Insurable gross profit
Turnover less variable costs alone, the basis of business interruption cover and the leading source of corporate underinsurance.
Textbook case: a company turns over 20 million euros with 12 million of variable costs. Its insurable gross profit is 8 million, its net profit may be as little as 600,000 euros, and insuring the second figure instead of the first leaves it underinsured by more than 90%. Insurable gross profit is turnover minus only the charges that vanish with activity: raw materials consumed, variable subcontracting, sales commissions. Wages, rent, depreciation and financing costs keep running during the shutdown and so stay in the base, since the business will have to pay them while taking nothing in. Owners instinctively think of net profit, the figure at the bottom of the income statement, and that is the most common mistake. It is paid for through the average clause, which cuts the indemnity in the ratio of declared to actual margin, partial losses included. The French debate of 2020 over administrative closures recalled the other boundary of this cover: in principle it presupposes prior physical damage.
A company with 20 million euros of turnover and 12 million of variable costs generates 8 million of insurable gross profit, while its net profit may be only 600,000 euros. Insuring net profit instead of gross profit leaves the business underinsured by more than 90%. The French debate of 2020 over administrative closures recalled the other limit of this cover, which in principle presupposes prior physical damage.
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