Business Interruption & Loss of Profits Insurance

No Property Damage — No BI Indemnity

Business interruption insurance does not operate in isolation. The policy requires a qualifying property damage event — typically covered under a fire, material damage or machinery breakdown policy — before any BI indemnity is triggered. This is the Material Damage Proviso. The BI policy then responds to the financial consequences of that physical event: the period during which the business cannot operate at its pre-loss capacity.

Gross Profit Basis vs Revenue Basis

The definition of the sum insured in a BI policy determines how the indemnity is calculated — and how much premium is payable.

Gross Profit Basis — Standard Approach

The gross profit basis is the international standard and is used in most Turkish and London market wordings. The sum insured is defined as:

Fixed costs — salaries, rent, depreciation, loan interest — and net profit remain covered because they are the costs the business still faces even when revenue falls. Variable costs are excluded because, if goods are not manufactured or sold, those purchases are never made. This produces a more accurate sum insured and a lower premium.

Revenue Basis (Turnover Basis)

Under a revenue basis the entire turnover is insured including variable costs. This is sometimes used by service businesses where variable costs are very low. For manufacturing and trading businesses it typically results in over-insurance: the premium is inflated and the indemnity overpays variable costs that were never actually incurred.

Which Basis to Choose?

Manufacturers and businesses with material variable costs should almost always use the gross profit basis. For service businesses with negligible variable costs the two bases converge; the correct basis is confirmed by working through the calculation with the insurer's proposal form.

Maximum Indemnity Period

The indemnity period is the span of time following the damage during which the business remains entitled to indemnity — from the date of damage until the business returns to its pre-loss trading position, subject to the maximum period selected on the policy.

Factors Affecting the Required Indemnity Period

Deductible (Waiting) Period

The waiting period is the initial days of interruption that the insured retains — the BI policy only responds after this period has expired. Revenue lost during the waiting period is not covered.

• Common options: 3, 7, 14 or 30 days
• Shorter waiting period = higher premium; longer waiting period = lower premium
• For businesses with sufficient working capital to absorb a brief interruption, a 14–30 day period offers a cost-effective balance
• For critical production facilities where any stoppage is severe, a 0 or 3-day waiting period is appropriate
• Waiting period for utility failure extensions is usually longer (24–72 hours)

Increased Cost of Working (ICOW)

ICOW is one of the most commercially valuable elements of a BI policy. It covers the reasonable and necessary extra expenditure incurred by the insured to avoid or reduce the interruption to the business — expenditure that would not have been incurred but for the damage.

Typical ICOW expenditure includes:

• Renting temporary production premises or office space
• Outsourcing production to a third-party manufacturer or subcontractor
• Hiring alternative equipment to replace damaged machinery during repair
• Overtime, accelerated repair and expediting costs to shorten the recovery period
• Additional logistics, freight and distribution costs to maintain customer supply

Contingent Business Interruption (CBI)

A standard BI policy responds only to physical damage at the insured's own premises. But if your sole-source supplier's factory burns down, or your largest customer suspends operations, your revenue is just as exposed. Contingent BI extends the policy to cover these indirect interruptions.

Types of Contingent BI

• Supplier Contingency: Damage at a supplier's premises preventing delivery of goods or services your business depends on to operate
• Customer Contingency: Damage at a key customer's premises preventing them from accepting your goods or services
• Leader Contingency: Damage at a major retail or anchor tenant whose presence drives traffic to your facility

The wording distinction between named (specific named suppliers) and unnamed (any supplier/customer within the scope) contingent BI is critical. Named CBI provides broader cover for the listed parties; unnamed CBI typically carries a sub-limit and a stricter loss trigger. Both require careful schedule maintenance.

Utility Failure (Service Interruption) Coverage

A failure in the public electricity grid, gas network, water supply or telecommunications infrastructure can halt operations entirely — without any physical damage to your premises. Standard BI policies do not respond to this scenario because there is no property damage at your location. A utility failure (or service interruption) extension covers revenue loss arising from interruption to specified utility services.

• Check whether the extension covers "off-premises" infrastructure failures or only damage to on-site infrastructure
• Distinguish between distribution company outages and damage to your private connection or sub-station
• A minimum interruption period (typically 24–72 hours) usually applies before the extension responds
• Sub-limits and specific utility exclusions should be reviewed carefully

How the BI Indemnity is Calculated

The indemnity is the difference between the turnover (or gross profit) the business would have achieved had the damage not occurred and what it actually achieved during the indemnity period. The insurer constructs the counterfactual using pre-loss financial accounts, budget projections and sector trend data.

The quality and completeness of the insured's financial records is critical to a timely and fair settlement. Businesses with clear management accounts, revenue segmentation and documented fixed-versus-variable cost analysis are consistently better served at the claims stage.

Information Required to Place BI Cover

Insurers require the following to price and structure a business interruption policy. Accurate and complete information consistently produces more competitive terms:

• Three years of audited profit and loss accounts with turnover, gross profit and cost breakdown
• Projected turnover and gross profit for the current year
• Monthly revenue profile (seasonality analysis)
• Named key suppliers — percentage of purchases from each
• Named key customers — percentage of turnover from top five
• Whether production or sales could be partially maintained at an alternative location
• Existing business continuity plan (BCP) and date of last test
• Current property/machinery damage insurer and policy reference

Business Interruption — FAQ

Other Commercial Insurance Solutions