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In the wake of Hurricanes Katrina and Rita, vexing questions regarding business-interruption losses emerged that were encountered infrequently in Texas and Louisiana before the storms. One of these issues is whether the wider economic impact of a catastrophic event should be considered when calculating business-interruption losses.

A catastrophic event, though it may ravage a local economy, also can lead to economic conditions that enhance a business’ post-catastrophe earnings, even in cases where the business suffers property damage and sustains a business-interruption loss. For example, as a result of a hurricane, a chemical processing plant had to shut down for 20 days. When the plant resumed business prior to other companies, it had a larger market share due to less competition. Accordingly, it had higher sales than it would have had the storm not occurred. In calculating its business-interruption loss, should the measure of damages be based on the plant’s sales history before the storm only? Or should the measure of the loss also take into consideration the favorable economic conditions that can exist after the hurricane?

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