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The Business Income Worksheet and the Combination Gross Earnings Business Interruption Worksheet

Summary: Along with the 1986 simplified business income coverage form, the Insurance Services Office introduced a revised business income worksheet. It was updated again in 1988 and issued as form number CP 15 15 07 88 and again in 1995 as CP 15 15 06 95 . It appears at first glance to be quite different from the old combination gross earnings business interruption worksheet, CF 15 15, but as the following discussion will show, the two worksheets request the same information and process it into the same final result, which is used for calculating the business income insurance coinsurance limit. Because little change took place in the 1995 revision of the worksheet see The Business Income Work Sheet – Step By Step the comparison between the 1988 worksheet and the gross earnings worksheet is still valid. In order to demonstrate the equality of the two worksheets, numbers were taken from an example of a manufacturing risk found in Business Interruption InsuranceIts Theory and Practice by Robert M. Morrison JD, CPCU (The National Underwriter Company 1986) and plugged into each worksheet. An explanation of how they match up follows.

1.The first six steps (A through F) of the business income worksheet develop the net sales value of production, which is the starting place (step A) on the combination gross earnings business interruption worksheet.

These first six steps on the business income worksheet correspond to the steps detailed in explanatory note 1 on the reverse side of the combination gross earnings business interruption worksheet, with one exception. The business income worksheet deducts prepaid freight and various other expenses from gross sales in step E, while the combination gross earnings business interruption worksheet requires that the calculation be done by the insured off the worksheet in order to enter net sales on the first line of the explanatory note.

In this example of the combination gross earnings business interruption worksheet, the off-worksheet calculation is shown as the first two entries in explanatory note 1, just to clarify the procedure.

Both worksheets produce a net sales value of production of $10,810,000the business income worksheet in step F and the combination gross earnings business interruption worksheet at the end of explanatory note 1 and in step A.

2.Step G in the business income worksheet adds other earnings from business operations to the net sales value of production to develop total revenues of $10,858,000 in step H.

The combination gross earnings business interruption worksheet does the same thing in step B to develop equal total revenues in step C.

3.Step I in the business income worksheet develops the costs of production that are to be deducted from total revenues. In doing this it combines the directions from explanatory note 2 on the back of the combination gross earnings business interruption worksheet and steps D 1, 2, 3, and 4 on the front of the combination gross earnings business interruption worksheet. Step I 1 in the business income worksheet starts with inventory at the beginning of the year of $1,150,000. This corresponds to the first entry in explanatory note 2.

4.The business income worksheet continues by adding the cost of raw stock, factory supplies, and other supplies consumed and purchased during the year to get a total cost of goods available for sale of $5,200,000. The combination gross earnings business interruption worksheet accomplishes this in the second and third entries of explanatory note 2.

5.The business income worksheet then deducts the year end inventory of $500,000 to arrive at the $4,700,000 cost of goods sold. The combination gross earnings business interruption worksheet does this in the last two entries of explanatory note 2.

Note that explanatory note 2, although completed just once in this example, is intended to be utilized four times to calculate separately the cost of D 1 (raw stock), D 2 (supplies consumed), D 3 (merchandise sold) and D 4 (services purchased from outsiders) (from the front of the combination gross earnings business interruption worksheet).

6.The $4,700,000 result of these calculations, cost of goods sold on the business income worksheet and D 5, total deductions, on the combination gross earnings business interruption worksheet, happen to correspond in this example, because there was no value for services purchased from outsiders. The business income worksheet adds the cost of these services after the cost of goods sold has been calculated and in that way determines total deductions. The combination gross earnings business interruption worksheet includes services from outsiders as one of the four costs that combine to make total deductions.

7.Subtracting total deductions of $4,700,000 from total revenues of $10,858,000 on both worksheets provides the base number of $6,158,000, which is called net income and expenses on the business income worksheet and gross earnings on the combination gross earnings business interruption worksheet. This is the number that is used for calculating the coinsurance requirement, unless the policy is endorsed with a payroll endorsement or another modifying endorsement.

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