A business interruption claim is worked out differently from a property claim. Damaged buildings and stock are measured in repair quotes and invoices. The interruption loss is measured in accounts: what the business earned after the damage, compared with what it would have earned without it. Understanding the method before you need it makes the claim faster and less contested. Our page on business interruption insurance explains the cover itself; this post follows a claim from the damage to the final payment.
The Material Damage Proviso
Business interruption cover generally responds only when the interruption follows physical loss or damage of a kind insured under a property policy. This is known as the material damage proviso. If a fire damages your premises and the property policy responds, the interruption claim can proceed. If the cause of the damage is excluded under the property policy, the interruption claim will usually fail with it.
That is why property and interruption cover should be arranged together and read together. Some wordings modify the proviso in particular situations, and extensions can widen the trigger beyond your own premises:
- damage at a customer’s or supplier’s premises;
- damage nearby that prevents access to your premises;
- failure of public utilities such as power or water, where the wording includes it.
These extensions commonly carry their own sublimits and conditions. Check them before you rely on them.
Loss of Gross Profit
The core of the claim is the loss of gross profit, and the calculation follows a pattern:
- Standard turnover. What the business turned over in the equivalent period before the damage, usually the same months in the previous year.
- Adjustments for trends. Standard turnover is adjusted for growth or decline, seasonal patterns and known changes, so it reflects what would have happened without the damage.
- Reduction in turnover. The shortfall between that adjusted figure and what the business actually turned over during the indemnity period.
- Rate of gross profit. The shortfall is multiplied by the proportion of turnover that represents insured gross profit.
- Savings. Costs that stop because of the interruption, such as reduced purchases or cancelled services, are deducted.
“Gross profit” in an insurance policy does not always mean the figure in your accounts. It is typically turnover less the costs the policy lists as uninsured working expenses, usually costs that rise and fall with sales, such as purchases. Your accountant and your broker should agree the definition at the time the cover is set up, not after the loss.
Some policies are written on a revenue basis instead, measuring the loss of revenue less savings. The method differs, but the principle is the same.
If the sum insured was set too low for the gross profit the business was actually earning, an underinsurance provision may reduce the claim. Our guide to underinsurance and co-insurance explains how that works.
Increased Cost of Working
After damage, businesses spend money to keep trading or to recover faster: temporary premises, hired equipment, overtime, outsourcing production, extra freight, or advertising to tell customers you are still open.
Under standard wording, increased cost of working is typically payable to the extent it avoids a loss of gross profit that would otherwise have been claimed. This is often called the economic limit. Spending more than the loss it prevents is not normally recoverable under that section.
Additional increased cost of working cover can pay beyond that limit, up to its own sum insured. It suits businesses that must keep serving customers whatever the cost, because losing them would cost more in the long run. Where possible, agree significant spending with the insurer or loss adjuster before committing to it.
Documents to Keep
A business interruption claim is only as strong as the records behind it. Keep these, and keep copies off site or in the cloud:
- Profit and loss statements for several prior years, monthly if you have them.
- Business activity statements and sales records by period.
- Budgets and forecasts prepared before the damage.
- Payroll records, including staff stood down or redeployed.
- Invoices for every extra cost incurred because of the damage.
- Records of costs saved, such as cancelled contracts and reduced purchases.
- Correspondence with customers about cancelled or lost orders.
Loss Adjusters and Forensic Accountants
For larger claims, the insurer usually appoints a loss adjuster to investigate and assess the claim. On business interruption, the adjuster may bring in a forensic accountant to test the calculation, the trends and the savings. Both are appointed by the insurer.
Your side of the table needs its own numbers. Your accountant knows the business and can prepare and support the claim, and some policies include a claims preparation costs extension that pays reasonable professional fees for doing so, up to a limit. Your broker coordinates, pushes for decisions and keeps the claim moving; our article on what a broker does during a claim explains that role. For the overall steps, see how the claims process works.
Interim Payments
Business interruption claims can run for months, because the loss is measured over the indemnity period. Policies commonly allow interim or progress payments as the loss is established, so the business is not left waiting until the end.
Interim payments depend on evidence. Provide monthly figures promptly, show the extra costs as they are incurred, and keep a running summary of the claim. The faster the insurer can see the loss, the faster money can move.
Making a Business Interruption Claim Run Smoothly
- Notify the insurer as soon as the damage occurs, even before you know the size of the interruption.
- Take steps to reduce the loss, and record what you did.
- Bring your accountant in early.
- Agree the basis of the standard turnover and the trend adjustments early.
- Get agreement before large extra spending where possible.
- Keep every invoice, payslip and customer email connected to the loss.
If you are reviewing cover rather than making a claim, our article on why businesses get interruption cover sets out the case for it, and our business interruption page explains how we arrange it.
Common Questions
Will business interruption pay if my supplier’s factory burns down?
Only if your policy has a suppliers’ extension, the damage is of a kind the extension includes, and the sublimit is enough. Check the wording.
My business was growing before the fire. Will the claim reflect that?
Trend adjustments are designed to allow for it. Bring the evidence: budgets, forecasts, new contracts and the monthly figures leading up to the damage.
Who pays my accountant to prepare the claim?
A claims preparation costs extension may, up to a limit. Without it, those fees are generally yours.
Talk It Through
Request a quote or call 1300 983 940 and we will review how your business interruption cover would be calculated before you ever need to claim.
General advice only. This article does not take your objectives, financial situation or needs into account. Consider the relevant PDS and Target Market Determination before deciding on a policy.