- What is lost profits?
- Loss of profits in insurance
- Calculation of lost profits
- Examples of lost profits
We explain what lost profits is and when this situation occurs. In addition, calculation methods and examples of lost profits.
What is lost profits?
It is spoken in the law of lost profits when a form of patrimonial damage occurs that consists of the impediment of a gain legitimate economic or loss of a utility economic as a result of the actions or decisions of a third party.
Loss of earnings, in other words, is the amount of money that would have been earned had an event not occurred or a decision was made that is responsibility from a third party. This occurs when it is certain that the money would have been obtained, for example, in the event that a merchant lost all his merchandise due to a fire spread from the premises next door.
Loss of profits in insurance
Thus, in many cases Business Insurers offer their policyholders compensation for lost profits, as long as they can prove the following:
- That the loss of earnings in fact exists and that there is a clear relationship with the damage.
- That it is possible to calculate economically what has ceased to be received.
Disputes regarding lost profits are usually determined in court, taking into consideration the circumstances, evidence and arguments of the parties, as well as the terms in which the contract (if any), since there is no single criterion to govern the matter.
Calculation of lost profits
There is no single method to calculate lost profits, and different criteria can be applied:
- Calculation method by points. A series of tables or scales is used that contain an arbitration system or measurement of the damage caused, taking into account applicable criteria according to the individual case and the category of damage.
- Linear method. It is used by linearly calculating the income prior to the damage caused by the amount of weather that was left (or would cease) to be perceived.
- Profitable capital method. It is mathematically determined what sum of money placed in the banking market would yield an interest that is equivalent to the profits not received by the damaged part. In the end, the damaged will receive the capital accumulated in a compensatory fund.
- Amortizable capital method. Similar to the previous one, the monthly amount that the damaged person ceased to receive is mathematically calculated and placed in the financial market to generate the profits from which the lost profits will be replaced. But at the end of the term, there will be no accumulated fund for it.
- Combined methods. Those that combine several of the previously described methods.
Examples of lost profits
Some possible cases that illustrate the loss of earnings claim are as follows:
- An employee is prevented from working due to an illegal decision of his company, and he stops receiving his salary for a month. Said money can be claimed from the company once the problem has been resolved, since had it not occurred, the employee would have received his salary.
- A seller orders a merchandise and it arrives in poor condition, impossible to sell. The seller can claim from the distributor the loss of profit from the sales that would have occurred if the merchandise arrived on time.
- A service company cannot work for a week as a result of a political act by the municipality. The company may claim the loss of profits from its services that, otherwise, could have occurred normally.