The Clause That Can Switch Off Business Interruption Underinsurance
Can the underinsurance clause be removed from a business interruption policy?
On most of the business pack wordings we place, yes. If the sum insured for your gross profit or annual revenue was worked out on a business interruption calculator the insurer approves, using the GST exclusive sales figures from your own Business Activity Statements, the wording deletes the underinsurance clause for that item entirely. Not reduces it. Deletes it.
That is an unusually generous thing for a policy to say, and almost nobody outside the industry knows it is there. In this guide from Consolidated Insurance Brokers you will see exactly what the wordings require, why insurers offer the trade at all, and the conditions that quietly switch the protection back off again.
What is a business interruption calculator?
It is an online tool that turns your own trading figures into the gross profit or annual revenue figure a business interruption policy needs. You give it your trading numbers and it produces the sum insured.
The reason it exists at all is that the figure a business interruption policy insures is not a number you already have. It is not your revenue, it is not your net profit, and it is not the gross profit line on your tax return. It is built specifically for insurance: your turnover, adjusted for stock movements, less the costs that genuinely stop when you stop trading. That definition is set out properly in Business Interruption Insurance, Explained Properly, and it is the single most misunderstood figure in a business pack.
Because that number is hard, guessing at it is common, and guessing is exactly what the underinsurance clause tests you against. A calculator is the wordings' answer to the guess.
One honest note about these tools, taken from the wordings themselves rather than from us. The calculator definition in one of the wordings we place says in terms that its results "should be taken as a guide only and should not be relied upon as the sole basis for your insurance decisions", and another wording says outright that the insurer "cannot and does not guarantee the accuracy" of the calculators for your particular circumstances. So the tool is not an oracle, and running one is not the same thing as getting advice. What it is, when it is done properly and documented, is a figure the insurer has agreed not to apply its underinsurance clause to.
Why would an insurer give up its underinsurance clause?
Because the clause and the calculator are solving the same problem from opposite ends, and the calculator solves it better for both sides.
An underinsurance clause exists to correct a pricing imbalance: declare half the real figure, pay roughly half the premium, and expect a partial loss paid in full. The clause claws that back at claim time. It is fair, but it is also a blunt instrument that only ever operates after the damage is done, when the argument is expensive for everyone and the client is at their least able to absorb a surprise.
An approved calculator fixes the same imbalance at the front end instead. If the figure was built from your own Business Activity Statement figures on a tool the insurer trusts, and the workings are on file, then the insurer already knows the premium matched the exposure. There is nothing left for the clause to correct, so several wordings simply switch it off.
That is the trade in one sentence: you accept a disciplined method for setting the number, and the insurer agrees not to apply its underinsurance clause to it. Be precise about what that is and is not. It removes the proportional reduction; it does not stop an insurer looking at your figures. Two of the wordings say expressly that if the calculation is not redone each year they reserve the right to review the data and the workings at claim time. So the deletion is a promise about one clause, not a promise to ask no questions.
It is the business interruption sibling of the escape hatch on the property side, where several wordings delete the average clause for property insured to a registered valuer's figure. Both say the same thing in different words. Do the work properly at the start, and the penalty at the end disappears.
What exactly do the wordings require?
Four conditions turn up again and again: the calculator has to be one the insurer approves, the figures have to come from your own Business Activity Statements, the result has to actually become your sum insured, and the workings have to be kept. Two more appear in some wordings and not others, and both are about timing. The differences between them are where the money is.
The calculator has to be one the insurer approves. Not any spreadsheet, not your accountant's own model, and not a figure that happens to have come out of a tool. Almost all the wordings say an approved calculator, two of them name a specific one, and one asks only that a business interruption calculator was used.
The figures have to come from your own Business Activity Statements. Specifically the GST exclusive sales figures, from the most recent twelve months in most of the wordings. This is the condition that makes the whole thing work, because it anchors the calculation to a document you have already lodged with the Australian Taxation Office rather than to a number someone felt comfortable with.
The result has to actually become the sum insured. Several wordings say this explicitly: the outputs of the calculation are adopted as the sum insured. Running the calculator and then insuring for a lower figure because the premium looked better is precisely the situation the clause is written to exclude.
The workings have to be kept. Several wordings require a copy of the data used and the calculation to be held on file, and one of them says on the insurer's file. A calculation nobody can produce two years later is, for this purpose, a calculation that did not happen.
Two more conditions appear in some wordings and not others, and both are timing conditions. Some require the calculation to be completed within two months of the policy starting or renewing. And at least two say plainly that if the calculation is not redone annually, the deletion stops applying. That second one is the trap: a business can qualify in year one, change nothing, and quietly stop qualifying by year three without a single document changing on its desk.
Which parts of your cover does the deletion actually reach?
Not all of them, and the scope differences between wordings are real money rather than a technicality.
Most of the deletion clauses reach both of the main bases: the gross profit item and the annual revenue item. Those are the two ways a business pack usually insures lost trading income, and they are what most businesses have. But not all of them do. At least one wording puts its deletion inside the gross profit part of the section only, which leaves an annual revenue sum insured on that same policy fully exposed to the underinsurance clause sitting a few pages away.
Past those two items the wordings diverge again. A couple reach loss of rent receivable as well, so a landlord's rental income gets the same protection. Most name gross profit and annual revenue only, and every one of those still insures rent receivable somewhere in the same section without extending the deletion to it. So the common position is that part of your income cover is protected from the clause and part of it is not, on one policy, and you cannot tell which from a schedule. It is in the wording.
And there is one wording on the panel that carries no business interruption underinsurance clause at all, so there is nothing there to delete and nothing to qualify for. A policy with no clause is not a policy with a defect. It is a structurally different answer to the same question, and if that is what you hold, this entire article is academic for you. Which is, in itself, worth knowing.
What does this mean for your own policy?
The honest position is that you cannot answer this from your schedule. A schedule shows your sums insured; it does not show how they were arrived at, whether an approved calculator produced them, whether the workings were kept, or whether the exercise has been repeated since. Those answers live in the file behind the policy, and in the wording itself.
So the useful questions are these, and they are worth putting to whoever arranges your cover, in writing, before your next renewal.
- Does my wording contain a business interruption underinsurance deletion at all? Some do, one carries no BI underinsurance clause in the first place, and the answer changes if you change insurer.
- If it does, what does it cover? Do not assume it reaches everything the section insures. Ask item by item: gross profit, annual revenue, and loss of rent receivable. At least one wording protects gross profit only, and most leave rent receivable outside the deletion while still insuring it.
- Were the conditions actually met, and are the workings on file? An approved calculator, GST exclusive figures from the BAS, the result adopted as the sum insured, the calculation kept.
- Does my wording require it to be redone annually? If it does, a qualifying calculation from three renewals ago is not protecting you today.
None of that is exotic. It is four questions about a clause that already exists in your policy, and the answers are either on your file or they are not. If they are not, that is not a disaster, because the underinsurance clause is survivable and its maths is set out in The Co-Insurance Clause: What Every Building Owner Must Know. But knowing which of the two positions you are in beats finding out during a claim, which is when this clause is otherwise introduced to people.
What a broker does here, and what we do not
Before you hand any of this over, you should know where a broker actually fits. Consolidated Insurance Brokers does not complete business interruption calculators at renewal. The calculator is the insurer's tool, and the figures that feed it are yours, out of your own BAS and your own accounts.
What you cannot do from a schedule is the part worth handing over. Your wording gets read properly, so you know whether the deletion exists on your policy and exactly which items it reaches. Your file gets checked against the conditions rather than assumed to meet them. And where another insurer's wording would serve you better on this point, finding it is what a market search at renewal is for. If the answers are not there, you hear it before your renewal rather than from an assessor after a fire.
Have us read your business interruption wording and tell you where you stand
Frequently asked questions
Does every business pack delete the underinsurance clause if you use a calculator?
No, and the differences matter. Most of the business pack wordings we place carry a deletion of this kind, one carries no business interruption underinsurance clause at all so there is nothing to delete, and the conditions attached vary between wordings. Some require the calculation within two months of renewal, some require it to be redone every year, and some say neither. Your own wording is the only place the answer lives.
Does the deletion apply to loss of rent as well as gross profit?
Usually not. Most of the deletion clauses we read name the gross profit and annual revenue items only, while the same section goes on to insure rent receivable separately, so rental income is commonly left subject to the underinsurance clause. A couple of wordings do reach it. If rental income is a material part of what you are insuring, ask the question specifically rather than assuming it travels with the rest of the cover.
What happens if I use a calculator but then insure for a lower figure?
On about half the wordings, the deletion plainly does not apply. Those ones say directly that the outputs of the calculation must be adopted as the sum insured, so a calculation producing one number followed by a policy carrying a smaller one fails the condition outright, the underinsurance clause stays live, and it is applied to the figure you actually chose. The remaining wordings are drafted more loosely, asking only that the Business Activity Statement figures used match the calculation. That is a weaker test on its face, and not one worth relying on. Insure for the figure the calculation produced.
Is a business interruption calculator the same as getting advice on my sum insured?
No, and the wordings say so themselves. One defines its calculator as a tool whose results "should be taken as a guide only", not something to rely on as the sole basis for an insurance decision, and another states that the insurer does not guarantee the calculator's accuracy for a particular business. The calculator is a disciplined method for producing a number the insurer has agreed not to apply its underinsurance clause to. Deciding whether that number is right for how your business would actually recover is a separate conversation, and it is the one worth having.
Related reading
- Business Interruption Insurance, Explained Properly: what the cover pays for, why the gross profit figure is not your accountant's, and why the indemnity period matters more than the sum insured.
- The Co-Insurance Clause: What Every Building Owner Must Know: the underinsurance maths this page deliberately does not repeat, plus the property-side version of the same escape.
- Business interruption insurance: the product page and the buying decision.
- Business insurance: the business pack these clauses live inside.