SHOULD I INSURE EVERY EXPENSE?

It is necessary to insure every expense of the business that is not truly variable in direct proportion to sales. This section of the website provides a brief commentary on 55 of the most common business expenses. No two businesses are the same, and the following must of necessity be a generalization and should be treated as such.

While not the only aspect to consider, the amount of the expense should be looked at. That is, the cost benefit of not insuring an item should always be kept in perspective. When you consider the consequences of getting it wrong, compared to the comparatively inexpensive cost of coverage, the recommendation is that if you are in doubt, insure it.

Term	Definition
A
Accountants’ & Auditors’ Fees	Accountancy work in connection with an Insured’s audit, financial and management reporting, taxation and/or other matters, will not change dramatically as a result of a reduction in Turnover due to a disruption to the business. Some saving may be negotiated, however, the expense certainly will not fall in proportion to the reduction in Turnover. As such, it should be insured in full. The fees for extra accountancy work which may arise in the production of information required by Insurers in connection with a claim following an insured loss, is typically payable by Insurers under the terms of the Claims Preparation or Professional Fees item of the Business Interruption policy. As the external accountant to the business does not prepare Business Interruption claims on a day-to-day basis, it is considered prudent to obtain specialist advice to prepare claims. Even accounting firms themselves engage Loss Management experts to prepare their own Business Interruption claims. Having said this, some additional financial reports may be necessary during the claims preparation process that the Insured’s usual accountants can most easily supply. The costs for these additional reports would be claimable if Claims Preparation fees are insured.
Advertising	Advertising expenses, exhibitions and trade show expenses, sports or other sponsorship expenses can be included in this expense. Advertising expenses are typically not directly variable to sales. In the event of a short-term loss, the advertising expense may in fact increase. Even in the case of a long-term disruption, the business will usually require advertising to continue to keep the brand and/or products in the public favour. Therefore, it is recommended that this expense be insured.
Annual Leave Provision	See Pay-Roll.
B
Bad Debts	As bad debts can only accrue on sales transacted or services rendered, they are traditionally not insured. However, I am not sure that this is good practice. Bad debts are not necessarily accrued by a business in direct proportion to sales. During boom times, sales may increase and, due to this general period of prosperity, bad debts may not be a problem. On the other side of the coin, during periods of recession or following a disruption, turnover may be reducing and the business may relax their criteria for providing credit. As a result, their bad debts may increase despite falling revenue. Another factor to consider is that for many businesses, bad debts are only relatively small and, as such, I tend to recommend insuring the expense. I am aware that some insurers and/or broker cluster group policies nominate bad debts as a standard Uninsured Working Expense. For many businesses this is quite acceptable.
Bank Charges	The rate of charges, which in reality is relatively minor, does not vary with Turnover and, as such, should be insured in full.
Bonuses	Bonuses are typically a financial reward or compensation given to an employee that complements their fixed wage or salary. Bonuses are generally used to reward achievement but could be awarded to show gratitude to employee’s tenure milestones, or to entice perspective employees to join a company.
C
Carriage (Shipping, Freight Container & Container-Base Services)	Carriage is, in general, a charge of a variable nature. In some industries, however, it can be that carriage by contract at a fixed price per month or year irrespective of the quantity of goods carried, is charged. This is the exception, however, rather than the rule. Where it does apply, it is a non-variable charge that should be insured. Otherwise, if it is truly variable as a proportion of sales, it need not be. Shipping and freight expenses for goods sent overseas - trucking, warehousing, insurance, lighterage to the loading tackle of a ship and shipping charges - including air freight, are a form of carriage. If they are a charge that will vary proportionately with any reduction in the quantity of goods transported, there is no necessity to insure them. Similarly, where the transport of goods overseas is in containers with use being made of the services, equipment, cranes and containers of a container-base firm, if the charges relate to the quantity of goods transported, they may be regarded as a variable expense and therefore not insured.
Commissions	If commissions are paid to Agents or staff, the first reaction is to treat them as an expense that does not require insuring. However, it is wise to first review any contracts to ensure that the business can reduce or suspend commissions in the event of an insured loss. Secondly, the long-term relationship with the company or individual reliant on the commission income needs to be considered. Will they abandon the Insured firm to a competitor which may, in the long-term, cost the business more than if they had continued to meet a fair or negotiated level of commission? If this is true then it is recommended that Commissions be insured.
Computing Expenses	This expense can include the cost of hosting a website or webmail, to providing regular maintenance to the business for all types of computing services. In most cats where I have examined the expense for a client, I have determined that the cost is not directly variable to sales and, as such, is an expense that needs to be insured.
Courier Charges	For most businesses, this cost is insignificant and should be treated the same as postage, which is discussed later in the chapter. If, on the other hand, the costs are significant and do vary in direct proportion to sales, for example in a mail order business, then the expense need not be insured.
Credit Card & EFTPOS Charges	The vast majority of these costs charged as a fixed percentage of sales. As long as the level of credit or sales transactions (as a percentage of sales revenue) to cash sales remains the same after a loss as before, then this expense need not be insured.
D
Depreciation of Buildings, Plant & Machinery, Fixtures & Fittings, Office Equipment, Vehicles etc (excluding stock)	Depreciation is an item, which often gives rise to argument. It is sometimes suggested that it need not be insured because if buildings and plant are destroyed, depreciation will either cease altogether or be reduced in proportion to the amount of damage sustained. However, Turnover can be adversely affected out of proportion to the amount of property destroyed, and so the reduction in the depreciation charge will not necessarily be proportionate with the fall in earnings. Further, when new buildings and plant replacing those destroyed are still not fully productive, depreciation will be taking place and the expense accounted for. The need to insure depreciation is even more obvious when the Business Interruption insurance is extended to include Loss of Turnover resulting from disruption arising out of an event away from the premises, such as prevention of access to customers, damage to supplier’s premises, or failure of a public utility. Another argument is that as depreciation is a non-cash expense, there is no need to insure it. Although it is a non-cash expense in the Profit & Loss Account as the actual expenditure occurred at an earlier time, i.e. when the asset was first purchased, it is a legitimate charge against the trading income of a business. Depreciation is the amortisation of the cost of that asset, less its estimated residual value, over the useful life of the asset. The value of the amortisation is properly a cost of earning revenue that is no different to any other operating cost charged against revenue. It is strongly recommended that this expense be insured in full.
Depreciation of Stock	Depreciation of stock, whether it be raw materials, consumable stores, work in progress or finished goods, generally arises through market fluctuations, the ageing of stock, changes in designs and fashions, or obsolescence. Typically, in the company’s annual accounts, depreciation is not debited as a charge but is reflected in the reduced amount of the closing stock figure according to the stock valuation. It is a trading loss attaching to the amount of stock held and, in general, would arise irrespective of damage occurring. Consequently, it is not regarded as insurable as part of Gross Profit, and is excluded by the use of opening and closing stock figures provided that due provision has been made for depreciation.
Director’s Remuneration & Fees	It is obviously desirable that whatever effect the damage may have, the directors of a business should continue to receive their normal remuneration. It often happens that the directors work longer and harder during a crisis, and it would be unreasonable for them not to be compensated. By insuring Directors Remuneration and Fees, you protect the directors’ income stream.
Discounting Charges	Although paid to a third party rather than being given to a customer (those given to customers being referred to as ‘discounts allowed’), discounting charges are in effect an expense of the same category. They reduce the amount received for goods sold, and typically vary with the volume of trade transacted. If they do occur at a fixed rate to Turnover, then they need not be insured.
Discounts Allowed	Whether shown as a debit in the accounts or deducted from the sales figures before the amount is recorded in the accounts, discounts allowed, being a cash discount allowed to customers for settlement within a credit period, is a charge which will on average vary in direct proportion to the value of goods sold or services rendered. Therefore, it need not be insured.
Discounts Received	Unless the rate of discount received is not directly proportional to the Turnover of the business, this item need not be considered when calculating the Insured Gross Profit.
Donations	Although donations may be largely an optional expense, it is the general practice to insure them fully.
E
Electricity	This expense is sometimes linked to power and light and/or water and/or gas. In any form, it does not necessarily vary directly with Turnover and, therefore, should be insured in full. There has been a tendency in the past to insure only part of the expense, say 50%, but the other 50% may or may not vary directly with Turnover. As a result, the Insured may be contributing to part of the expense if a claim is made.
F
Facsimile Charges	See Telecommunications
Freight	Freight is, in general, a charge of a variable nature. In some industries, however, it can be that freight is by contract at a fixed price per month or year irrespective of the quantity of goods carried is charged. This is the exception, however, rather than the rule. Where it does apply, it is a non-variable charge that should be insured. Otherwise, if it is truly variable as a proportion of sales, it need not be. Shipping and freight expenses for goods sent overseas - trucking, warehousing, insurance, lighterage to the loading tackle of a ship and shipping charges - including air freight, are a form of carriage. If they are a charge that will vary proportionately with any reduction in the quantity of goods transported, there is no necessity to insure them. Similarly, where the transport of goods overseas is in containers with use being made of the services, equipment, cranes and containers of a container-base firm, if the charges relate to the quantity of goods transported, they may be regarded as a variable expense and therefore not insured. Businesses may have freight of different types. Eg. Freight inwards, freight outwards, freight miscellaneous are just a few examples. As with all Uninsured Working Expenses, it is important to record exactly what is not going to be insured using the same terminology and the Insured’s chart of accounts.
Fringe Benefits Tax	Refer to see Pay-Roll
G
Gas	Gas can appear as an expense item, particularly in those areas where piped natural gas is readily available. The cost can sometimes be linked to light and power and/or water. Where the expense is not significant, it is recommended that it be insured. However, where the expense is significant, a closer look is required, including reviewing the contractual obligations of the supply contract; where there is a large variable component, this need not be insured. Where a percentage of gas is insured, the expense variable endorsement (refer download area) is recommended.
General Expenses	General expenses are any expenses that are too small to have its own expense category in the chart of accounts. It may include parking, stationery, minor repairs, postage, staff amenities. Such expenses are typically fixed or at least semi fixed and it is considered prudent to insured them fully.
H
Hire Purchase or Hire Contract Charges	Hire purchase and hire contract charges do not vary with Turnover, but where they arise from the hire of plant and machinery. It is sometimes suggested that because destruction of the items would mean recovery of the value under the Material Damage section of the policy or a Fire & Perils policy, discharge of the hire agreement would cause the cessation of the charge. As such, it is not necessary to insure it. Damage may occur, however, which interferes with production without destroying the particular plant or machinery, which is the subject of the hiring agreement. To cover this possibility, the hire purchase or hire contract charges should be insured in full.
I
Insurance Premiums	Insurance cover is still required in the event of damage in all but the most severe cases. Even then, as soon as insured property is replaced, insurance will be required to protect it. As such, insurance should be insured in full. Liability, Directors & Officers, Professional Indemnity, Motor Fleet, Accident & Health etc continue to be required regardless of the extent of damage. If any property retains some value, this property too, needs to remain insured. Workers' compensation insurance premiums are included in the definition of Payroll/Wages, as they will reduce in proportion to the reduction in Payroll. It should therefore be treated the same as Wages.
Interest Payments	Examples of interest payments include interest on debentures and loans, bank overdrafts, mortgages, and interest or trade accounts. Some part of the total interest payments may cease after damage if the money obtained from the Material Damage insurance on the leased property destroyed, is used to repay the principal on which interest is payable. However, as replacement equipment, stock etc is acquired, fresh financing and therefore interest expenses will be payable. Other interest expenses will continue throughout the period of disruption. Either way, all interest payments should be insured.
Internet Charges	See Telecommunications
J
K
L
Lighting & Heating	The necessity to include these charges in full is sometimes questioned, but to omit them could leave an Insured open to loss in a variety of circumstances. In fact, in many cases, the costs of lighting and heating increase during a period of interruption because of usage at times when they would not normally be necessary. As such, it is highly recommended that lighting and heating be insured in full. This may need to be reviewed for a large manufacturing business where the cost of lighting and heating is grouped with electricity or power, and can be substantial. In such cases, the truly variable component need not be insured.
Long Service Provisions	Refer to Pay-Roll.
M
Mobile Phone Charges	See Telecommunications
Motor Vehicle Expenses	Where this expense item includes vehicles collecting or delivering goods, it might be argued that if a firm is running a fleet of delivery vans, some of these could be laid up after damage at the premises if there is not sufficient work for all of them. In such a case, some suggest that it is a variable charge that does not need to be insured - I do not support this view. In most cases, the vehicles are on lease and registration, lease payments and third party insurance continues even if they are temporarily off the road. It is also my experience that such vehicles often do more deliveries to accommodate shorter production runs and, as such, the cost increases rather than decreases. To be certain of full protection against possible loss, it is recommended to insure motor vehicles expenses in full. Petrol or other fuel, oil and tyre costs and, to some extent, vehicle repairs, can be classified in another accounts code/category. As they do vary in ratio with mileage, they could be reduced if mileage was reduced, but it is again unlikely to be in direct proportion with Turnover for the same reasons as set out in the preceding paragraph. As such, it is again recommended that they be insured in full. Often the operating costs of management or business owners' vehicles are included in this category. These costs will certainly continue regardless of the level of Turnover and, as a result, should certainly be insured in full.
N
O
Office Expenses	It is recommended that office expenses be insured in full. These may include petty cash disbursements for such items as staff amenities, minor repairs, stationery, specialist photocopying and the like. It can cover minor marketing expenses and other day to day costs of running the business. These costs are typically not directly proportionate to Turnover and, as such, should be insured in full.
Other Expenses	Obviously, there are many other expense items not mentioned. However, it is hoped that from those listed, you will have gained an adequate understanding of the principles involved, which will enable you to decide whether a particular expense should or should not be insured (i.e. whether it is a fixed charge or a variable charge) in relation to Turnover.
P
Packaging	Packaging is, in general, a charge of a variable nature, which will on average vary in direct proportion to the value of goods sold. Therefore, it need not be insured. This expense is recorded here if packaging has not already been captured in your answer to the question on purchases above.
Payroll Tax	See Pay-Roll.
Postage	The cost of postage may be less than normal during a period of interruption. However, the reduction would not be in the same rate as the reduction in Turnover. Postage and courier expenditure can increase because of the extra correspondence that is inevitable after serious damage. As such, this expense should be insured in full.
Power	Power can be a significant manufacturing cost in some industries, none greater than in the production of aluminium. In the vast majority of businesses, it is only a minimal expense and does not vary in direct relationship with Turnover. As such, except in some rare cases where power consumption is a truly variable expense as a proportion of Turnover, it is recommended that this expense be fully insured. This may need to be reviewed for a large manufacturing business where the cost of lighting and heating can be grouped with electricity or power, and can be substantial. In such cases, the truly variable component need not be insured.
Printing & Stationery	An item referring to expenses of this kind will appear in one form or another in every set of accounts, and as it is not typically directly related to Turnover, it should be insured in full.
Purchases	Purchases are in 99.9% of cases one of the true variable expenses of a business and, as a result, need not be insured. In some service industries such as accounting, legal practices etc, there are no purchases. In effect, this means such businesses may need to insure their full revenue.
Q
R
Rates	Local authorities continue to charge rates regardless of the level of revenue earned at the site. Therefore, rates should be insured in full.
Rent	Rent, as an overhead charge, should always be insured. This is true even where there is a lease in place with a cessation of rent clause for total non-occupancy or a reduction in rent in the event of partial loss. There are two reasons for this. First, alternative premises will need to be secured, and if Turnover is down, then rent as a percentage of sales will increase. Secondly, there are occasions where disruption to the business can occur although there is no damage to the building. As such, no saving in normal rent occurs. Examples of this are prevention of access, damage at customers' or suppliers' premises, and disruption due to a failure of public utilities. Other rental payments such as ground rent, rent for wharves or railway sidings, rent for space and power, rent for advertising signs, rent for office machinery, computer leasing, telephone systems etc, and fire and/or burglar alarm systems, should similarly be insured. If the Insured of the operating company own the building through another entity, such as a superannuation company, family trust or the like, then it is prudent to insure the rent as part of the insurable gross profit of the operating company and again as gross rentals for the entity of the company that owns the building. The reason for this is that the Insured may in fact claim it twice. Once under the operating company’s primary gross profit policy in the case of them relocating temporarily while the building may be rebuilt. They will typically stop paying rent to the landlord (the entity that owns the building) but the company will have to pay the rent at the temporary premises. Turnover may well be down due to the insured peril and so a gross profit claim will be lodged from which the rental for the temporary premises will be paid. The entity that owns the building may need to continue to make repayments on any loan. Even if not, the owner’s of the legal entity will no doubt require the rent to be paid. As the insurer could pay out a claim twice - once for the tenant part of the group, and another as loss of rent for the landlord - the item should be insured twice.
Repairs & Maintenance	Repairs and maintenance is another of those items, which often gives rise to argument. It is sometimes suggested that it need not be insured due to the fact that if buildings and plant are destroyed, repairs and maintenance will either cease altogether or be reduced in proportion to the amount of damage suffered. However, Turnover can be adversely affected out of proportion to the amount of property destroyed, and so the reduction in the repairs and maintenance charge will not necessarily be proportionate with the fall in earnings. The need to insure repairs and maintenance, like several other business expenses, is even more obvious when the Business Interruption insurance is extended to include Loss of Turnover resulting from disruption away from the premises, such as the prevention of access, damage at customers' or suppliers' premises or failure of a public utility. I have seen claims where the maintenance expense goes up during the period of disruption, although the loss involved damage to only one part of production machinery. The reason being that the maintenance team used the forced closure of the factory to undertake a full maintenance program on the undamaged machinery and plant, so that when the damaged section was repaired, the factory could operate for as long as practical without a further maintenance shut. It is therefore strongly recommended that repairs and maintenance be insured in full. Where the cost, particularly in a large manufacturing concern, is considerable, the truly variable component of this expense may not need to be insured. Where a percentage of Repairs and Maintenance is insured, the expense variable endorsement is recommended.
Royalties	If payable regardless of Turnover, say as an annual fee, then royalties should be insured in full. Where they are payable as a fixed percentage of sales or as a per unit rate, they need not be insured. Care should be taken to read the contract as proceeds from an insurance policy may be deemed as Turnover and, in such cases, royalties would need to be insured in full. Special care also needs to be made when the royalty is paid to a parent company that is also named in the policy. In this scenario, the expense needs to be insured.
S
Salaries	Refer to Pay-Roll.
Sick Leave Provisions	See Pay-Roll.
Storage Handling Charges	The cost of manual and mechanical handling by employees at an outsourced warehouse of an Insured's goods in store, should vary in ratio to the quantity of goods moved in and out. Before making a final decision on whether to insure this expense, the contractual conditions should be reviewed. If the expense is truly variable with Turnover, then it need not be insured.
Storage Rent	This should be insured in the Gross Profit item if the expense is for space, that is, for specific buildings or portions of warehousing premises. In such circumstances, the expense will not decrease proportionately with a reduction in the quantity of goods passing in and out of store, particularly where the rent is paid on a monthly or annual basis. Where the rent is paid according to the quantity of goods stored and/or the length of time they are in storage, the charge is more controllable. Even so, the question as to whether it is a fixed or truly variable expense can vary with each business. It could well be that the expense increases due to the fact that the onsite storage utilised by the Insured is lost due to the insured peril. As such, it is recommended that this expense be insured.
Subscriptions	Often business operators claim before a loss that they would discontinue such payments in full in the event of damage. They are usually only thinking of a total loss situation. As has been stated earlier, most losses are only partial. Either way, such payments would almost invariably be continued in full, particularly subscriptions to trade associations and trade journals, which are considered essential. While some may argue that this is an optional expense, it is recommended that it be insured in full. It is typically an expense which, in the scheme of things, is very small. As such, the cost of insurance is negligible, while the benefit of continual subscription can be high in comparison to the premium saving.
T
Taxation	Taxation in this area does not include GST, VAT, Payroll Tax and FBT, all of which are discussed separately in this Guide. The question of how taxation on profits is to be dealt with does not arise because only the uninsured working expenses are mentioned as being deducted from the amount of Turnover to arrive at the Insured Gross Profit. Consequently, there is no definition of net profit. Therefore, any taxation on trading profits is automatically included in the insurance, and is payable.
Telecommunications (including telephone, facsimile, mobile, internet)	Rental and, where applicable, hire charges for telephones, answering services and data lines should be treated as fixed expenses that will not vary in direct proportion to Turnover and, as such, should be insured in full. Similarly, fixed contracts on usage should also be insured. In fact, in most businesses, the entire expense is best insured.
Telephone, facsimile, mobile, internet	See Telecommunications
Trade Levies & Export Promotion Levies	Expenses of this kind call for special consideration as there are different methods of charging them and they can be very substantial amounts. Where they are fixed charges irrespective of production, they should be insured in full. On the other hand, where the cost is incurred in direct proportion to sales, it need not be insured. Any contracts covering the payment of such levies should be read, as it may be that insurance proceeds under a Business Interruption policy could be deemed as sales revenue, which, in turn, creates an expense payable, by the business. In such cases, trade levies should be insured in full.
Travelling Expenses	This expense can cover a variety of expense types. It can, for example, cover the cost of sales representatives. In such a case, there may be a shortage of goods available for sale from a manufacturer, wholesaler or retailer as a result of damage to a factory or warehouse. In such a situation, the sales representatives who have a round of regular clientele, will usually find it necessary to call on them just as frequently as before the loss, in order to maintain their goodwill and/or to sell those goods which are available. As such, it should be insured in full. On the other hand, where salespersons are selling entirely by 'cold canvas' with no repeat custom, their expenses may fall with a reduction in the volume of goods available for sale. Whether such costs, particularly if the company supplies company vehicles etc, would fall in direct proportion to sales is very unlikely. When a firm's travelling is done by one or more of the principals or directors of the company, the accounts item of travelling expenses usually covers the principals' and directors' use of motor vehicles for social and pleasure purposes as well as their journeys for marketing. In these cases, it is obviously a charge to be included in the insurance.
U
Uniforms, Work Clothing, Protective Clothing etc	In a business where the Insured provides uniforms or working clothing for employees, the expenses should be insured at least to the same relative extent that the payroll of such employees is similarly covered, but this item does not fall with in the definition of Pay-Roll. See Pay-Roll for further commentary.
V
Value Added Tax	Value Added Tax ("VAT") is charged by the majority of businesses as a flat rate of sales. The amount collected is then payable to the government. As the VAT is payable as a flat rate of sales, it is truly variable with sales and is therefore not required to be insured. The Insurer is said to be indemnifying the Insured for Loss of Gross Profit, not lost sales. Therefore, the payment made by the Insured does not include VAT. The VAT charged to the business is able to be offset by the business in their return. If the amount paid is greater than the amount collected, the shortfall can be claimed back. As a result, it is not necessary to include VAT in the Gross Profit calculation. A word of caution though, some insurers do require that VAT be included in the sum insured / declared value on both material damage and business interruption sections of the policy. Understanding the requirements of any policy is of course paramount.
W
Wages & Salaries	Insurance of payroll, which includes salaries, wages and associated costs such as payroll tax, FBT, overtime, commissions, bonuses, holiday pay, sick pay, workers' compensation insurance premiums and/or accident compensation levies, superannuation and pension fund contributions, long service leave and the like, call for individual consideration. In the 21st Century employees are regarded at the most important asset of the business. Further we often see the need for more labour not less, to replace the work of a damaged machine or machines. The best way to protect the ongoing viability of the business is to insured wages and salaries full. To learn more, see Pay-Roll for further commentary.
Water	In the majority of businesses, this cost is not great and rarely is strictly variable with the level of Turnover. As such, in the majority of cases, it should be insured in full. Only in cases where it is truly proportionate to Turnover, should it not be insured. Where a percentage of water is to be insured, the expense variable endorsement (refer download area)is recommended.
Workers Compensation Insurance/Workcover	See Pay-Roll for further commentary.
Wrapping Materials, Packaging, Boxes & Other Containers of All Kinds	These are all items of expense that are typically related to the quantity of goods sold or produced. Therefore, they are not insured in the majority of cases.
X
Y
Z