Definition of gross profit assurance

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What is gross profit insurance?

The term gross profit insurance refers to a type of business interruption insurance that provides funds equal to the amount of lost profits if an insurable event, such as property damage, occurs. Gross profit insurance is most commonly used in the UK and Canada. This type of insurance differs from gross salary insurance, which is more commonly found in the United States.

Key points to remember

  • Gross profit insurance is a type of business interruption insurance that covers loss of profits in the event of an insurable event.
  • The policy coverage extends over the entire period during which the insured is rebuilding or repairing his business property.
  • The policy covers losses incurred while the business is unable to operate normally, with a predefined compensation period usually set at a maximum of three years.
  • Coverage does not cover everything, as the immediate cause is used to determine whether or not an event caused a loss to the insured.

Understanding Gross Profit Assurance

Gross margin is calculated as sales less purchases and variable costs. The loss formula examines revenue over a specific period of time, such as 12 months, although extenuating circumstances that affect revenue during the review period may need to be smoothed out.

As mentioned above, gross profit insurance is commonly used in Canada and the UK. It is a type of business interruption insurance – insurance that replaces the loss of income due to a loss – designed to bring the insured back to where they would have been financially assuming the insurable event had not occurred. Insurance events include things like fires or natural disasters. The amount of losses incurred by a business is calculated based on a predefined formula and usually relies on historical turnover rates to determine how much a business loses.

The policy coverage extends over the period during which the insured is rebuilding or repairing his business property. The policy covers losses incurred by the business when it cannot function as it normally would, although a predefined indemnity period is usually set at a maximum of three years. If the business is still rebuilding at this stage, all losses fall outside the compensation period and are therefore no longer covered.

Special considerations

Gross profit insurance coverage may not apply in all situations. In most cases, the immediate cause is used to determine whether or not an event caused a loss to the insured. The policy covers increased labor costs, which are additional expenses incurred to prevent sales from falling. The policy also covers the loss of any finished product that could have been sold had it not been damaged.

The challenges of gross profit insurance

One of the main challenges in establishing coverage levels for gross profit insurance is defining what constitutes gross profit, as standards can vary among accountants and business people. Sales, work in progress (WIP), and opening and closing inventories are easily determined in accordance with normal accounting policies. Meanwhile, uninsured running costs refer to costs – sometimes referred to as specified running costs – that vary in direct proportion to revenue. So, if the turnover is reduced by 30%, the costs will also be reduced by 30%. Calculating an accountant’s gross profit will subtract any costs that vary in proportion to production – for insurance purposes, they must vary in direct proportion. This is a key distinction and the source of a lot of underinsurance.

Defining what constitutes gross profit can be difficult as standards vary among accountants and business people.

Gross profit insurance vs. Gross profit insurance

Gross earnings insurance, commonly used in the United States, is another form of business interruption insurance coverage. But there are major differences between this type of coverage and gross profit insurance. Gross revenue is the total amount of sales or revenue less cost of goods sold (COGS). This type of insurance covers a reduction in the insured’s gross income resulting from direct damage.

Unlike gross profit insurance, gross profit insurance is generally less expensive for the insured. Because gross profit insurance has more coverage, the premiums are higher. On the other hand, the premiums for gross salary insurance are cheaper because the coverage is less comprehensive.

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