By Richard Willis, Managing Director, Willis Insurance and Risk Management
Gross profit. The profit a company makes after subtracting the costs of goods sold from total sales revenue.
Correct…. When referring to the term in a financial context.
However, in the insurance industry ‘gross profit’ includes additional expenditure such as wage roll.
It is officially defined by the amount which the sum of the turnover and the amounts of the closing stock and work in progress shall exceed the sum of the amounts of the opening stock and work in progress and the amount of the Uninsured Working Expenses including wage roll. These can include purchases (net of discounts) or bad debts.
As a type of Business Interruption Insurance, Gross Profit Insurance essentially aims to bring the insured company back to where it would have been financially had the insurable event not occurred. The Policy covers losses experienced by a company unable to function as it should throughout the pre-defined timeframe required for the company to rebuild or repair its premises.
Unfortunately, companies often think they have this type of Business Interruption Insurance but are then surprised when a crisis occurs and they discover their level of cover or indemnity period is inadequate to cover costs or losses. This can be due to underinsurance, failure to review or even the wrong type or lack of cover. Needless to say this can spell disaster when the amount that can be claimed is insufficient to cover a loss.
One of the most frequent causes of confusion over cover level is that the sum insured is insufficient due to a misunderstanding of how to actually calculate the correct figure. This isn’t helped by the differing definitions of ‘gross profit’ as understood by the finance world and the insurance industry.
A 2016/2017 survey conducted by Chartered Institute of Loss Adjusters revealed that 44% of Business Interruption Insurance policies had inadequate sums insured, with an average shortfall of almost 45%. A concerning statistic considering no business, no matter the size or industry, is immune to risk.
The catastrophic blaze within Belfast’s Bank Buildings, occupied by Primark, has brought to the fore the absolute need for businesses to ensure they have the correct level of insurance.
Since the building was sadly destroyed at the end of August, Primark has revealed that the replacement cost of the building and resulting business interruption is insured.
In similar cases, it can take six months to obtain planning permission alone, and coupled with demolition and redesign, a 12-month indemnity period can be severely inadequate to get the business back to the turnover/profit position that it previously enjoyed.
Business Interruption policies should be a key component of any insurance protection to cover both loss of income and additional expenses incurred through any temporary interruption caused by an insured incident.
With many different options and types of cover available, it can be a minefield for businesses to navigate and this is why seeking professional advice on the matter with a reputable broker is vital. If the cover is not tailored to your business specifically, even taking inflation and anticipated growth during the indemnity period into account, things can go very wrong when a claim is required.