The Treatment of Solar Power Generation Under a Business Interruption Claim

Increased use of solar power may lead to a problem in a Business Interruption claim

The issue of revenue generated by, or reduced operating costs achieved by, an insured company generating some of its own power has not really been addressed by the Accounting Standards and can easily be overlooked in the calculation of the sum insured/declared value under a business interruption (consequential loss of profits policy/section).

When checking a business interruption calculation prepared by an external accountant, one of the LMI team had need to speak to the senior partner of the large accounting firm to determine how they accounted for the revenue generated by the solar power generation in the Insured’s accounts.

The accountant advised that they were treating this as an offset in the electricity cost centre. This, in effect, was reducing the level of expenses. We pointed out this had caused an error in the Business Interruption sum insured.

After explaining that any revenue generated, including rebates on purchase price or offset in any expenditure, should be treated as revenue. He immediately understood the situation and said he would put out an instruction to staff straight away and thanked us for bringing the matter to his attention.

Max Salveson of our Melbourne office asked him why accountants had not established an accounting practice standard for revenue earned from solar power generation in particular. His response was that, like him, he suspected nobody thought about the Business Interruption insurance aspect. He said his partner is on the professional body’s committee and he will ask him to raise this as a topic.

Hopefully the following spreadsheet explains the issue for readers.

Graph showing diffence in settlement if income from solar power generation treated as a expense rebate

The loss of the revenue may be treated as a increase in cost of working,but it is subject to all the tests that apply to such costs. To avoid any dispute at claim time I would recommend that a “Reduced Margin” extension be endorsed on to the Policy. The wording of this endorsement, which I believe should be a core endorsement on all business interruption policies,is shown below:

REDUCED MARGIN

If, in consequence of Damage giving rise to a claim under this Policy, Turnover is maintained at a reduced Rate of Gross Profit, an equitable allowance shall be made for the loss of Gross Profit resulting from an increase in the ratio to Turnover of stock usage or purchases (adjusted for stock variations). No allowance shall be made for an increase in the ratio to Turnover of any other uninsured expenses.

This clause will not protect an insured where electricity/power is listed as an Uninsured Working Expense.

To my mind,it is far better to include the revenue from solar generation as revenue in the business’s Profit and Loss Statement and in the Bsiness Interruption sum insured/declared value calculation.

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