Advocating for the policyholder by valuing, documenting and settling their property damage claims.

Deducting the Cost of Goods, Establishing Value

Business Income Insurance Having and Understanding This Coverage Can Be Essential to a Company's Survival

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insured ultimately received a settlement virtually three times the insurance company's opening valuation. Key to the business interruption claim presentation was establishing realistic production/sales projections, based on the company's sustained growth over recent years, using accepted statistical methods for projecting those results forward. In addition, recent modernization and equipment changes had improved the company's production dramatically.

Deducting the Cost of Goods, Establishing Value
Should the policy contain a coinsurance or contribution clause, the calculation of insurable value is a very important consideration. Sales, minus the cost of goods sold, yields gross profit, which is the true starting point of the claim. Once sales are projected, the anticipated cost of

goods/services must be subtracted. In most industries this factor is generally constant over a long period of time. However, if the insured has made or plans to make changes to become more profitable, corresponding changes in the gross profit percentage would certainly be in order.

Except in cases involving independent contractors, labor expense is not taken into account in calculating gross profit under most policy forms. An ordinary payroll exclusion—which lowers the amount of insurance needed for an insured to meet the coinsurance requirement—may be purchased for an additional premium. However, if the insured needs to retain non-key employees during the period of interruption, such an exclusion would not be a wise purchase.

If a firm is out of business for only 60 days, for example, it may opt to retain all its employees. Being out of business for 180 days might make that choice impossible. Consequently, 60-day payroll coverage might be appropriate.

Under the old forms, projected gross earnings (gross profit) formed the basis of the claim, with payroll not considered an expense, and the projected 12-month gross earnings period calculated from the date of the loss. The current ISO forms, however, leave less exposure for the insured, allowing the insured to calculate the projected gross earnings from the inception date of the policy. This point has great significance for a growing business. Otherwise, every month the insured might have to re-evaluate the amount of business income insurance they should be carrying.