Do You Have Insurance Cover for Business Interruption and Loss of Profits?

An interruption to your business following a disaster such as fire, flooding or theft can be devastating, unless you’re insured against it. Unfortunately, many businesses assume they have Business Interruption cover and only discover their mistake when they come to make an insurance claim.

A Business Insurance policy covers the losses a company experiences when it’s unable to function for a pre-determined amount of time. There are many circumstances, however, in which the insurer’s loss adjuster may refuse your claim wholly or partially. This could be because the defined period wasn’t long enough for your company to get back on its feet, or it could be because you’ve underestimated your normal profits.

Gross Profit Insurance is one type of Business Interruption policy, in which the aim is to restore the company to the level it would have been if the disaster hadn’t happened. However, many companies seem confused about exactly what their gross profits are.

What Are Gross Profits?

If you ask an accountant to calculate your company’s gross profits, they’ll simply take the costs involved in producing goods sold from the total sales revenue. This is fine for accounting purposes, but unfortunately it’s not the way it’s calculated when you’re making an insurance claim for Business Interruption insurance.

The calculation the loss adjuster expects you to make involves two complex figures. One is defined as the sum of the turnover, the value of the closing stock and any work in progress. The other is the sum of the value of the opening stock and work in progress and any uninsured working expenses, such as wage roll, purchases or bad debts. Gross profit is the amount by which the first exceeds the second.

In 2016/17, the Chartered Institute of Loss Adjusters calculated that nearly 45% of Business Interruption policies were inadequate, the average shortfall being more than 40%. If your business is in this position, you could find yourself in a desperate position if you suffer a disaster.

Allied Claims would strongly advise all companies not only to have Business Interruption insurance in place, but also to make sure they’re fully covered for the recovery time and loss of profits required.