Lost Profits Expert Witness: Quantifying Business Interruption Claims

A claim about what would have happened

Business interruption cover, known in some markets as consequential loss or loss of profits insurance, pays for the financial result the business would have achieved had the insured event not occurred. That makes every claim a counterfactual exercise: someone must model the 'but for' scenario, compare it with what actually happened and isolate the shortfall caused by the insured damage.

Insurers typically appoint forensic accountants early, and their first projection tends to frame the negotiation. A policyholder who relies only on internal accounts staff is at a disadvantage, not because those staff lack ability but because loss quantification under an insurance wording is a specialised discipline with its own conventions and pitfalls.

Who acts as a lost profits expert

Most lost profits experts are forensic accountants, often chartered or certified public accountants with a background in audit, corporate finance or claims. Some are economists who model market trends, demand and pricing. In complex matters, the accountant works alongside an industry specialist who can explain seasonality, contract pipelines or capacity constraints in a particular sector such as hospitality, manufacturing or logistics.

Where the dispute reaches court, the expert's role changes from adviser to independent witness. In England and Wales the expert's duty is owed to the court, and in US proceedings the methodology must withstand challenges to reliability. A good expert is therefore careful from the outset, knowing that every assumption may later be examined.

How the loss is measured

The policy wording governs the calculation. UK-style wordings often refer to a reduction in turnover multiplied by a rate of gross profit, while US forms commonly refer to net income plus continuing normal operating expenses. The definitions of gross profit, standard turnover and the indemnity period, together with any trends clause, determine what the expert may and may not include.

The expert usually works through several steps: establishing a baseline from historical performance, adjusting it for trends and circumstances that would have affected the business anyway, projecting expected revenue over the indemnity period, deducting saved costs and adding increased costs of working that reduced the loss.

• Monthly management accounts and audited statements for several prior years
• Budgets, forecasts and board papers prepared before the loss
• Order books, signed contracts and cancelled bookings
• Payroll records and evidence of retained staff
• Invoices for temporary premises, overtime, outsourcing or expedited shipping

Where insurers and policyholders usually disagree

The baseline is the first battleground. An insurer may argue that a growing business had simply reached a peak, or that a new product line was too recent to project. Trends clauses invite argument about market conditions, competitors and wider economic shocks. The length of the indemnity period, whether the business could have recovered faster, and whether lost customers ever returned are also common points of contention.

The UK business interruption test case brought by the Financial Conduct Authority during the pandemic showed how much depends on wording, causation and the treatment of wider events in the counterfactual. The detail of that litigation is beyond this page, but it illustrates why the expert must understand the policy language, not just the accounts.

Increased cost of working and mitigation

Most policies expect the insured to reduce the loss where reasonably possible and pay for the extra expense incurred in doing so, often subject to an economic limit. A restaurant that hires a food truck, or a factory that outsources production to a competitor, may preserve customer relationships and reduce the overall claim. The expert documents these decisions, shows how they reduced the loss and defends them against hindsight criticism.

Policyholders should record why each mitigation step was chosen and what alternatives were considered. Contemporaneous emails and meeting notes are far more convincing than explanations prepared months later.

Fees and timing of the engagement

Forensic accountants generally bill by the hour or day, with rates that vary by seniority, firm size and location. Some commercial policies include a claims preparation costs extension that reimburses part of the cost of professional help in presenting the claim, usually up to a stated limit and often excluding costs of disputing the insurer's position. Read the clause carefully and ask the insurer to confirm in writing how it will apply.

Instructing the expert early tends to save money: the expert can set up a reporting framework from the first month, so that data is collected in a usable form rather than reconstructed later.

Making the report hold up

A persuasive lost profits report states its assumptions openly, tests them through sensitivity analysis and reconciles the projection with documents the business prepared before the loss. It addresses the insurer's accountant point by point and explains why a different approach is more consistent with the policy wording and the evidence. Round numbers, unexplained growth rates and reliance on optimistic forecasts without supporting data quickly undermine credibility.

Common mistakes that weaken a claim

Businesses often undermine their own claims by mixing insured and uninsured causes, for example blaming the whole downturn on the fire when a major customer was already leaving. Others submit projections prepared after the loss that contradict earlier budgets, or forget to deduct costs that stopped during the closure. A lost profits expert identifies these weaknesses before the insurer does, so the claim presented is one that can be defended line by line.

Another frequent error is waiting for the indemnity period to end before starting the quantification. Interim payments are usually easier to obtain when monthly figures are prepared as the period runs, with a clear reconciliation to the accounts.

Lost profits claims are won on method and documentation rather than on headline figures. A well-prepared expert who knows the wording and the business can narrow the gap with the insurer long before any hearing.