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Business Interruption Insurance

Business Interruption Insurance (BI) is vital for virtually all businesses if they are to survive a major disaster such as a fire. BI protects the business from the break or reduced trading in their commercial activities and consequently being unable to maintain their turnover or income.

BI cover will maintain payments to employees, increased costs to the business such as renting alternative accommodation and any fixed costs.

Types of Business Interruption Insurance:

  • Loss of Gross Profit - The most common basis of BI insurance as per the definition below and designed for manufacturers, retailers, importers, wholesalers.
  • Loss of Gross Revenue/Fees - Designed for consultants, accountants, architects, solicitors, real-estate agents.
  • Increased Cost of Working - Covers any additional expenditure incurred by the insured solely for the purpose of reducing the shortage in production following an insured loss.
  • Advanced Profits Insurance - Covers the expected profits of a new enterprise or an extension to an existing business.

Calculating the Sum Insured on a Loss of Gross Profit basis:

It is vital to ensure that you accurately calculate your gross profit from your accounting records according to the specific definition of gross profit within the BI section of the insurance policy. The insurance definition of Gross Profit does not always match that used by your accountant and is normally shown as follows:

The amount by which the sum of the amount of the turnover and the amounts of the closing stock and work in progress shall exceed the sum of the amounts of the opening stock and work in progress and the amount of the Specified Working Expenses.

The Gross Profit must then be increased proportionately for Indemnity Periods longer than 12 months.

Calculating the Indemnity Period:

The most common problem with BI cover is underestimating the maximum indemnity period. Many companies choose 12 months simply because it is the policy period or they estimate that it is going to take only 12 months to rebuild.

However, the maximum indemnity period should be set to reflect what the worst expected loss that might affect your business and estimate how long it will take for trade to fully return to normal and restore turnover to the level reached prior to the loss.

Contact a member of our Insurance Team below

Mitchell Charlesworth Insurance Solutions Ltd is registered in England and Wales no. 7002662 and is authorised and regulated by the Financial Conduct Authority.