When estimating values at risk for business interruption insurance, it is necessary to differentiate between maximum possible loss and maximum probable loss. The maximum possible loss is an estimate of loss value that assumes the entire insured entity, including all locations, comes to a complete halt. The maximum probable loss envisions likely loss scenarios which may not affect all locations.
One of the important factors to consider is the geographic location of the insured properties. Let’s assume that we are discussing a retailer with three locations in the Southwest. Because of the nature of retail, the locations operate independently of each other. Now let’s consider the geographic locations.
In the illustration below, all three locations are tightly clustered. This means that a single, regional, catastrophic event could easily impact all three locations. Specifically, a single hurricane could cause direct physical damage, an issuance of evacuation orders, power outages, and ingress/egress issues. This is a case where the maximum probable loss is the same as the maximum possible loss and the value of all locations should be considered.
This second illustration paints quite a different picture. The locations are physically separated and it is highly unlikely that any single insured event would have an impact on all of the locations. Each location would have to be considered for its own potential threats, the likelihood of an event, the values at risk for each location, and the likelihood of multiple concurrent events. In this situation, I would propose that it is statistically improbable that all three locations would suffer a complete, 12 month shutdown at the same time. Therefore, values at risk considering all three locations would overstate the potential values at risk. I would propose that insuring the value at risk from the two highest valued locations would provide reasonable coverage for all probable loss scenarios.
A geographic analysis can greatly impact potential business interruption values at risk. An operation with multiple locations, interdependent locations, and contingent loss issues can make the issues even more complicated. An experienced, credentialed professional, with specific training in damage measurement and risk management, can help explore these issues and work with a broker to find the right balance of business interruption insurance.
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