Are Business Interruption Claims Underpaying You?

When disaster strikes—whether it’s a fire, flood, or forced closure—business owners expect insurance to be a financial lifeline. Business interruption (BI) insurance is supposed to replace lost income during the downtime. But what if the math behind your claim is quietly working against you?

Many policyholders are shocked to discover that their actual economic loss far exceeds what their insurer is offering. This underpayment often stems from how projected sales are calculated—especially when insurers ignore seasonality and growth trends in revenue.

Let’s break down how this happens—and what you can do to challenge it.

🔍 The Basics: How Business Interruption Losses Are Calculated

In most BI claims, the core formula looks like this:

Projected Sales – Saved Expenses = Business Income Loss

To get to “projected sales,” insurers often rely on historical sales averages—usually from the last 6 or 12 months. But here’s the problem:

• Averages hide growth trends.

• Averages ignore seasonality.

• Averaging methods may dilute recent surges in business performance.

📉 Case Example: Ignoring Growth Understates Loss

Imagine a retail business with these actual sales figures:

If a loss occurs in January 2025, and the insurer uses a flat average from the past 6 months—say, $11,588 per day—they may project your January sales at:

17 business days × $11,588/day = $196,996

But if your business had been growing at a 15% annual clip, your trend-adjusted daily sales should be:

$11,588 × 1.15 = $13,326/day

That would put January’s projected sales at:

17 × $13,326 = $226,542

➡ Difference: nearly $30,000 in projected sales—in just one month. And that translates directly into a lower loss payment.

📊 Seasonality: The Silent Loss Multiplier

Beyond growth, many businesses are seasonal. Think of restaurants in summer, tax firms in Q1, or retail in December. Ignoring this dynamic can understate sales even further.

To properly account for seasonality, you need to create a seasonal index, which compares each month to the “average month.” Here’s an example:

If January has a seasonal index of 0.83, it means it typically performs 17% below average. Conversely, December is 14% above average. Failing to adjust for this can lead to skewed comparisons when calculating loss over multiple months.

⚠️ Three Common Mistakes in Insurer Projections

1. Flatlining Sales Figures
   Using a simple average across 6 or 12 months ignores upward (or downward) momentum in the business.

2. Ignoring Seasonality
   Not applying seasonal indices can distort reality—particularly harmful if the loss occurred during your peak months.

3. Misapplying Payroll Allocations
   Many BI policies cover ordinary payroll for a defined period (e.g., 60 days). Failing to correctly allocate “continuing” vs. “non-continuing” payroll can suppress loss estimates even further.

🧠 What Should a Fair Claim Include?

To ensure you’re not underpaid, your business income loss should be based on:

✅ Seasonally adjusted projections
✅ Trend-adjusted growth rates
✅ Detailed continuing vs. non-continuing expense analysis
✅ Actual loss periods segmented correctly (e.g., by payroll coverage limits)

🛡️ How to Protect Yourself

• Request the insurer’s full calculation workbook. Examine how they determined your projected sales and loss.

• Perform your own trend and seasonality analysis. Even a simple 2-year average can reveal discrepancies.

• Consult a forensic economist. Experts can model more realistic projections using time series methods, growth curves, and proper seasonal decomposition.

• Push back when the numbers don’t add up. Insurers often take a “standard” approach, but your business isn’t standard—and your claim shouldn’t be either.

📣 Conclusion: Know Your Numbers, Protect Your Rights

If your business has suffered a loss, don’t leave money on the table. Understanding how seasonal trends and sales growth affect your loss calculations could mean recovering tens of thousands more.

A properly prepared business interruption claim isn’t just about plugging in past numbers—it’s about telling your economic story accurately.

Related: commercial litigation support · business interruption lost profits. Source: the Judicial Council’s California Civil Jury Instructions.