Maximum Foreseeable Loss (MFL): Meaning, Calculating, Example

Alexandra Twin has 15+ years of experience as an editor and writer, covering financial news for public and private companies.

What Is Maximum Foreseeable Loss (MFL)?

The maximum foreseeable loss is an insurance term used in the insurance of businesses and business property. MFL is a worst-case situation in which damages and losses are significant.

MFL is the most substantial financial hit a policyholder could experience when an insured property has been harmed or destroyed by an adverse event, such as a fire. It assumes a malfunction and non-response of usual safeguards, like sprinklers and professional firefighters, that would typically limit such a loss.

Key Takeaways

• Maximum Foreseeable Loss (MFL) is an insurance term applied to the protection of a business or business property.
• MFL is a reference to the largest hit a policyholder could experience if the insured property has been harmed or destroyed.
• Typically, the damage comes from adverse events, including fires, tornados, hurricanes, or other natural disasters.

Claiming Maximum Foreseeable Losses

A claim for a maximum foreseeable loss includes physical losses, such as the property housing the business and the products, supplies, and equipment owned by the company, as well as the impact the adverse event had on the day-to-day running of the operations.

The policy acknowledges the potential loss of business, called business interruption, which is likely unavoidable during property repairs. Depending on the size of the property and the extent of the business, repairs could take weeks or months. The business interruption might be complete (100%) or partial (50%) depending on the ability to resume business at another location or digitally. The maximum foreseeable loss refers to the worst-case scenario a company might potentially face due to an adverse event.

MFL and Other Loss Determinations

Insurers use a maximum foreseeable loss for underwriting insurance coverage. Besides MFL, the insurance underwriter considers probable maximum loss and usual loss expectancy for typical business types. For example, the maximum foreseeable loss for the owner of a warehouse who experiences a fire, hurricane, or tornado is the full value of the warehouse building and all its contents.

Most owners would seek such coverage. However, the owner of the warehouse typically chooses to protect the business in the event of less all-encompassing damage, such as water damage of products after a roof leak. Other thresholds can reflect the impact of smaller, yet still detrimental, losses to the company.

Probable and Normal Loss Expectancy

The probable maximum loss (PML) is a lower financial figure that assumes part of the physical structure and some of the contents of the warehouse are salvageable due to passive safeguards partially limiting the damage.

A smaller allowance would be the normal loss expectancy, the highest claim a company can file for property damage and business interruption from an adverse event like a fire. It is a best-case loss scenario. Normal loss expectancy assumes that all protection systems worked correctly, and the damage is limited to 10% of the property’s insured value.

Determining MFL

The percentage of the property’s total insured value at risk varies with each policy based on factors such as building construction, the combustibility of the building’s contents, the ease of damage to the contents, and existing firefighting services in the area.

Calculating different loss estimates helps insurers determine how much coverage their clients need to purchase and how much the insurers are at risk of paying out under different types of claims.

MFL Example

Let’s say a retailer had a crucial warehouse that held the majority of its offerings. The retailer knows that it needs to be fully stocked ahead of a critical holiday shopping season and is depending on the contents of this warehouse to satisfy its customers and capitalize on consumer spending.

If anything happens to this warehouse, it would be a huge blow to the retailer. Not only would the retailer have lost inventory it already paid for, but they would also experience a business interruption resulting from the destruction of its inventory, its inability to fulfill customer orders, and its inability to take advantage of the holiday shopping period.

The maximum foreseeable loss in this scenario is that a fire or natural disaster destroys the warehouse ahead of a major shopping event. The destruction of the warehouse would cause a massive business interruption that would substantially damage the company’s results and hurt its reputation with consumers in the long run. Purchasing insurance in anticipation of the maximum foreseeable loss would be essential for the retailer.

The maximum foreseeable loss in this scenario is that a fire or natural disaster destroys the warehouse ahead of a major shopping event. The destruction of the warehouse would cause a massive business interruption that would substantially damage the company’s results and hurt its reputation with consumers in the long run. Purchasing insurance in anticipation of the maximum foreseeable loss would be essential for the retailer.