Calculating the Gross Profit Sum Insured
The following is the definition of the Loss of Gross Profit used by Insurers. It is important to note that this calculation will be used by Insurers’ appointed Loss Adjusters in the event of a claim, and if you are underinsured your claim will be adjusted accordingly.
Wages are not deducted from the Gross Profit sum insured as in the event that you are not able to trade following a major loss you will still have/want to be paying your employees so that they are still your employees when you reopen. In insurance contracts Gross Profit is defined as:
The amount by which
a the sum of the Turnover and the amounts of the closing stock and work in progress
b the sum of the amounts of the opening stock and work in progress and the amount of the Uninsured Working Expenses
Uninsured Working Expenses
These are expenses that you would not incur if you could not trade. They usually include:
1 Purchases (net of discounts)
2 Bad debts
3 Packaging carriage and freight
4 Discounts allowed
This is the period beginning from the date that the material damage loss occurs and ending once the results of the loss cease to affect your Business, subject to the Maximum Indemnity Period shown in the policy schedule.
The Maximum Indemnity Period is usually 12, 18, 24 or 36 months. When selecting the Maximum Indemnity Period factors that should be taken into consideration include the construction of your premises, the length of time it would take to get planning for a rebuild, the availability of replacement machinery and plant, and whether being unable to supply would mean that your customers would go elsewhere.
Allowing for future growth
When setting the sum insured allowance should be made for the future growth of your business. For example you need to ensure that if you had a renewal date of 1st January 2015 and a 12 month indemnity period that the sum insured is sufficient to cover your expected gross profit for the period 31st December 2015 to 30th December 2016 as a loss could occur on the last day of the period of insurance.