Here’s a closer look at the differences between gross profit and gross earnings.
Traditionally, the insurance industry provides business interruption coverage based on local market practice. Most insurance companies ask their clients to select one of two coverage choices: Gross Earnings (primarily used in the United States) or Gross Profit (primarily used outside the United States).
While similar in their purpose, these two forms have significant differences that brokers and insureds need to take into account when placing coverage. Here’s a closer look at the differences between gross earnings and gross profit.
This sales-based business interruption calculation covers the restoration of the business and aims to compensate the insured for any lost of profit as a result of covered property damage suffered. Any unrealized Gross Profit resulting from loss or damage to an insured’s finished goods inventory is also covered under the Gross Profit form.
Gross Profit coverage lasts until sales lost as a direct result of physical loss or damage are restored to the pre-loss level, even if this period is beyond the time it takes to repair or replace the damaged property. There is, however, a fixed maximum time limit on the period of indemnity. Typically, this period will be between 6 and 24 months, in 6 month intervals.
This cover is often advantageous in loss scenarios involving limited production loss, but with protracted loss of sales. The primary limitation is the fixed maximum time limit on the period of indemnity.
This production-based business interruption calculation typically provides coverage for the actual loss sustained of the gross earnings the insured would have achieved, had the insured physical damage not occurred. Coverage is based on the length of time necessary to repair or replace the damaged or destroyed property with the exercise of due diligence and dispatch. Any subsequent losses suffered by the business after the property has been repaired are not covered.
The standard Gross Earnings form does not cover losses resulting from loss or damage to an insured’s finished goods inventory, due to the fact that Gross Earnings deals with future production and stock is considered past production. To mitigate this effect, Gross Earnings policies can cover finished goods stock at selling price. For specific details, look to your policy’s valuation section.
Unlike Gross Profit, the Gross Earnings form has an unlimited period of liability. The time element coverage continues until production/operations are restored to pre-loss levels. Once restored, however, coverage ceases. This leaves a potential gap for continued loss of sales, which is typically covered through an extended period of liability (EPL) coverage. EPL is intended too extend the period of liability and is intended to extend the loss of income provision beyond the reconstruction period. This extension is usually limited to a period of 90 days after reconstruction, or a multiple thereof, and allows an insured to restore their business within this period.
The Gross Earnings form is often advantageous in loss scenarios involving extended production/operations downtime. The primary limitation is the lack of standard coverage for continuing loss of sales
Why choose one if you can have both?
No one can predict the future, but when it comes to picking business interruption coverage, insurance companies often ask their clients to do just that—to choose between the Gross Earnings and the Gross Profits forms—before a loss ever happens.
However, at Affiliated FM, we offer your clients a choice. With our Business Interruption Select, your clients can choose their optimal business interruption coverage after a loss occurs, rather than at policy inception. Business Interruption Select is an integral part of our new proVision 4100 form. Find out more about this form in Easy to Read, Navigate and Sell.
For any additional questions about Gross Profit, Gross Earnings and BI Select coverage, talk with your production underwriter.