PROForensics is uniquely qualified in Ireland to offer expert financial advice in the management and settlement of Business Interruption Insurance claims given that we have multiple professional qualifications and work experience in both the accounting and insurance disciplines.
What is Business Interruption Insurance?
Business Interruption Insurance, also known as ‘loss of profits insurance’ and ‘consequential loss insurance’, aims to protect a business for the interruption and loss caused as a result of an insured peril such as fire or flood.
For the Property Damage element of the claim, this is a relatively straight forward calculation. The insured is indemnified by the amount that will enable them to put themselves back to the situation that they were in before the insured peril took place. In effect this means putting the buildings and contents back to pre-loss condition subject to the terms and conditions of the insurance policy.
For the Business Interruption element of the claim, this is a more complex calculation. The principle remains that the insured is indemnified for the loss suffered to the business as a result of the insured peril. However there are many different factors that determine what exactly is covered. You need to be aware of these factors, understand their relevance to the terms and conditions of the insurance policy in place at the time of the incident and calculate their financial effect in the Business Interruption calculation.
Calculation of a Business Interruption Insurance Claim:
The basic undertaking in a Business Interruption Insurance policy is to pay the insured the shortfall in gross profit following a loss at the insured’s premises. The steps involved in the calculation can be summarised as follows:
1. Calculate the rate of gross profit
- This is the ratio of gross profit to turnover expressed as a percentage
- It should be referenced to the most recent financial statements and management account
2. Calculate the reduction in turnover during the indemnity period
- This is the reduction in turnover resulting from the insured peril.
- It is limited to the period of indemnity specified in the policy, which is usually with 12 months or 24 months.
- The reduction in turnover should be referenced to the most recent financial statements and management account.
3. Apply the rate of gross profit to the reduction in turnover, which will give the loss of gross profit
- This is the GP% as calculated in 1 multiplied by the reduction in turnover calculated in 2.
4. Add any increase in cost of working
- This is expenditure required in the short term to ensure recovery of the trading position in the long run.
- Examples of this includes plant hire, advertising, hire of temporary staff.
5. Deduct any savings
- This is the savings resulting from charges or expenses which cease to be payable during the indemnity period as a result of the reduction in turnover.
- Examples of this are savings in payroll, light & heat, postage etc.
6. Test for underinsurance (average)
- The insured must adequately insure the level of gross profit specified for the indemnity period.
- Therefore if the sum insured is not adequate, it follows that the amount payable must be proportionately reduced.
- Most insurers will not apply average if the sum insured is within a very close % of what it should have been. The industry norm is that average will not apply if the sum insured is within 85% of what it should have been.
