Calculating Your Needed Coverage Amount for Business Interruption Insurance

Calculating Your Needed Coverage Amount for Business Interruption Insurance
The following is an extremely simplified methodology and if your business is larger or more complex, you need to involve an insurance agent and accountant.
Calculate the net sales of the business. This figure can be reached by subtracting several adjustments from gross sales. Adjustments might include, but not be limited to:

• discounts given, and
• returns and allowances, and
• bad debt, and
• freight.

Calculate total revenues by adding net sales and other income that would be lost should your normal business operations be interrupted by a covered loss. Other income could include, but is not be limited to:

• rent, and interest, and service fees.
• Calculate the gross earnings of your business. This figure is often the result of the total revenues less the merchandise or materials consumed. There are two factors that go into the merchandise and materials consumed:

1. purchases during the year, and
2. change in inventory (the beginning inventory minus the ending inventory).

Calculate your gross sales after discontinued expenses. Discontinued expenses are those expenses that will not be incurred during the time of the business interruption. These expenses could include:

• payroll that would not continue, and
• rent, and
• utilities, and
• delivery, and
• advertising, and
• maintenance.

Subtract the total of the discontinued expenses from the gross earnings.
Determine the probable duration of your business interruption. There is no method to determine that duration. You need to guestimate how long you believe it would take you to rebuild or relocate your business in a worst-case scenario, given the advice of your insurance and accounting professional. If you feel you require six months of Business Interruption Insurance, multiply the gross earnings after discontinued expenses by 50%. If you require nine months of Business Interruption Insurance, multiply the gross earnings after discontinued expenses by three quarters 75%.