How To Calculate Your Business Interruption Insurance

Business InterruptionIt is reported that 8 in 10 large commercial insurance claims are underinsured in respect of their business interruption insurance.  We have compiled the following to  help you calculate your cover and what it all means: In order to make sure that you are properly covered it is necessary to know how to calculate the amount of Gross Profit that you need to insure.  If you require a two year indemnity period then, in effect, you have to review the expected level of Gross Profit to be earned in what would be years 2 and 3 after the first year of insurance.   For example if, at the end of 2012, you were calculating the Gross Profit to be insured for a 2 year indemnity period commencing 1 January 2013 and ending 31 December 2014 then you need to calculate the Gross Profit for the period 1 January 2014 to 31 December 2015.  The reason for this is that your Business Interruption Policy pays for a two year period from the date of a loss.  If the loss is at the end of your current intended policy period ceasing 31 December 2013 then your claim will run for year 2 (2014) and year 3 (2015) and it is this period that needs to be insured.

Example (if calculating for a 2013 policy):

You must identify Gross Profit and Turnover for the years 2010 to 2015.  Estimated figures should only be used when actual figures are not available.  The anticipated Gross Profit for the two year period 2014 (£3,200,000) and 2015 (£4,000,000) gives an amount of £7,200,000 for the 2 year indemnity period to commence 1 January 2013.  This exercise needs to be reviewed for each policy renewal and the Gross Profit insured amended accordingly.  This form of cover is called a “Sum Insured” basis. If the Gross Profit is underestimated then you run the risk of having “Average” applied to your claim on a “Sum Insured” policy.  This is where, if for example, you insured for £6,480,000 instead of the correct figure of £7,200,000 and had a claim of £1,000,000 then insurers would only pay 90% (£6,480,000 / £7,200,000 = 90%) and proportionately reduce the claim to £900,000. To avoid average being applied you should be insured on an “Estimated Gross Profit” basis which would remove the problem of average.  Although the figures that you are using may be estimated you must specifically request an “Estimated Gross Profit” policy from your insurers otherwise they will issue a “Sum Insured” basis with an average clause included. We recommend the use of an “Estimated Gross Profit” policy – please speak to us about arranging this cover for you. Business interruption can appear a real minefield.  If you wish to discuss your requirements or have any queries, please do not hesitate to contact us.

Call Bromwall on 01707 883377 or email us on info@bromwall.com 

Image courtesy of mrpuen / FreeDigitalPhotos.net  

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