The Gross Earnings Endorsement Form (Mercantile Or Non-Manufacturing) (IBC Form 4029)

CHAPTER 5

Introduction:

The Gross Earnings, Profits and related forms are not policies, but endorsements to be added to a direct-damage form.
They are not clear-language forms. The language is more legalistic and formal than that of the newer Business Income forms.

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

American approach to business interruption insurance.
The insured is considered indemnified once able to re-open for business.

Definitions:

Gross Earnings are defined as the sum of:
Total net sales, and
Other earnings derived from operations of the business,

Less the cost of:

Merchandise sold, including packaging materials therefor,
Materials and supplies consumed directly in supplying the service(s) sold by the Insured, and
Service(s) purchased from outsiders (not employees of the Insured) for resale which do not continue under contract.

No other costs shall be deducted in determining “gross earnings”.

Intended for non-manufacturing risks

Normal – identical to that in the Business Income Forms.
Ordinary Payroll – differs only superficially from the Business Income form but is identical in intent.

Indemnity Agreement:

This clause specifies the insurer’s undertaking to the insured: to pay up to the amount of insurance for loss arising from a direct damage loss caused by an insured peril to insured property.

Measure of Recovery:

Combines the intents of two Business Income Clauses – the Determination of Payment and the definition of Indemnity Period.
The measure of the insured’s recovery will be the loss of gross earnings less charges and expenses that do not necessarily continue during the interruption.
He clause limits the length of interruption for which indemnity will be paid (ie: the indemnity period) by the due diligence proviso.
Also provides that normal charges and expenses, including payroll, that continue during the interruption will be included in the settlement if they are necessary to allow the insured to resume operations with the same quality of service that existed before.

Coinsurance Clause:

Encourages insurance to value.
The percentage of coinsurance is found in the Declarations page.
The percentage may be 50% or 80%, depending on which of the Payroll Options the insured chooses.

Payroll Options:

A significant difference from this form to the Business Income forms.
Though it is a semi-variable expense in both forms, the Payroll clause in the Business Income forms allows the insured to restore coverage for Ordinary Payroll that the forms otherwise exclude.
In the Gross Earnings form, the Payroll Options clause allows the insured to limit or eliminate coverage for Ordinary Payroll that the forms otherwise include.
There are options of coverage:
Sum insured including the total payroll
This is the standard for the form
It applies if no option under the Payroll Options clause is exercised
The amount of insurance includes ordinary payroll and may be subject, in its entirety, to either 50% or 80% coinsurance
Sum insured including limited payroll coverage
First of two options
The insured may decide that full payroll coverage is unnecessary but still want to retain some coverage in case an interruption of business proves to be only a short one.
The insured can retain for a shorter period, employees who would otherwise be let go and have to be replaced before business resumed.
Allows the insured to choose coverage of ordinary payroll for 90 days following the loss.
There is revised coinsurance clause that requires the amount of insurance to be at least equal to the sum of 80% of the gross earnings, less ordinary payroll, that would have been earned, had no loss occurred, in the 12 months immediately after the loss; and 80% of the ordinary payroll expense that would have been incurred, had no loss occurred, in the 90 days immediately after the loss
The insured may calculate an appropriate amount of insurance by first subtracting the entire ordinary payroll from the annual gross earnings.
Sum insured excluding ordinary payroll
This is the 2nd of the two options.
It relieves the insurer of any liability for ordinary payroll expense. Like the limited-coverage option, this option includes a revised Coinsurance clause.
It requires the amount of insurance to be at least 80% of what the gross earnings would have been, had no loss occurred, in the 12 months immediately after the loss, less 80% of what the ordinary payroll would have been during the same period.
Wages in lieu of notice
Almost without exception, an employer cannot terminate employment without giving the employee notice or the equivalent amount of pay in lieu of notice.
This option is offered in separate endorsements that covers the expense to the insured when ordinary payroll coverage is excluded but the insured remains obliged to pay wages in lieu of notice to employees that their employment will be terminated.
This covers the expenses imposed by law or contract when the expense is incurred because of an insured peril.
It generally covers 2 weeks wages in lieu of notice, but this may be extended by negotiation where the insured is required by a labor contract to provide greater notice.

Premium Adjustment:

Encourages the insured to insure to value.
To claim a premium adjustment, the insured must file an application within 12 months of the expiry of the policy showing:
The amount of insurance on gross earnings, less the amount applying to ordinary payroll, if either option was selected from the Payroll Options clause
That 80% (or 50% depending on the coinsurance requirement selected) of gross earnings, certified by the insured’s auditors as earned during the financial year most nearly concurrent with the policy term, was less than the amount in (i).

Having fulfilled these two requirements, the insured may claim a return of up to 50% of the premium paid for gross earnings (less premium paid for ordinary payroll), if either option under the Payroll Options clause was chosen if the coinsurance requirement is 80%; or up to 25% if the coinsurance requirement is 50%.
There are two additional qualifiers:
A loss during the policy term makes the full-term premium on the amount of the loss fully earned and not subject to return.
In calculating the premium adjustment, the period of indemnity for any loss is limited to 12 months.

Resumption of Operations:

The common-law duty that underlies the alternate trading clause – the duty to minimize loss.
The clause requires the insured to reduce loss, if possible, by resuming complete or partial operation of the described property, whether damaged or not; or by using merchandise or other property at the described locations or elsewhere.
The possible reduction will be considered in determining the claim settlement.

Expenses to Reduce Loss:

The Gross Earnings forms cover the expenses the insured incurs to reduce the loss, except expense for extinguishing fire, provided that the aggregate of such expenses is not more than the amount of loss avoided by incurring them.
Such expenses are not subject to coinsurance.

Other Provisions:

Media Limitation – similar to corresponding provision in business income form.
Limited to the lesser of 30 consecutive calendar days or
The time that would be needed to rebuild, repair, or replace other property described to the policy that has been damaged or destroyed.
Interruption by Civil Authority – but for some slight differences in language, this clause in the Gross Earnings form is identical to that in the Business Income forms.
Additional exclusions – are the same as the second set of exclusions in the standard Business Income (Named Perils) form.
Waiver of Term or Condition – in effect a non-waiver clause. The insurer will not be deemed to have waived any term of the policy unless in writing signed on the insurer’s behalf by someone authorized to do so. Secondly, neither the insurer nor the insured will be deemed to have waived any term of the policy by any act concerning the appraisal of an amount of loss or other actions arising from either party’s rights or obligations concerning a claim.

The Gross Earnings Endorsement Form (Manufacturing) (IBC Form 4028)

Intended for manufacturing risks.
Includes some elements that were in the Business Income forms but not in the Gross Earnings forms.
We will discuss only the clauses that differ between the two types of Gross Earnings forms.

Definitions:

Finished stock – stock manufactured by the insured which, in the ordinary course of the insured’s business, is ready for packing, shipment or sale.
Gross Earnings are defined as the sum of:
Total net sales value of production
Total net sales of merchandise and
Other earnings derived from operations of the business,

Less the cost of:

Raw stock from which production is derived
Supplies consisting of materials consumed directly in the conversation of such raw stock into finished stock or in supplying the service(s) sold by the insured.
Merchandise sold, including packaging materials therefor and
Service(s) purchased from outsiders (not employees of the insured) for resale which do not continue under contract..

Total net sales value of production is essentially the net sales less the inventory at the beginning of the policy period plus the inventory at the end of the policy period.

Total net sales of merchandise comprise revenue from the sale of goods the insured di not manufacture.

The third source of revenue – other earnings – is the same in both forms.

Merchandise – goods kept for sale by the insured which are not the produce ot manufacturing operations conducted by the insured.
Normal – defined as in the non-manufacturing form.
Ordinary payroll expense – defined as in the non-manufacturing form
Raw stock – material in the state in which it is received for conversion by the insured into finished stock
Stock in process - raw stock which has undergone any aging, seasoning, mechanical or other process of manufacture at the location(s) herein described, but which has not become “finished stock”.

Indemnity Agreement:

This clause specifies the insurer’s undertaking to the insured: to pay up to the amount of insurance for loss arising from a direct damage loss caused by an insured peril to insured property.
Manufacturing form excludes finished stock.
A different assumption in the definition of business income.

Resumption of Operations:

A third requirement to reduce the loss.

Expenses to Reduce Loss:

Adds coverage for additional expenses.
Covers additional expenses the insured incurs to replace any finished stock used to reduce loss as required by the resumption of operations clause.

Additional Exclusion:

No coverage for finished stock.

Rating the Gross Earnings Form:

Rating depends on payroll and coinsurance.
Gross earnings rates are based on the direct-damage building rate at 80% coinsurance (90% if the building is sprinklered)
An insured can choose Gross Earnings at 50% coinsurance only when annual payroll is included in the calculation of Gross Earnings.
Rates are increased when the insured odes not fully insure payroll.

Choosing an Amount of Gross Earnings Insurance:

Choose a Coinsurance percentage
Estimate the maximum down time.
Estimate the maximum loss of sales during the downtime
Determine the sales during the last financial year
Calculate the ratio of the result of #2 to the result of #3
Choose a coinsurance percentage that reflects the result of #4 and is consistent with the insured’s decision regarding ordinary payroll.
Choose an Amount of Insurance

Determine the gross earnings during the last financial year
Trend the gross earnings for a period equivalent to the maximum down time beginning on the last day of the policy period
Apply the coinsurance percentage to the result of #7

Settling Losses Under the Gross Earnings Forms:

Due diligence
Estimate of loss
Expenses to reduce loss
Other expenses
Rate of gross earnings
Loss calculation
Coinsurance
Settlement

The Profits Endorsement Form (IBC Form 4030):

The British approach to business income insurance.
To indemnify the isnured until the interruption has ceased to affect the level of profit – which may be some time after the damaged or destroyed property has been rebuilt, repaired or replaced.

Definitions:

Gross Profit – the sum produced by adding to the net profit the amount of the insured standing charges or if there is no net profit the amount of the insured standing charges less such a proportion of any net trading loss as the amount of the insured standing charges bears to all standing charges of the business.
Net profit – the net trading profit (exclusive of all capital receipts and accretions and all outlay properly chargeable to capital) resulting from the business of the insured at the premises after due provision has been made for all standing and other charges including depreciation, but before the deduction of any taxation chargeable on profits.
Turnover – 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.
Indemnity period – the period beginning with the occurrence of a peril insured against and ending no later than 12 months thereafter during which the results of the business shall be affected in consequence of the destruction or damage by a peril insured against, except that if media for, or programming records pertaining to, electronic data processing or electronically controlled equipment including data thereon be destroyed or damaged by a peril insured against then the indemnity period in respect thereof shall not exceed beyond:

30 consecutive days after the occurrence of such destruction or damage or
The date upon which liability ceases under this insurance for loss arising from other property destroyed or damaged by the same occurrence

whichever shall be the later.

Insured standing charges – all standing charges are insured unless otherwise specified below, in which case only those standing charges so specified are insured. They are fixed and semi-variable expenses. The following shall in no event be deemed standing charges.
Depreciation of stock
Bad debts
Wages and salaries other than salaries to permanent staff and wages to foremen and important employees whose services would not be dispensed with should the business be interfered with or interrupted.
Rate of gross profit – the rate of gross profit earned on the turnover during the financial year immediately before the date of the destruction or damage by perils insured against
Annual turnover – the turnover during the 12 months immediately before the date of the destruction or damage by perils insured against
Standard turnover – the turnover during that period in the 12 months immediately before the date of the destruction or damage by perils insured against which corresponds with the indemnity period.

Indemnity Period:

Insurers’ undertaking not limited here to the amount of insurance.

Measure of Recovery:

Reduction in turnover is calculated by applying the rate of gross profit to tohe amount by which the turnover during the indemnity period falls short of the standard turnover, as a result of the destruction or damage by an insured peril.
The second cause of los gross profit is the increase in cost of working, which corresponds to increase in cost of operations in the business income form.
The loss settlement may be reduced by a feature of this clause that is found in the Business Income forms, not in the Determination of Payments clause but in the coinsurance clause. Commonly called an average clause.

Payroll Option:

Ordinary payroll expense may be covered for up to 90 days.
Coinsurance provision confined to the payroll option clause.
Added security for the insurer.

Provisions:

But for the substitution of turnover for revenue, this provision is identical to the alternate trading clause
Limits insurer’s liability for increased cost of working
This provision excludes liability under the form for loss arising from fines or damages from breach of contract or any other penalties
Civil authority clause
This provision extends coverage to include loss arising from the operation of a by-law.
The insured has the obligation to minimize the loss
The last provision is identical to the waiver of term or condition clause

Premium Adjustment:

To claim a premium adjustment, the insured must file an application within 12 months of the expiry of the policy showing:
The total amount of insurance on gross profit carried under the policy and any other such policies, and that the amount was not reduced during the policy term
Must show the gross profit earned to have been less than the amount of insurance

Return premium may be up to 50%.

Choosing an Amount of Profits Insurance:

Differences in forms extend to differences in choosing amount of insurance
Required information comes from financial statements
Annual figures are required
The sum must be projected for two years
The amount must also reflect 100% coinsurance requirement.

Settling Losses Under the Profits Form:

Due diligence
The loss of turnover during the indemnity period will be estimated, taking into account the experience of the business before the loss and the likely experience during the indemnity period had no loss occurred
The increased cost of working will be established
It will be determined whether any of the insured standing charges ceased or diminished during the indemnity period
The rate of gross profit will be calculated and the annual turnover and standard turnover determined
The loss of gross profits will be calculated
The adequacy of the amount of insurance will be assessed against the requirements of the average clause
The amount of the claim to be paid will be determined