We explain what loss of profit is and when this situation occurs. Additionally, calculation methods and examples of lost profits.
What is Lost Profits?
It is spoken in law of lost profits when a form of pecuniary damage occurs that consists of the impediment of a legitimate economic gain or the loss of an economic utility as a consequence of the actions or decisions of a third party.
Lost profits, in other words, is the amount of money that would have been earned if an event had not occurred or having made a decision that is the responsibility of a third party. This takes place when there is certainty that said money would have been obtained, for example, in the event that a merchant lost all his merchandise due to a fire spreading from the premises next door.
See also: Social entrepreneurship
Lost profits in insurance
Thus, in many cases insurance companies offer their insured compensation for lost profits, as long as they can prove the following:
- That the loss of profits actually exists and that there is a clear relationship with the damage.
- That what has been missed can be economically calculated.
Disputes regarding lost profits are usually determined in court, taking into consideration the circumstances, evidence and allegations of the parties, as well as the terms of the contract (if any), since there is no single criterion to govern the subject.
Calculation of lost profits
There is no single method to calculate lost profits, and different criteria can be applied:
- Point calculation method A series of tables or scales are used that contain a system of arbitration 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 time that was (or would stop) being earned.
- Profitable capital method It is determined mathematically what sum of money placed in the banking market would yield an interest that is equivalent to the profits not received by the damaged party. In the end, the injured party will receive the capital accumulated in a compensation fund.
- Amortizing capital method Similar to the previous one, the monthly amount that the injured party stopped receiving 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 methods described above.
Examples of lost profits
Some possible cases that illustrate the claim for lost profits are the following:
- An employee is prevented from working due to an illegal decision by his company, and stops receiving his salary for a month. Said money can be claimed from the company once the problem is resolved, since if it had not occurred the employee would have received his salary.
- A seller orders merchandise and it arrives in poor condition, impossible to sell. The seller can claim from the distributor the lost profits 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 lost profits from its services that, otherwise, could have been provided normally.
