April 2019

Loss of Income in Business Property Insurance

When a business suffers a loss to a fixed physical asset, such as when a fire damaged a building, the insured may incur an interruption to their business which can result in the loss of income and the incurrence of expenses.

The Property insurance policy will define what a business interruption (BI) loss is and will provide guidelines regarding how a BI loss will be calculated. Business interruption is a broad category that applies to an overall loss of income. While forms will vary slightly, two sample definitions of BI are:

  1. Net income (net profit or loss before income taxes) that would have been earned or incurred plus continuing normal operating expenses incurred during the period of restoration, including payroll.
  2. Gross earnings less charges and expenses which do not necessarily continue during the interruption of business operations. Gross earnings are defined as the net sales values of production, net sales from merchandising or non-manufacturing operations, and any other earnings derived from the operations of the business less various costs associated with production of stock and merchandise.

Rental value income (RVI) is another coverage that pays for a loss of income stream. However, the coverage is a narrow category which applies to lost gross rental income from the use of property when the insured leases or rents property out for a profit.

Continuing expenses cannot be avoided and don’t change because there is an interruption in business.  Examples of continuing expenses include taxes, insurance, rent, licenses, payroll of key employees, interest, and debt. Non-continuing expenses may be saved or discontinued if there is an interruption in business.  Examples of non-continuing expenses include salaries of hourly employees, unemployment taxes, and some utilities.

This article examines how BI and RVI losses may treat depreciation after the damage or destruction of a fixed physical asset.Read More »Loss of Income in Business Property Insurance