Business Interruption Policies…Things are a changing!

(Gross Profit vs. Gross Earnings vs. Hybrid Policies)

Traditionally, business interruption insurance policies have fallen under one of two styles, Gross Earnings or Gross Profits.  In recent years the consistency in policy styles has been eroding and new hybrid style forms are starting to become more prevalent.  These policies rely on components from each of the two traditional styles.

As a result of the changes many policies have undergone in recent years, it is important to understand the traditional characteristics of each form, and subsequently how they integrate into the new hybrid policies.

Traditional policy characteristics

Below is a brief comparison of the two traditional styles based a few key coverage characteristics. While every policy can vary, the information listed below is most common based on our experience:

Item:

Gross Profit

Gross Earnings

Indemnity Period Business returns to normal operations Period to Rebuild, Repair, or Replace the damaged property
Measure of Recovery Gross Profit Rate:  Net Income plus Insured Standing Charges (Fixed Expenses) Gross Earnings Rate: Sales less variable expenses
Ordinary Payroll Not insured Insured
Co-Insurance Hidden in the policy wording at an implied rate of 100% Specifically stated in the wording at varying rates, typically either 80%, 90%, or 100%
Additional Expenses Referred to as an Increase in Cost of Working Referred to as Expense to Reduce Loss

Hybrid policies

There is an increasing variety of hybrid type business interruption policies available in the market place. These policies incorporate components from each of the above traditional lists, and often make even further modifications. For example, it is no longer uncommon to find a policy which will feature an indemnity period based on a return to normal operation calculated using a gross earnings rate with no co-insurance requirements.  Sometimes, these hybrid type policies will be developed in an attempt to market them at specific business types, for example restaurants.  As a result you may see these policies named in such a way that incorporates their target market into the policy wording title.  As such, it is important to thoroughly review the policy you are dealing with when assessing a claim.

What further complicates the claims process, are the terms used within the industry. Terms such as “Business Income”, “Business Earnings”, and “Loss of Income” have been adopted by many insurers to name their business interruption coverages in place of the more traditional Gross Earnings or Gross Profits titles.  Even between two insurers, a single term such as “Business Income” may refer to either a profits style wording or an earning style policy.

Final Thoughts

After a long period in which business interruption coverages didn’t change significantly, the push for customization for everything in recent years and the desire for insurers to differentiate themselves has resulted in a lot of changes in recent years, not always for the better.  The ever decreasing standardization of these policies has made it more important than ever to take the time to carefully review and understand the policy you are dealing with.

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