2 ADJUSTINGTODAY.COM How does one adjust a business income claimwhen the insured business is losing money? ANSWER: It’s really no different than a claim settlement for a business that is turning a profit. It’s just a matter of determining how much larger a deficit is than it would have been if there had been no insured loss. The basic calculation is the same. A business income loss is determined by combining the normally expected profit or loss for the period of restoration with the continuing expenses for the period. This simple table compares business income losses for two companies, one operating at a profit and the other at a loss: Businesses often operate at a loss, especially when they are new and during seasonal downturns for their products. In real life, coverage for these enterprises would be subject to coinsurance requirements, deductibles and limits. PROFITABLE BUSINESS UNPROFITABLE BUSINESS Normal sales $10,000 $5,000 Normal expenses $7,500 $7,500 Normal profit/loss $2,500 -$2,500 Sales during suspension $0 $0 Expenses during suspension $7,500 $7,500 Profit/loss during suspension -$7,500 -$7,500 Business income loss = Normal profit + = Normal profit + Continuing Expenses Continuing Expenses + $2,500 + $7,500 -$2,500 + $7,500 = $10,000 = $5,000 Effect on balance sheet Still a $2,500 profit Still a $2,500 loss What about an otherwise profitable firm that has a new subsidiary faced with substantial start-up or R&D costs, so that the combined result is an operating loss for the firm? ANSWER: In such a case, income coverage would depend on whether the firm and its subsidiary were insured as one entity or as separate entities. If the firm and its subsidiary are insured jointly, any income loss by the start-up subsidiary would be recoverable for the overall firm, whose profits would be diminished by the loss to the subsidiary. Similarly, if the subsidiary were insured separately, its income loss would be recoverable, as its loss would be greater than anticipated. In either case, the impact on the overall company’s balance sheet should be the same.
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