I hear this from clients a lot: “But we have business interruption insurance for our lost sales! If we have business income coverage, doesn’t the insurance company have to pay us for our lost sales?” This issue in particular can be really frustrating for risk managers, corporate officers, and business owners.
I usually answer this concern with this phrase: It Depends. I say the phrase ‘it depends’ so often regarding different aspects of preparing a business interruption insurance claim that I’m going to start tracking those issues in this blog. When I say ‘it depends’ to my clients, I’m not trying to be like Bill Clinton rationalizing the meaning of “Is”.
I’ve seen some policies, most are placed outside of the United States, that allow the insured party to recover lost gross sales (with no adjustments) in the event of a business interruption. What happens more often in the U.S. is that business interruption insurance policies have an additional clause that allows for a deduction of saved, discontinuing, or non-continuing expenses. This adjustment often produces a number that is very close to the business’ contribution margin.
As a general rule, the insured will not recover variable expenses that are associated with lost sales. (Think Cost of Goods Sold.) There are other expenses that are not variable such as rent and depreciation that may, or may not, be recovered depending on the circumstances.
It is important for risk managers, corporate officers, and business owners to understand their business interruption values at risk and what they will recover following a loss. Truly understanding the values at risk number allows businesses to purchase the correct amount of coverage, create the correct business continuity plan, and make fully-informed financial decisions following a business income loss.
Are you or your client concerned about not recovering lost sales after a business interruption loss? Ask me a question below, in the Comments section, and I’ll help you sort it out.
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