Business interruption: insuring the income, not the building

Rebuilding after a fire takes months, and for most of those months the business earns nothing while still paying salaries, rent and interest. Business interruption cover is what bridges that: it pays the profit you would have made and the fixed costs you cannot avoid. Property cover puts the building back; this is the part that keeps the company alive while it happens, and it is routinely underbought because the figures behind it are harder to work out than a rebuild cost.

What business interruption cover pays

• Lost gross profit for the period you cannot trade normally, calculated to a formula in the policy rather than to your accounts.
• Continuing fixed costs — wages, rent, finance — that carry on regardless of revenue.
• Increased cost of working: temporary premises, overtime, expedited deliveries that reduce the overall loss.
• Usually not loss caused by a supplier's or customer's own interruption, unless that extension was bought specifically.
• Nothing at all unless the cause is an insured peril under the linked property policy — this is cover that attaches to damage.

The indemnity period is the number that matters

It is the maximum length of time the policy will pay, and the standard twelve months is wrong for most businesses. Twelve months assumes you are trading normally a year after the loss, which ignores the sequence: insurer assessment, planning permission, rebuilding, refitting, and then the slow return of customers who went elsewhere in the meantime. Specialist premises or long lead-time equipment make eighteen or twenty-four months the realistic figure, and the extra premium for the longer period is small compared with discovering that payments stopped while the business was still half recovered.

The sum insured is gross profit as the policy defines it, which is not the gross profit in your accounts. Insurance definitions typically mean turnover less only genuinely variable costs, so using the accounting figure understates it badly — and underinsurance here reduces the payout proportionally, exactly as it does on the building.

Calculating the figure

1. Start from projected turnover for the indemnity period, not last year's actual, because the cover has to reflect where the business is heading.
2. Deduct only truly variable costs, then check the definition in the wording rather than assuming your accountant's version matches.
3. Scale the result to the full indemnity period — a twenty-four month period needs roughly two years of gross profit, which surprises people.
4. Add payroll if the wording treats it separately, since some policies insure wages under their own item.
5. Recalculate at every renewal, because a growing business is underinsured by default within two years.

Where claims fall short

Three places, consistently. The indemnity period runs out before trading recovers. The sum insured was based on the accounting definition of gross profit and is therefore too low. Or there is no documentation of what the business was earning before the loss, which turns the claim into an argument — the records that prove pre-loss performance are ordinary management accounts, and they are far harder to assemble after the premises have burned down than before.

Ettex Sheets is enough to hold the working: turnover, variable costs, the resulting insurable figure and the period it covers, recalculated each renewal rather than copied forward. Keeping that calculation beside the policy makes the annual renewal a check rather than a repeat of last year's number.