Whether you love or hate Bill Clinton the man did give us some timeless entertainment–my personal favorite is his rationalization of the word ‘is.’ It was hilarious to watch this mis-guided logic play out on CNN, but it’s not so funny when the same type of flawed thinking is applied to a business interruption calculation.
Many of the policies I’ve seen say something to the effect that the insured is entitled to their lost net profits and continuing normal operating expenses incurred. In this case, the word to focus on is ‘incurred.’
The word ‘incurred’ is important in the world of accounting–and in fact, the word exists only because of accrual accounting. If the business world used a cash-only system, then the word would change to ‘paid.’
We all know that the business world does not, in fact, run on a cash-only system. That’s why I experience a bit of righteous indignation on behalf of my clients when an accountant working for the insurance company asks to see proof of payment for continuing expenses being ‘incurred.’ When the insured doesn’t provide a cancelled check as proof of payment for the expense, then the insurance company’s accountant attempts to deduct the item from the claim as not ‘incurred.’
In the business world, an expense is ‘incurred’ when all of the agreement terms are met and an obligation to pay is created. The ‘obligation’ is the trigger, not the outflow of cash.
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