What Is Maximum Foreseeable Loss (MFL)?

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

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

Claiming Maximum Foreseeable Losses

A claim for a maximum foreseeable loss is extensive, as it will include not just physical losses, such as the property housing the business and the products, supplies, and equipment owned by the company, but also 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 while repairs to the property are ongoing. 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 (say, 50%) depending on whether it’s possible to resume business at another physical location or in some cases, digitally. The maximum foreseeable loss refers to the worst-case scenario that a company might potentially face should an adverse event occur.

MFL and Other Loss Determinations

Insurers use a maximum foreseeable loss for underwriting policies for insurance coverage. Besides MFL, the insurance underwriter considers probable maximum loss and usual loss expectancy for the 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 of its contents.

Common sense suggests most owners would seek such coverage. However, the owner of the warehouse also 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 which 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. That's because the building’s passive safeguards partially limited the damage, but the most critical active one did not.

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 to be decimated by a particular type of loss varies with each policy based on factors which include building construction, the combustibility of the building's contents, the ease with which the contents may be damaged, and existing firefighting services in the immediate area. Calculating different loss estimates is essential in helping 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 help it 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, not to mention hurt its reputation with consumers in the long run. As a result, purchasing insurance in anticipation of the maximum foreseeable loss would be essential for the retailer.