Maximum Foreseeable Loss: Definition & How to Claim It

KEY TAKEAWAYS

• The maximum foreseeable loss is an insurance term regarding the worst-case scenario of a policy holder. 
• This is when it comes to the highest loss in relation to property damage.
• Anyone who incurs a maximum foreseeable loss will have experienced a significant extent of damage or catastrophic loss to their property.

What Is Maximum Foreseeable Loss (MFL)?

Maximum foreseeable loss is an insurance term. It is the highest loss or worst-case scenario that can happen to someone who has insurance. It is a reference to the worst financial hit a policyholder could experience when it comes to property damage. This is when an insured property has been destroyed or harmed by any unexpected events. 

The maximum foreseeable loss assumes that any safeguard that would limit such a loss has malfunctioned. Or it is unresponsive. So for example, if the sprinklers didn’t go off to limit the fire, or professional firefighters didn’t turn up in time.

Anyone who incurs a maximum foreseeable loss has experienced significant damage. This means that they need to claim the highest payout possible. This is in order to restore the physical locations to their normal situation before the event occurred. 

What Does a Maximum Foreseeable Loss Claim Include?

When the policyholder is compensated, the claim for damages tends to include:

• Compensation for repair
• Compensation for reconstruction
• Compensation for the purchase of a business property or an asset
• Compensation for the loss of income

Before the policyholder is compensated, the insurance must conduct an investigation. This is into the loss suffered. This is to try and figure out if the loss was suffered due to negligence on the part of the policyholder. They must also carry out an independent assessment. As well as a valuation of the value of loss. This is to determine the overall extent of the loss or damages that was suffered by the insured party. 

What Are the Causes of Maximum Foreseeable Loss?

There are a number of adverse events that can cause the insured party to suffer significant damages or losses. These are negative events that would incur the maximum foreseeable loss. Here are three of the most common main events that result in a claim:

Explosion

When working with flammable or highly volatile materials, explosions can be a common cause of a claim. The explosion could also occur due to the nature of the work, or when activity happens that has a high risk of explosion. 

Examples of where this could occur are:

• Fuel storage facilities
• Breweries
• Fertilizer manufacturing plants
• Chemical processing facilities

These sorts of facilities are required to put stringent measures in place to reduce the chances of an explosion taking place. As well as any other adverse events that may lead to a high loss claim. 

Fire

Fire is the most common cause of maximum foreseeable loss. When it is uninterrupted, fire can spread until everything that it can reach has been consumed. So for example, if a fire breaks out in a company’s warehouse, and the prevention and control measures fail, the fire will burn for a long time. This is due to all of the materials it can reach. 

Warehouses tend to have a lot of flammable materials, such as wooden pallets and packaging materials. So fire can spread quickly and grow exponentially and a free-burn situation can take place.

Equipment Failure

When essential equipment fails, it can lead to a maximum foreseeable loss. This is especially true when the equipment is a central part of the production process of a business. So if a highly specialized piece of equipment fails, the business can have a significant loss of income. 

It’s also important to note that equipment failure can lead to other adverse events that may incur a maximum loss. For example an explosion or a fire. This would add damages on top of a loss of income.

Businesses are required to mitigate equipment failure. This can be done through regular upkeep and replacement of defective or worn-out parts. It’s also important to do routine maintenance and thorough monitoring of the machinery. 

How Do You Claim Maximum Foreseeable Loss?

Filing a claim is an extensive process. You have to consider not only your physical losses but also the negative impact of the loss on your normal business operations. This is known as business interruption. 

Getting back to a position of normality after a claim can take weeks, months, or even years. 

This business interruption may be full or partial. 

Summary

Maximum foreseeable loss is the worst-case scenario of an insurance claim. Any business should mitigate the chances of this happening to the best of their ability. 

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.