Study 5 – The Gross Earnings and Profits Form

1. C40 – Business Interruption Insurance Study 5 – The Gross Earnings and Profits Form

2. Study 5 – Gross Earnings / Profit Forms • Distinguish the characteristics of the Gross Earnings and Profits based forms • Define the terms show in the Definitions section • Discuss each of the clauses in the forms • Explain how the Gross forms are rated • Describe the process by which amounts of insurance are chosen • Describe the loss settlement process • Summarize the differences between the forms

3. Introduction

4. Gross Earnings Endorsement Form (Mercantile or Non-Manufacturing) (IBC Form 4029)

5. Definitions Defined as: • Total net sales and • Other earnings Less the cost of: • Merchandise sold • Materials / supplies • Services purchased Gross Earnings

6. Definitions Defined as: The condition which would have exited had no loss occurred. Normal

7. Definitions Defined as: The entire payroll expense for all employees other than: • Salaries to permanent staff • Wages to foremen and important employees Ordinary Payroll

8. Indemnity Agreement • To pay up to the amount of insurance for loss arising from a direct-damage loss caused by an insured peril to insured property.

9. Measure of Recovery The loss of gross earnings less • Charges • Expenses That do not necessarily continue during the interruption.

10. Co-insurance Clause

11. Wages in Lieu of Notice Sum Insured Including Limited Payroll Coverage Sum Insured Excluding Ordinary Payroll Sum Insured Including the Total Payroll

12. Premium Adjustment • Encourages insurance to value • Application required within 12 months • Up to 50% of premium may be returned • Two additional qualifiers

13. Gross Earnings Forms Resumption of Operations Expenses to Reduce Loss Covers the expenses the insured incurs to reduce the loss, except for extinguishing fire. • The insured has the duty to minimize the loss.

14. Gross Earnings Forms Media Limitation Interruption by Civil Authority Covers the expenses the insured incurs but to not exceed 2 weeks. • Limited to the lesser of: • 30 consecutive calendar days, or • The time that would be needed to rebuild, repair or replace.

15. Gross Earnings Forms Additional Exclusions Waiver of Term or Condition Covers the expenses the insured incurs to recue the loss, except for extinguishing fire. • The same as the second set of exclusions in the standard Business Income (Named Perils) form.

16. Gross Earnings Endorsement Form (Manufacturing) (IBC Form 4028)

17. Definitions Defined as: • Net sales of production • Net sales of merchandise • Other earnings Less the cost of: • Raw stock • Supplies • Merchandise sold • Services purchased Gross Earnings

18. Definitions Defined as: Stock that is ready for packing, shipment or sale. Finished Stock

19. Definitions Defined as: Goods kept for sale which are not the product of manufacturing operations. Merchandise

20. Definitions Defined as: The condition which would have exited had no loss occurred. Normal

21. Definitions Defined as: The entire payroll expense for all employees other than: • Salaries to permanent staff • Wages to foremen and important employees Ordinary Payroll

22. Definitions Defined as: Material in the state in which it is received for conversion. Raw Stock

23. Definitions Defined as: Raw stock which has undergone any aging, seasoning, mechanical or other process of manufacture at the locations, but which has not become finished stock. Stock in Process

24. Indemnity Agreement • To pay up to the amount of insurance for loss arising from a direct-damage loss caused by an insured peril to insured property.

25. Gross Earnings Forms Resumption of Operations Expenses to Reduce Loss Covers the expenses the insured incurs to reduce the loss, except for extinguishing fire. • The insured has the duty to minimize the loss.

26. Additional Exclusions

27. Payroll Option Coinsurance Rate (% of Basic Rate) Including Payroll 50% 80% 80% 60% Excluding Payroll 80% 70% Limited Pay (90 Days) 80% 130% (payroll) 70% (remain) Limited Pay (180 Days) 80% 70% (payroll) 70% (remain) 2 Weeks Wage in Lieu 100% 500% (wages) Of Notice 80% 70% (remain)

28. Choosing an Amount of Insurance #1 Estimate the maximum downtime #2 Estimate the maximum loss of sales #3 Determine the sales during the financial year A – CHOOSE A CO-INSURANCE PERCENTAGE #5 Choose a co-insurance % #4 Calculate the ratio of the result #2 and #3

29. Choosing an Amount of Insurance #6 Determine the gross earnings #7 Trend the gross earnings for a period of time #8 Apply the co-insurance percentage B – CHOOSE AN AMOUNT OF INSURANCE

30. Settling Losses – Gross Earnings Due diligence Estimate of loss Expenses to reduce loss Settle the Claim Co-insurance Loss calculation Rate of gross earnings Other expenses

31. To Be Continued …… • Questions????????????????? • Discussion>>>>>>>>>>>>>>>>

32. The Profits Endorsement Form(IBC Form 4030)

33. Definitions Defined as: • Net profit and • All standing charges Gross Profit

34. Definitions Defined as: The net trading profit resulting from the business of the insured after provision has been made for all standing and other charges. Net Profit

35. Definitions Defined as: The money paid or payable to the Insured for goods sold and delivered and for services rendered in course of the business at the premises. Turnover

36. Definitions Defined as: Shall not extend beyond: • 30 consecutive days after the occurrence, or • The date upon which liability ceases. Indemnity Period

37. Definitions Defined as: Operating expenses – both fixed and variable expenses. Not to include: • Depreciation of stock, • Bad debts, • Wages of important employees Standing Charges

38. Definitions Defined as: Earned on the turnover during the financial year immediately before the date of damage. Rate of Gross Profit

39. Definitions Defined as: The turnover during the 12 months immediately before the date of the destruction or damage. Annual Turnover

40. Definitions Defined as: Turnover during that period in the 12 months immediately before the date of the destruction or damage. Standard Turnover

41. Indemnity Agreement • To pay up to the amount of insurance for loss arising from a direct-damage loss caused by an insured peril to insured property.

42. Measure of Recovery The loss of gross profit • Reduction in turnover • Increase in cost of working

44. Provisions lternate Trading ost of working xcludes fines ivil authority y-laws bligation to minimize aiver of term

45. Premium Adjustment • No reference to ordinary payroll • Must show gross profit to 100% • Up to 50% of premium may be returned • Qualifiers

46. Rating the Profits Form

47. Choosing an Amount of Profits Insurance • Required information comes from financial statements • Annual figures are needed • Sum must be projected for two years • Amount must also reflect 100% co-insurance requirement

48. Settling Losses – Profits Form Due diligence Loss of turnover Increased cost of working Settle the Claim Average clause Loss of gross profit Rate of gross profit; turnover Charges ceased or diminished

49. Gross Earnings / Profits FormSummary Gross Earnings Profits Form Coverage Gross profit: the sum of net profit before taxes and insured standing charges. • Coverage • Difference between income and expenditures • Includes ordinary payroll.

50. Gross Earnings / Profits FormSummary Gross Earnings Profits Form Indemnity Period Time required for turnover to reach level it would have reached had no loss occurred. • Indemnity Period • Time required to repair, replace or rebuild damaged property with due diligence and dispatch.