There are two policy forms generally used to insure loss of income to a business. Each represents a different approach to achieve the same result in the insuring of business interruption losses. There is the Gross Earnings Form and the Profits Form. This portion will focus on the Gross Earnings Form.
The Profits Form provides indemnity from the date of loss until the level of sales reaches the level that the business would have attained had the loss not occurred, subject to the policy limit and the period of indemnity. Due diligence and dispatch to repair, replace or rebuild damaged property is imposed only upon the insured. It requires the insured to do and permit to be done all reasonable things which minimize the loss.
Gross Profit = Net Profit Before Tax + Insured Standing Charges
The Profits form requires that the insured carry insurance to 100% of the possible loss of gross profits. There are no alternatives. Insureds are not required to insure all of the business operating expenses (standing charges) but select only those which they wish to include in the coverage. Standing coverages that are excluded by the policy are:
- Depreciation of Stock – Depreciation is a normal business loss and is not insurable. It is a trading loss which arises from aging of stock and other market conditions and does not occur as a result or consequence of the destruction or damage to the business.
- Bad Debts – This charge relates to actual bad debts incurred and applies to business transacted in the past, consequently it is not a part of the loss of profits that follows the destruction or damage to the business.
- Ordinary Payroll – This is excluded under the Profits wording, and requires the insured to decide who is an important employee and insure them as a “key employee” under the standing charges.
The Profits wording specifically states that the indemnity period will not exceed 12 months from the date of loss. Coverage will apply only for the time during those 12 months in which the results of the business are actually affected as a consequence of the destruction or damage caused by an insured peril. This can be extended to 18, 24, 30 or 36 months. It is important when extending the period of indemnity to ensure that the sum insured is adequate for this time period.
*** For exact terms, definitions, limitations and extensions, please talk to your broker and refer to your final policy wording ***