(June 2019)
Insurance Services Office (ISO) CP 15 15–Business Income Report/Worksheet is required whenever the Agreed Value Option is selected, or the Premium Adjustment Form is included with any of the business income coverage forms. Using it for other applications is optional. It is recommended that any business that has business income coverage written on a coinsurance basis complete and use it to assist in analyzing operations and determining the proper limit of insurance.
Any inventory valuation method such as Last-In, First-Out (LIFO), First-In, First-Out (FIFO), or any other accepted method can be used as long as it is used for both beginning and ending inventories.
If the Agreed Value Option is selected, the named insured or its qualified representative must certify that the worksheet is accurate. Entries are required for the total agreed value and for the coinsurance percentage desired.
When CP 15 20–Business Income Premium Adjustment is attached, it is both an initial worksheet as well as the final report. The named insured provides the initial worksheet to the insurance company when CP 15 20 is originally added because it is the basis of the initial premium calculation. The named insured sends the final report to the insurance company no later than 120 days after coverage expires or is cancelled. The final report is then used to calculate the final premium.
Related Article: CP 15 20–Business Income Premium Adjustment (Reporting Form)
The worksheet is designed to permit a two-part analysis. The first set of columns is for the entry of income and expenses for the most current 12-month period. The period ends at the inception date of coverage or the latest policy anniversary date, whichever is later. The second set of columns is for the entry of estimated income and expenses for the 12-month period that follows the time period in the first column. Each set consists of non-manufacturing operations and manufacturing operations. ISO defines non-manufacturing operations as those that consist principally of sale or storage of goods and/or merchandise or those that primarily furnish or render services. Businesses that use machinery for packing, shipping, minor repair work, or to alter goods are considered non-manufacturing if those operations that involve machines are incidental to a primarily non-manufacturing risk. Both columns can be used if the named insured has both manufacturing and non-manufacturing operations.
The Business Income Report/Work Sheet Financial Analysis section consists of 12 steps. The letters A through L denote these steps. The actual values for the most current 12-month time period are entered in the first set of columns and the estimated for the upcoming 12-month time period are entered in the second set of columns.
All calculations begin with gross sales. The rest of the sections consist of deductions from and additions to gross sales.
This applies to manufacturing risks only. The finished stock inventory at the beginning of the period is deducted. This figure is based on sales value, not the named insured’s cost.
This applies to manufacturing risks only. The finished stock inventory at the end of the period is added. This figure is based on sales value, not the named insured’s cost.
This applies to manufacturing risks only.
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Example: Heaven Help Us Wings calculates its business income exposure for the past year. The gross sales for 01/01/19 to 01/01/20 were $1,000,000. The finished inventory was $125,000 as of 01/01/19 and $25,000 as of 12/31/19. Because $125,000 of the sales was from inventory already produced, that amount must be subtracted. The $25,000 of inventory manufactured during the time period that was not yet sold must be added back in because it was part of the production year. As a result, the Gross Sales Value of Production is $900,000. The estimate is that the gross sales will increase by 15% and that the ending finished inventory will be $25,000. So, the gross sales estimate is $1,150,000 with no deduction because the starting and ending inventory are both $25,000. |
These are all deducted because they do not continue during an interruption of business.
Non-manufacturing risks enter Net Sales which is the difference between A. and E.
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Example: Gloria Patri Florist calculates its business income exposure for the past year. The gross sales for 01/01/19 to 01/01/20 were $1,000,000. There was no prepaid freight. There was $75,000 in returns and allowances, $25,000 in discounts, and $50,000 in bad debts and collection expenses, for a total of $150,000. As a result, the $1,000,000 in gross sales in Step A. is reduced by $150,000 for a net sales figure of $850,000. The estimate is that gross sales will increase by 15% and that the deductions will be the same as the prior year. Therefore, the Nets Sales estimate for the next year is $1,000,000. |
Manufacturing risks enter Net Sales Value of Production which is the difference between D and E.
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Example: Continuing the Heaven Help Us Wings example above, Heaven has $10,000 in prepaid freight, $10,000 in returns and allowances, $25,000 in discounts, and $5,000 in bad debts and collection-expenses. The total of $50,000 is subtracted from the $900,000 Gross Sales of Production in Step D. As a result, the Net Sales Value of Production is $850,000. Heaven estimates that all of these deductions will remain the same in the coming year so the $50,000 is subtracted from the estimated $1,150,000 for a total of $1,100,000. |
Other earnings received are entered in this section. Examples are commissions, rental income, discounts received from suppliers, and similar or related revenue. It does not include investment income or rental income from other property that this coverage form does not insure.
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Examples:
It estimates that rents will increase by 20% to $60,000 but that suppliers’ discounts will shrink by 10% to $45,000 so the estimated Total Revenue is $1,205,000.
It estimates that commission will increase to
$30,000, rents will fall to $25,000 but there will be no change in supplier discounts,
so the estimated Total Revenue is $1,080,000. |
The values of the following five categories are treated as deductions:
This amount is calculated in the Supplementary section. This calculation is analyzed in the supplementary section.
This refers to services that outsiders provide that do not continue under contract after a covered loss occurs.
Manufacturing risks can deduct these expenses by using CP 15 11–Power, Heat, and Refrigeration Deduction. It can be used only if the manufacturer is not contractually required to continue them after a loss.
This is a significant amount in every operation. There is an option to completely exclude all ordinary payroll expense or to limit payroll expense to a certain number of days. This is done by using CP 15 10–Payroll Limitation or Exclusion.
These are calculated in the Supplementary Section. This calculation is analyzed below.
The items in I. Deduct are subtracted from H. Total Revenues.
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Examples:
It estimates that its cost of goods sold is $345,000 and the value of services is $52,500. This results in an estimated business income exposure of $807,500 ($1,205,000 minus $397,500).
It estimates that its cost of goods sold is $525,000 and the value of services is $86,250. It excludes payroll of $175,000. This results in an estimated business income exposure of $468,750 ($1,080,000 minus $611,250). |
This entry is for both manufacturing and non-manufacturing businesses.
An operation that has both manufacturing and non-manufacturing operations is combined in this step.
These expenses are only added to the estimate because they are added limits in case of a loss. They will not be used as part of any business income coinsurance calculation.
The extra expenses that can be incurred to limit any suspension of business and to continue operations must be determined.
Related Article: Extra Expense Worksheet
These options are useful only if unused coverage limits are still available after a business income loss is paid. The amount of time required to return to the revenue position that existed before the loss occurred must be determined.
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Examples:
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Examples:
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Calculating the cost of goods sold consists of the following three steps:
Inventory at the
beginning of the year
Manufacturing risks include the values of raw material and stock in process but not finished stock. Non-manufacturing risks’ entire inventory is included.
The following items are added to this figure:
Cost of goods available for sale
This is the total of inventory and all items listed above.
Inventory at the end of the year is deducted from this figure. Manufacturing risks include raw material and stock in process but not finished stock.
Costs of goods sold
This figure is entered in Step I. in the primary calculation section above.
Royalties
All royalties not specifically included in the coverage should be listed.
Note: An endorsement is not available that covers royalties. As a result, they must be entered on the declarations or they must be added by a manuscript endorsement.
The formula for special mining deductions is as follows:
Actual depletion (also referred to as unit cost or cost depletion). It is not a depletion percentage. PLUS
Welfare and retirement fund charges (based on tonnage) PLUS
Hired trucks EQUALS
Special Mining Deductions amount (entered in step I in the primary calculation section above)