January 2007

Q:
If a fixed asset is totally destroyed and not repairable, can you include depreciation as a fixed/continuing expense on the business interruption loss?

A:
This question has sparked much debate over the years. There are some insureds who assert that even though the asset is destroyed, depreciation continues because it is a "non-cash expense".

While final interpretation of the policy language is the responsibility of the insurance carrier, many accounting firms – Matson, Driscoll & Damico included – hold that if a fixed asset is destroyed, the basis no longer exists and the remaining useful life depreciation expense must discontinue.

Most policies state that charges and expenses which do not necessarily continue should be considered in arriving at the proper business interruption measurement. Whether they are cash or non-cash expenses makes no difference, if they are charges and expenses that abate during the loss period.

Partial damage to an asset that can be repaired generally allows for continuing depreciation expenses. Naturally, each business interruption case has its own set of facts and circumstances based on the particular business, which must be explored and understood to properly measure the Actual Loss Sustained.