Business Interruption policies typically set out the measure of
recovery on a commercial insurance claim as either a Gross Earnings
Form or a Profits Form. In practice, these two forms are often
confused or improperly applied.
In an effort to help illustrate the differences between the two
forms we have included a brief case study highlighting the major
steps in calculating a business interruption loss under each form
and have set out the major conceptual differences between the
Case Study – The Delicious Cookie Store
On October 31, 2014, The Delicious Cookie Store
("the Store") was raided by the Cookie Monster and
his cronies, the Cookie Crusaders. Thankfully, the Cookie
Crusaders were contained by local authorities, but not before they
destroyed the premises and ate all of the cookies ("the
Loss"). It took 6 months to repair the damage done by
the Cookie Crusaders (the Store reopened on May 1, 2015) and an
additional 3 months for sales to return to pre-Loss levels (on
August 1, 2015).
The Store's sales didn't experience any seasonality
and consistently amounted to $15,000 per month prior to the Loss.
After the repairs were complete, the Store earned the following
sales from May to July 2015:
May 2015 - $5,000
June 2015 - $10,000
July 2015 - $14,000
Further, the Store didn't pay any of its hourly staff
until it reopened.
STEP 1: PROJECT SALES LOSS
(Reference: Major Conceptual Differences - Indemnity
Period, as below)
First, we project what sales would have been had the Loss not
occurred and then we deduct actual sales during the same period to
calculate the sales shortfall. The indemnity period under a
gross earnings form is restricted to when repairs are completed,
whereas, under a profits form the indemnity period extends until
sales return to their pre-loss levels. Remember that, in both
cases, the indemnity period is typically restricted to a maximum 12
The gross earnings form refers to the sales shortfall as the
"Reduction in Sales" and the profits form calls it the
"Reduction in Turnover." For simplicity, we will refer to
the sales loss as "sales shortfall."
STEP 2: CALCULATE RATE OF GROSS EARNINGS / RATE OF PROFITS
(Reference: Major Conceptual Differences - Loss
Measurement & Ordinary Payroll, as below)
Next, we calculate the percentage of sales that is
insured. Since the purpose of insurance is to return the
insured to the position that they would have been in had the loss
not occurred, the Store is not "insured" for 100% of
their lost sales. This is because, had the loss not occurred,
they would not have retained 100% of their sales because they had
to incur certain expenses in order to make those sales.
So what portion of the sales are "insured"?
Under a gross earnings form, the Store is insured for their
sales less any costs that directly vary with sales. Under a
profits form, the Store is insured for their net income plus any
fixed expenses. In many cases, this percentage is
STEP 3: CALCULATE BUSINESS INTERRUPTION LOSS
Finally, we multiple the sales shortfall by the rate of gross
earnings or rate of profits (which are equal in this case study) as
In this instance, the gross earnings form results in a lower
business interruption loss payable than the profits form. This may
not always be the case; however, the purpose of this exercise is to
illustrate how variations in wording can culminate in different
Major Conceptual Differences
The following table outlines the major conceptual differences
between the Gross Earnings and Profits forms. Please note
that the concepts discussed below are not to be used as a
comprehensive guide, as each form is specific to the policy.
Please feel free to contact your Collins Barrow advisor should
you have any claim preparation questions or inquires.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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