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Time Element

Quantum of Loss: Understanding Bias in Business Interruption Claims

Daniel Torpey | August 18, 2021

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The best plans of risk managers, brokers, and underwriters may not always predict the strangest of circumstances, let alone provide a clear path to insurance recovery. Commercial property and business interruption (BI) claims, while simple in theory regarding what should be paid, continue to challenge both the insured and insurer to settle. 1

This is especially true when dealing with large losses or the larger-than-life personalities of those involved in the process. Unlike other financial transactions such as mergers, acquisitions, financing, restructuring, initial public offerings, or issuing debt, today's corporate risk managers do not have an army of financial advisers on their side who have "been there and done that" to help them navigate their way to an optimal settlement. To make matters worse, a risk manager is often thrown in the middle of differing perspectives from internal C-suite executives and the insurance company representatives.

It is true that risk managers may have access to run ideas by their broker or even their insurers, but both are subject to potential inherent bias in their view of claims and the relationships they have fostered in the industry. The insured's view of the claims process varies from company to company, and on any given day, may range from fair, objective, and reasonable to extremely skeptical and mistrusting of the insurers and their representatives. There are many professionals in the claim industry, but how many are truly objective and will help the policyholder through the process? The key for a policyholder is to tap into the knowledge of how to navigate a large and complex claim, which often includes the ability to manage or counter the inherent bias of those they will be working with on the claim.

This article will focus on recognizing that all parties in the claims process may be subject to potential bias. A risk manager needs to increase their awareness of bias impacting the professionals' decision-making and understand how to deal with that bias in order to effectively settle the claim. To do so, we will use a theoretical formula and methodology to capture both the quantitative and qualitative aspects to value and manage a large-scale, complex property and BI claim. The fundamental elements of a BI claim consist of the correct application of the BI formula and the integrity of the calculations behind it. 2

The full "quantum of loss" point of view will add a level of complexity to the formula by defining the full "time element" equation and not solely the BI element and "property damage" equation. The formula will also apply qualitative factors to incorporate critical aspects of the claims process.

If you walk into a negotiation with the expectation that a client is going to be difficult or undercut you, you might respond to their propositions differently than if you went in assuming that your only expectation was to find an agreement that worked for both parties. On the other hand, you might be more willing to be shortchanged if you go in with too low expectations, imagining that anything greater than that is great.

Source: Brianna Wiest, "6 Mental Biases That Are Making You a Less Effective Negotiator," Forbes, February 14, 2019.

The Property Damage and Time Element Loss Equation (Quantitative Formula)

Here we introduce the quantitative formula and the components of such calculation, which adds the extra expense, expediting, and property damage elements to the BI formula referenced above.

The author has used the form of a mathematical formula for illustrative purposes; risk professionals looking to apply the scientific method in its precession to their own claim should proceed with caution.

Time element loss equation
  • PD = property damage
  • BI = business interruption (T = time, Q = quantity, V = value)
  • EEE = extra expense + expediting

Property damage refers to the costs associated with repairing or replacing damaged property such as buildings, equipment, inventory, personal property of officers/employees/others, etc. Although this may seem like the most straightforward part of a commercial property insurance claim, differences in opinion often arise relating to the following.

  • Scope of repairs versus replacement
  • Whether items can be cleaned or covered under warranty or if a full replacement is needed
  • Valuation of property damage elements (i.e., obsolete inventory or increased costs due to changes in building code)
  • Different estimates from different contractors
  • Repairing or replacing apart from "like kind and quality"

Bias will further complicate finalizing these amounts.

The term business interruption outside of insurance relates to the disruption of business operations. For property insurance policies, business interruption relates to the financial impact of such a disruption over a period of liability subject to the coverage endorsement, limits and sublimits, and an application of coinsurance, if applicable. The essential equation to determine the business interruption impact is T (the number of time units (hours or days) operations are shut down) x Q (the quantity of goods normally produced or sold per unit of time used in T) x V (the value of each unit of production). All three metrics contain an element of subjectivity and can be complicated by factors such as minimal historical data, potential makeup from inventory at distribution centers, potential makeup at other plants, seasonality, etc. A successful resolution requires the management of expectations and the overall project.

Extra expenses are the costs incurred to continue business activities due to the loss event, over and above the costs normally incurred for the business. Expediting expenses at times may be a stand-alone endorsement or incorporated as part of the BI formula to mitigate a loss and include paying premiums for freight, labor, and other costs to get materials or other resources. There are often limits to this coverage if noted within a separate endorsement.

So, where does bias factor into the claims process, and how can one avoid or navigate through the associated bias? The below qualitative aspects of the insurance process will help pinpoint potential areas of bias.

Bias can come in many forms, three of which are discussed further below. Let's first start with the formula.

Quantum of Loss/Qualitative Formula

As we add more elements to the loss process, the formula becomes more of a qualitative formula in order to proscribe some method, steps, or process to what in reality is often impacted by bias, industry convention, and not always the most scientific process.


Quantum of loss equation
  • P = policy
  • ME = managing expectations, (2) = squared (managing expectations for all parties)
  • PM = project management
  • PD = property damage and properly documenting

A claim lives and dies by the policy, which details the terms and conditions of the insurance. Apart from the quantitative formula discussed, policies also include other coverage, which may differ between insurers but commonly includes coverage for losses resulting from civil authority, debris removal, decontamination costs, ingress/egress, professional fees, and protection and preservation of property. Companies may also have more than one insurance policy that will respond to a certain event, which can create opportunities for strong opinions (also known as "bias") of what is covered under each policy among insurers.

Apart from understanding and applying the insurance policy, managing expectations, project management, and properly documenting the claim are all critical parts of the claim process that will have an impact on achieving a successful outcome. In each of these areas, a certain "bias" can impact any or all of the following elements.

Managing expectations is often an area subject to bias for both the insured and the insurer, yet it involves making sure that all stakeholders, internal and external, have a clear understanding of what to expect and should involve the communication of the following.

  • Internal. Manage expectations of superiors, C-suite, and business units
    • Process. Extensive documentation and management representations
    • Timing. Common for claims to extend beyond the year of the insurable event
    • Recovery. Ranges of recovery
    • Determine how settlement translates into recovery for individual business units
  • External. Manage expectations of the insurance company and representatives
    • Who is involved in this process from the company?
    • What type of information is shared with the insurers and the representatives, and when is it provided?
    • How is information communicated (live meetings, virtual, email, etc.)?
    • What level of detail and explanation of information to provide?
    • What is the expectation of the timing of advances and amount of recovery?

Project management is the managing and organization of the overall claims process to achieve a successful settlement, which also includes proper documentation.

Outlined below are some leading practices that will contribute to a smooth process in managing the claim. These "leading practices" are not defined in any policy but will allow the insurer and insured to benefit from a structured approach to help improve the claims process.

Project Management

  • Provide timely notice of loss.
  • Mitigate your losses and know your policy(ies).
  • Assemble the team (can be internal and external professionals).
    • The internal team should have clearly defined roles and responsibilities.
    • External claim accountants and consultants should have clearly defined roles and responsibilities.
    • Keep the broker involved and up to speed throughout the process.
  • Create a documentation process.
    • Create a process to capture all estimated and incurred costs associated with the loss, including appropriate documentation and clear descriptions of claim items and rationale, if necessary.
    • Develop a claim summary—including consideration of all potential avenues for recovery and organized by insurance classification.
    • Implement a system for documenting each category of loss and supporting your claim.
    • Exclude unnecessary data.
  • Institute a communication protocol.
    • Establish communication protocol and project management—internally and externally.
    • Establish a meeting schedule with the insurance adjusters and accountants and set a defined agenda for each meeting.
    • Continue to provide regular updates to the loss estimate.
    • Document all substantive agreements with insurers.
  • Follow the communication protocol.
    • Don't get dragged into multiple emails or letter-writing campaigns.
    • Encourage virtual and live meetings to keep the process moving.
    • Be aware of bias in communications.
  • Request advances from your insurer early and often as claim proof allows and pursue advances.
  • Prepare the claim, submit it to the insurers, and continue dialogue with the adjuster and insurers to move toward settlement.
  • Keep the claim process moving.
  • Understand the claim process, techniques, and goals used by the insurance company adjustment team.
  • Move the claim forward in manageable pieces
  • Settle areas where you can early, and set goals to reach a settlement.

As you navigate the claim process, you will also need to remain aware of the multiple biases potentially impacting project management or the claim process and understand how to deal with these biases.

Identify Bias in Decision-Making: Four Biases To Consider in Claims

The key to managing expectations is identifying the drivers of each party when walking into a meeting. What's their point of view and goals? External parties invested in the claim include insurers, adjusters (appointed by the insurance company), forensic accountants (the adjusters will often involve forensic accountants to help measure the loss), brokers, and other potential third parties, including the suppliers, shareholders, and lenders.

The expectations of external parties must be managed at the same time as managing expectations of internal parties, including executives, business units, employees involved in repairs/replacements, boards of directors, and audit committees. Internal and external parties both have inherent biases. Bias is the tendency to favor or dispel something and can come in many types. Although there are countless biases in the world, this article focuses on those that are relevant to overcoming the challenges in calculating the quantum of loss.

Selective Perception

Selective perception involves the interpretation of information to support your own personal perspective. Individuals will often use select information to confirm initial beliefs, which is often also referred to as confirmation bias. An example of this would be when calculating the Q (quantity) of loss from the formula using arbitrary sales trends to predict the sales during the loss period (e.g., 3-, 6-, or 9-month period) that are not at all related to the loss period. Will an insurer or insurers simply use base periods to optimize their positions or truly seek to understand "what would sales have been had no loss occurred?" Sales trends consider multiple factors, such as seasonality, cyclical, or current business environment conditions and are not simply a mathematical formula.

Mitigating selective perception includes challenging information presented, exposing what could be considered as contradicting information, and identifying valid information that disproves the selective perspective. Understanding everyone's perspectives and how information is being interpreted will help the involved parties overcome this bias.

Anchoring Bias

Anchoring bias involves "anchoring" to preliminary or preexisting information. The most common example of this would be when management uses the initial quantum of loss as the basis for what they expect to recover upon settlement. This bias involves jumping to conclusions based on the initial discussions and may be caused by feeling pressure from external or internal forces. This type of partiality is similar to a "first impression" bias.

Mitigating anchoring bias can include considering where the pressure may be coming from. Leading practices can include treating the development of the initial claim summary as a high-level estimate and flushing out all possible costs and avenues of recovery. If these preliminary estimates are shared, it's important to manage expectations by informing all parties that updates will be provided over time and advise against overreliance on early estimates.

Gambler's Fallacy

The gambler's fallacy involves the belief that a certain event is more or less likely to occur based on the outcome of a previous event. This bias occurs when you allow unrelated past events to influence your expectation for the future. It can present itself in the quantitative formula (i.e., using historical original construction rebuild scenarios when contemplating periods of interruption).

An extreme example for illustrative purposes would be the rebuilding of the World Trade Center in New York City after the events of September 11, 2001. When the towers initially went up around 1971, the planning, permitting, and build time was 12–13 years as a result of open access and the fact that little was built around the existing site. Fast forward to 2001, and the World Trade Center is surrounded by multiple other buildings and developments and is impacted by a laundry list of additional zoning and code requirements, including subfloor dynamics of an underground multistate subway system. If you were gambling for the same rebuild time of the 1970s, you lost. Mitigating the gambler's fallacy may involve looking at various trends and the current environment, not merely relying on history.

Clustering Illusion

Clustering illusion is the tendency to see patterns in random events. This bias can occur in the claim process when an unrelated event occurs around the time of the insured event and a party to the claim believes it is related to the insured event. For example, when calculating the V (value) of loss from the formula, the policyholder may experience a decrease in the cost of materials caused by a change in supplier immediately following the event, which was planned prior to the loss. The insurance company may believe that the savings are a result of the loss and want to offset the savings in the measurement of the business interruption. To mitigate this conflict, the policyholder should manage expectations and communicate any unrelated business changes up front. It's also important to have the appropriate documentation to support these changes, including management reporting, business plans, etc.


The path to insurance recovery involves quantitative and qualitative aspects. Successful recovery can be facilitated by recognizing that both parties come to the table with bias and understanding how to deal with that bias to navigate toward an effective settlement. While we are exposed to a variety of biases in our lives, the four areas of bias discussed above are the most relevant for a complex business interruption claim. Identifying bias early in the claim process may help mitigate the impact of bias and will certainly help the risk professional to pay meticulous attention to all the elements of the formula as well as collaboration, brainstorming, and discussion with all parties, which can help alleviate the pressures and outside influences that are brought into the virtual or live negotiation room.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.


1 The author would like to recognize the contributions of Nadia Zed and Rachael Picard-Vu for their efforts with this article. They are chartered accountants with Ernst & Young LLP's Forensic and Integrity Services practice, based in Toronto. They help policyholders prepare, present, and settle property, business interruption, cyber crime, and other complex insurance claims. Reach them at [email protected] and [email protected].
2 This calculation is defined and explored in The Essential Equation: a Formula for Determining Business Interruption Loss by Daniel Torpey.