. Example: 2020 civil authority orders,
PG&E shutoff. Coverage depends on policy wording — “prohibits
access” vs “prevents.” I calculate same lost profits
method.
5. What Insurance Denies and How I Prove
Insurers deny: “No physical damage,” “Loss is
not covered,” “You would have lost money anyway.” I counter
with:
- Physical
damage to property including smoke, contamination — per ABM v. XYZ
California - Trend
shows profitable before — bank statements prove - Extra
expenses reasonable and necessary to mitigate — invoices
Documents I Request: P&L 36 months, sales tax
returns, POS reports, bank statements, payroll records, invoices for extra
expenses, insurance policy (CP 00 30), lease, photos of damage, restoration
timeline.
Cost: BI preliminary calc $5k-$15k includes but-for
analysis, saved expense analysis, extra expense schedule, damages summary.
Testimony $375/hr as of 2026. Based in Fremont, serving Bay Area & beyond: San Jose,
Oakland, San Francisco.
Conclusion
In addition to the matter of recovering costs, extraordinary events/acts of god can affect the valuation of a business, either temporarily or permanently.