Written by William Paull
Co-Founder & Account Director
Reviewed by Jeff Forbes
Co-Founder & Account Director
On this page
- What does business interruption insurance actually pay for?
- Why is my "gross profit" figure for insurance different from my accountant's gross profit?
- What does "indemnity period" actually mean, and why does it matter more than the sum insured?
- Why would spending money to reopen faster ever cost me money?
- Is business interruption insurance the same as loss of rent cover for landlords?
- Does the underinsurance penalty apply to a declared profit figure the same way it applies to a building?
- FAQ
What does business interruption insurance actually pay for?
Business interruption insurance restores the profit position your business would have been in if the loss had never happened. If a fire stops you selling $500,000 of stock, you also didn't have to buy or make that stock. The real gap is the profit you missed, plus the costs that kept running.
For what to buy and who needs it, see the Consolidated Insurance Brokers guide to business interruption insurance.
Why is my "gross profit" figure for insurance different from my accountant's gross profit?
An accountant's gross profit is turnover minus the cost of goods sold. A business interruption policy's gross profit is turnover minus only the costs that stop automatically when you stop trading. For a business with real labour or overheads, the two can differ a lot, and the insurance figure is almost always larger.
Rent doesn't stop for most businesses, and whether yours pauses at all depends on your lease. Most wages don't stop, at least not immediately, and neither do loan repayments. The policy exists to keep paying those, so only costs that switch off with the tap, like raw materials, sit outside the insured figure.
Picture a suburban clinic or trade business turning over $800,000 a year. About $40,000 of materials and consumables would stop, but $350,000 of wages and overheads would keep landing. Declaring the "net profit" line, or even the accounting "gross profit" line, is likely to leave that business many hundreds of thousands of dollars underinsured.
Declare too low and the underinsurance penalty below applies. A real Australian business found this out the hard way when a claim ran a full 12 months against a declared figure that was far too low. Have the figure checked against the policy's definition by someone who reads business interruption wordings for a living, before it goes on the schedule.
What does "indemnity period" actually mean, and why does it matter more than the sum insured?
The indemnity period is the maximum length of time your business interruption policy will keep paying. That period runs two clocks: the time to physically rebuild or repair, and the separate, usually longer, time for trade to recover afterwards. Most policies default to 12 months, which is often only enough for the first clock.
Clock one: getting the doors open again. Assessors, contractors, council approvals, materials, then the rebuild or re-fit.
Clock two: getting trade back to where it was. It starts only when clock one finishes, and businesses consistently underestimate it. Regular customers have found somewhere else, staff who left haven't all come back, and a competitor may have picked up your customers. Every week of that slow climb uses up your indemnity period, whether or not the building is finished.
You need cover for both clocks added together: a twelve-month period can be consumed by a five-month closure plus seven months for trade to recover. Once it runs out, it runs out, recovered or not.
In a matter that went to the Australian Financial Complaints Authority, a business was sabotaged repeatedly over several weeks, its systems locked out and key equipment disabled. The insurer accepted the equipment damage but disputed that business interruption cover had been triggered, offering a fraction of the claim. AFCA found the cover was triggered and ordered a proper assessment of how long the loss ran. The length of time the loss should be measured over was itself the argument. A badly chosen indemnity period can't fix that number later.
Case
We have watched the clock run out on our own files too. On a loss of rent claim we handled, the limit ran out about a week before a tenant was signed, as the commercial landlord's insurance guide tells.
So Consolidated Insurance Brokers treats the period as a decision, not a box on a form. We strongly recommend 24 or 36 months, depending on your business, and 18 months is the minimum. More months give you a stronger position at claim time.
Why would spending money to reopen faster ever cost me money?
A standard policy only refunds extra costs you spend to keep trading, such as temporary premises or hired equipment, up to the amount those costs save the insurer. Spend more and you pay the difference, unless your policy carries the extension that removes the ceiling, usually called Additional Increased Cost of Working.
Say $40,000 on temporary premises only reduces the loss from $100,000 to $85,000. Under the standard cover, you're reimbursed the $15,000 it saved, not the $40,000 you spent. You're $25,000 worse off for getting back on your feet quickly.
The extension can reimburse the full reasonable cost of getting back to trading, even where it is higher than the loss avoided. The spending has to be reasonable and stay within the extension's own limit. Sometimes the only temporary premises available cost more than the trade they protect. The extension is not automatic, so check your policy for it by name.
Is business interruption insurance the same as loss of rent cover for landlords?
No. Business interruption protects a trading business's lost profit, while loss of rent protects a landlord's lost rental income. If your only connection to a commercial building is collecting rent from it, loss of rent is the cover that applies. That cover runs on the same two-clock indemnity-period logic.
An owner-occupier trading from a building they also own may need both, often through two different entities (see owner-occupier insurance). The landlord side is in the commercial landlord's insurance guide and commercial landlord insurance. What has to happen before the cover pays is in loss of rent insurance for a commercial property.
Does the underinsurance penalty apply to a declared profit figure the same way it applies to a building?
Yes, and the same partial-versus-total distinction applies. On a partial disruption, an underinsured profit figure gets your payout scaled down in proportion. On a total shutdown, you're paid up to the figure you declared and no further, even if the real loss was higher.
A building's sum insured is tested the same way, and the worked maths is in The Co-Insurance Clause: What Every Building Owner Must Know.
FAQ
How is business interruption insurance actually calculated?
A business interruption claim starts from insurance-defined gross profit: turnover adjusted for stock movement, minus only the costs that stop automatically when you can't trade. Consolidated Insurance Brokers helps you set that figure and your indemnity period. Reasonable extra costs of reopening sooner are added, over the part of the period the disruption uses. Get either input wrong and the result is accurate to the wrong inputs.
What is an indemnity period in business interruption insurance?
An indemnity period is the maximum time the policy keeps paying, and it has to cover both the time to reopen and the separate time for trade to recover. Consolidated Insurance Brokers checks your period against how long your recovery would really take. The period is not automatically as long as the disruption, and when it runs out, payments stop.
What's the difference between Increased Cost of Working and Additional Increased Cost of Working?
Increased Cost of Working reimburses extra costs you spend to keep trading, but only up to the amount those costs save the insurer. Additional Increased Cost of Working is the extension that removes that ceiling, and Consolidated Insurance Brokers checks your policy for it by name. Without the extension, any spending above that saving comes out of your pocket.
Why does a business interruption policy use "gross profit" instead of my revenue or my net profit?
The policy uses gross profit because it restores the profit position you would have been in, not every dollar of sales you missed. Consolidated Insurance Brokers works out the figure to declare with you. Full revenue would over-compensate, because the materials and stock behind those sales were never bought. Net profit would understate, because it strips out rent and wages the policy keeps paying.
If my business interruption cover runs out before I've fully recovered, is there anything I can do?
Not after the event: once the indemnity period ends, payments stop however trade is going, and there is no retrospective extension. If you're partway through a claim and worried, raise it early with Consolidated Insurance Brokers. We can then review whether the period was realistic for next time. The only real fix is a longer period chosen beforehand.