ADJUSTERSINTERNATIONAL.COM • (800) 382-2468 • INFO@ADJUSTERSINTERNATIONAL.COM 3 2 ADJUSTINGTODAY.COM Different theories and methodologies can be used to determine the length of the delay. It’s not uncommon for the insurer to take a different approach than the policyholder. Regardless of the method used, it is important to recognize that the economic impact often extends beyond the time it takes just to replace the brick and mortar. The policyholder is in the best position to know the actual financial impact of the delay. So, the carrier must rely on the policyholder’s information - not only what’s in construction schedules or charts. Therefore, the insurer must consider the possibility that the loss extends past the time to replace the brick and mortar. Measuring the Loss When measuring the potential economic loss(es), it’s important to consider the type of business that is expected to be underway once the building is completed. Different operations are likely to have different business cycles. For example, let’s say the building is intended for residential or commercial rental units or commercial sales. The 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Month Month 1 (Projected Opening Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 (Actual Opening) Month 8 Month 9 Month 10 Month 11 Month 12 Month 13 Month 14 Month 15 Month 16 Projected Ramp Up During Delay Period Delay in Achieving Stabilized Revenue Exhibit A - Measured Lost Ramp Up or Stabilized Occupancy Methodology Shading Representation Orange - Projected Ramp Up During Delay Period Green - Anticipated Ramp Up of Net Income had the event not occurred Red - Hypothetical Actual Ramp Up of Net Income upon completion of the building after the event occurred Blue - Total Delay in Achieving Stabilized Occupancy Yellow - If you were to look at Projected Ramp of Net Income had the event not occurred and compared it to hypothetical ramp up that will actually occur, this is Loss of Net Income that would be sustained on a monthly basis Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Month 13 Month 14 Month 15 Month 16 10% 20% 30% 40% 50% 60% 60% 60% 60% 60% 50% 40% 30% 20% 10% 10% 30% 60% 100% 150% 210% 270% 330% 390% 450% 500% 540% 570% 590% 600% 0% 0% 0% 0% 0% 0% 0% 0% 0% 100% 100% 100% 100% 100% 100% 0% 0% 0% 0% 0% 0% 0% 0% 0% 100% 200% 300% 400% 500% 600% Methodology 1: Lost Net Income Cumulative Lost Net Income Methodology 2: Lost Net Income Cumulative Lost Net Income This article offers valuable insight into properly measuring these losses. It emphasizes how to treat revenue that would have been earned during both the planned “ramp-up” period and the actual (delayed) “ramp-up” period. Knowing how to apply the terms of a builder’s risk policy to the claim requires expertise in policy interpretation, construction and forensic accounting. This is especially true for calculating the lost revenue during the two ramp-up periods. A public adjuster experienced in builder’s risk claims adds substantial value to the process. Their ability to properly forecast and measure lost income is crucial to a full recovery. We trust you will find this article both insightful and useful. Enjoy! Ethan A. Gross, JD Editor normal first step would be to measure the expected stabilized net income for the period of indemnity (the time the insurer must pay after a loss). That’s the amount to use to project future lost net income. This approach identifies the full net income that the insured has lost due to the delay in completion of the project. Let us explain further. Ramping Up The common sense way to measure the damages might seem to be to consider what the projected net income would have been in the months immediately after the completion of the project. But this would not result in an accurate measurement of the actual damages sustained because it doesn’t take “ramp-up” time into account. A ramp-up period is the time it takes from opening a business to when the business is at a stabilized level with consistent sales or rentals. The problem with the “common sense” approach is that when the building actually opens in the future, the business will experience those same number of ramp-up months. Effectively, the insured would go through two separate ramp-up periods; the pre-loss “scheduled” ramp-up period and the “actual” ramp up period post completion. This is illustrated in Exhibit A. As shown in Exhibit A, if projected net income for months one through six is used, the measurement would not capture a large part of the loss. If you used the projected net income — had the property damage not occurred and compared to the actual net income achieved — there would be a net income loss (highlighted in green and orange in Exhibit A) all the way through month 15. Measuring the projected income for the six months following the loss would overlook the lost income for months seven through 15 (highlighted in orange). Month 16 is when the business is expected to reach its stabilized net income after taking into account the delay period. This is why measuring only the original projected net income during the delay period is not the accurate way to measure the loss. Typically, builder’s risk insurance policies include wording in the “delay” coverage section
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