retail/mercantile business, the cost of
goods sold (COGS) abates because the
goods are not sold and not expensed off
the business’ balance sheet. Many other
types of variable expenses can abate, depending on the severity of the loss and
may include utilities, business personal
property and real property taxes, advertising, shipping costs, depreciation
on destroyed business property, payroll
Top-Down Method (Gross income
less discontinued expenses)
Gross Loss of Revenue – Discontinued
= the Loss Payable
Doing the math — The methods
In practice, the top-down method is
used in most cases to quantify the loss
of business income for the period of in-
Whether the top-down or bottom-up
method is used, the period of restoration
or suspension must be projected.
The next step is to establish the loss of
sales and billing revenue, and then quantify the discontinued and continuing expenses for the relevant period to establish
the period of indemnity.
Various methods are used to quantify revenue and expenses to arrive at the
business income loss in dollars and cents.
All of the methods use a “retrospective”
approach as they require looking back at
the business’ historical records preceding
the date of loss.
As to the loss of revenue, the business’
historical daily sales and billing can be
examined and averaged to quantify daily,
weekly and monthly loss of revenue.
For expenses, other methods can be
used to calculate those that discontinue
to compute the variable expenses as a
percentage of sales. Variable expense ratios can be derived from income statements such as: profit and loss statements,
tax returns and forms. Prior sales tax records can also be helpful. Annual income
statements usually show percentages for
each expense during the period covered
by the income statement.
With retail or mercantile businesses,
the cost of goods sold (COGS) discontin-
ues when business operations are inter-
rupted during the restoration period.
Most federal tax returns include an
the cost of goods sold as a line item. The
COGS as a percentage of the gross revenue can be quantified with an expense
ratio using information in these tax
Proration can be used to quantify fixed
expenses such as rental or lease payments
for any month or part of a month during
the period of suspension.
The loss of net profit for each day of
operation can also be ascertained using
income statements for any period to establish a daily gross revenue and net income. This is done by dividing the gross
revenue or net profit by the number of
days of operation in the period covered
by the statement. The results represent
the average daily sales or daily net profit
for the projected period of indemnity.
Because of the complexity of payroll
coverage, the actual dollars and cents total
of incurred or discontinued payroll should
be used to evaluate the loss payable.
Extra Expense (EE)
or minimize the suspension of operations or to resume partial operations at
the insured location or elsewhere for
the period of restoration. The third extra expense provision provides coverage
to “repair or replace property and to replace or restore lost information or damaged records.” The “to the extent” provi-sion;applies;to;the;third;category;of;EE,
which is used to measure the amount of
coverage based on the amount of reduction of the business income loss. (See
Chapter;Five;§;5. 6;page;162;&;§;5. 7;page
Loss determination and “to the
Handling a business income loss is measured by the baseline and the process detailed in the BP or CP policy provisions.
As to the BP 00 03, the business income
der f.(1) Business Income and page 30 at
paragraph 7. Resumption of Operations.
Gross revenue less discontinued
(or abated) expenses
The adjuster needs to determine which
expenses have been discontinued and
which will continue during the period of
restoration. Expenses may discontinue
following a covered loss for a number of
reasons and the primary one is that they
are not incurred. If an expense is not incurred, it cannot be reimbursed to the insured business.
If employees are laid off and not paid,
payroll is not incurred and discontinues.
ordinary payroll (hourly worker payroll)
endorsement is selected by the insured.
The businessowners policy includes 60
days of ordinary payroll coverage, but
only if it is incurred. If the period of res-
will be considered a discontinued expense
leased and sustains heavy damage, the
lease’s “abatement clause” may apply so
that lease payments discontinue during
the period of restoration.
Secured business personal property
that is leased or may be collateral for
loans such as, dealer flooring financing
usually has a loss payable endorsement
attached to the policy and is recorded
with the secretary of state and/or the
county recorder’s office.
inventory as collateral. Business Personal
Property (BPP) coverage insures several
categories of movable property which can
include unscheduled and scheduled BPP.
Business property that is leased such as
vehicles or equipment used in the business may be insured by other insurers,
but lease payments are typically paid by
The same situation applies to loan payments where business property is used as
collateral. In the event of a total loss, the
other insurer pays the loss and the lease
or loan payments will discontinue or
abate.;Real;and;business;personal;prop-erty is usually destroyed as the result of
serious or catastrophic losses. Although
lease and loan payments may abate, there
will be an increase in loss payments under structure and BPP coverages.
When operations are suspended in a