Gross Earnings

Gross Earnings Business Interruption Insurance

This is a basic form of business interruption insurance to cover the loss of income and ongoing expenses while shut down by an insured loss. This loss must have resulted in damage or destruction of property on the premises except for the interruption by civil authority. The Gross Earnings policy pays for the loss of productive time while the Gross Profits policy pays for loss of actual sales.

This form of business interruption will not pay past the time that it takes to rebuild with property with "due diligence and dispatch". The issue here is that the delay could be out of your control. Once there is a delay then that period of the delay is not covered by insurance. As soon as the physical restoration is completed then the coverage stops.

The payments to be made will be based on the 12 months after the date of damage, had no loss occurred. The limitation is by the amount that you, the insured, have chosen to insure and by the time it takes to repair or rebuild with due diligence.

If you choose the Gross Earnings form then you are assuming that there will never be a total loss. So you can buy insurance to 50% of value in the the case of a policy intended to last for six months or 80% if you think it would be needed for 12 months. If you chose the 50% then your rate will be higher but the actual premium will end up lower because you are buying a lower amount.

Your employees will have 90 days of payroll coverage under this form if you choose this option. You can also add in special Auditor's fees that will be necessary for verifying the amount payable once a loss does occur.

There are some conditions regarding your need to reduce your loss by continuing operations elsewhere or making use of other property or stock in order to try and reduce the total loss.

How to determine the value of Gross Earnings

Gross earnings is the total of the following:

  • Total net sales value of production
  • Total net sales of merchandise
  • Other earnings derived from operations of the business

Less the cost of:

  • Raw stock from which production is derived
  • Supplies consisting of materials to be used directly in the conversion of raw stock into finished stock or in suplying the services sold by you, the insured
  • Merchandise sold, including the packaging materials
  • Services purchased from outsiders (not your employees) for resale which do not continue under contract

These are all the costs that are deducted when determining "Gross Earnings". The experience of the business before the date of damage or destruction and the probable experience thereafter is considered when determining the correct amount. So if you fail to deduct an amount you will end up with a more generous value.

Now you need to consider the maximum period it will take to repair any damage. You also need to consider the amount of gross earnings that will be lost during that period.

The formula is: the number of months to rebuild times estimated gross earnings during that period, divided by annual gross earnings times 100.

For example, it you estimate six months to repair a shop and that business is earning $200,000 gross earnings per month giving a total of $2.4 million per year then the formula would be:
6 x $200,000 = $1.2 million divided by $2.4 million = 50%.

If this same business is seasonal in nature wherein six months have $300,000 gross profit per month and the other six months only have $100,000 gross profit per month for a total of $2.4 million then you have a different answer. If the loss were to occur at the start of the busy season then the loss would work out as:
6 x $300,000 = $1.8 million divided by $2.4 million= 66 2/3%

So it is easy to see that for the first situation you would choose the 50% coverage and for the second the 80% coverage.

Consider your options carefully for business interruption insurance. You want to be sure that you have the insurance that is best for your needs and that is within your control. Talk to your agent or broker.