The Business Interruption Period of Indemnity
Copperfield Foods Ltd. operates a single processing plant insured under a gross earnings form with a 12-month period of indemnity, a $50,000 ordinary payroll exclusion, and a $25,000 deductible. A fire on 1 June destroys the packaging line. Copperfield's monthly records show: net sales $900,000; cost of goods sold $600,000 (of which $180,000 is ordinary payroll); other variable costs $60,000; and continuing fixed expenses of $120,000 per month. The plant is fully restored and back to normal output on 1 December. However, a key customer cancels a supply contract in September because of the disruption, costing Copperfield $400,000 of profit over the following year. Copperfield claims $400,000 for the lost contract on top of its interruption loss.
1. Calculate the gross earnings and gross profit exposures and the monthly interruption loss, showing how the payroll exclusion changes the result.
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Gross earnings is usually defined as net sales less cost of goods sold, plus other variable costs that do not necessarily cease. Here net sales $900,000 less COGS $600,000 = $300,000, plus other variable costs $60,000 = $360,000 per month, or $4,320,000 annualized.
Gross profit (the 'earnings' approach used in many North American forms) is net sales less cost of goods sold, i.e., $300,000 per month, or $3,600,000 annualized. The difference between the two measures is whether the insured's 'cost of goods sold' includes costs that continue during shutdown.
The ordinary payroll exclusion removes $180,000 per month from the insured exposure, because the insured has chosen to retain that payroll risk. Under the gross earnings form, the monthly loss is therefore $360,000 − $180,000 = $180,000, before continuing fixed expenses are considered, depending on whether fixed expenses are already embedded in the gross earnings definition. If the form is written so that continuing fixed expenses are separately recoverable, add the $120,000: $300,000 per month.
The practical point for the exam is that the payroll exclusion is a rating and coverage choice, not an automatic saving. Copperfield must keep paying the excluded payroll itself, so the exclusion lowers premium but leaves a $180,000 monthly gap that the insured must fund from its own resources.
2. Determine the recoverable interruption loss for the five-month restoration period and address the $400,000 lost-contract claim.
Read the worked answer
The restoration period runs from 1 June to 1 December, five months. Using the $180,000 monthly figure from the payroll exclusion (the figure that excludes ordinary payroll but retains continuing fixed expenses), the gross loss is 5 × $180,000 = $900,000. Subtract the $25,000 deductible: $875,000.
If the policy instead treats continuing fixed expenses as separately recoverable on top of the gross earnings figure, the monthly loss is $300,000 and the five-month gross loss is $1,500,000, less the $25,000 deductible = $1,475,000. The correct figure depends on the form's definition, and the adjuster must read it rather than assume.
The $400,000 lost-contract claim is a consequential loss and is not recoverable under a standard gross earnings form. Business interruption responds to loss of earnings caused by damage to the insured's own property during the period of indemnity; it does not cover loss of a customer's business or loss of market. To recover it, Copperfield would need either a contingent business interruption extension (which typically responds to damage at a supplier's or customer's premises, not to a customer's voluntary cancellation) or a specific extension for loss of a key customer, which is rarely available.
The claim also fails on timing: the $400,000 loss falls outside the 12-month period of indemnity in part, and the cancellation was a business decision by the customer, not physical damage. The adjuster should deny the $400,000 and document the reasoning, while confirming whether the policy contains any extension for loss of market or contract cancellation.