How is business interruption insurance calculated? In most Australian wordings the claim is the gross profit you lose because turnover falls after insured damage, plus the extra costs you reasonably spend to keep trading, less any insured costs that stop while you are closed. Gross profit here is an insurance definition, usually turnover less the costs that fall away with sales, such as stock purchases. The sum insured and the indemnity period limit the result, and a sum insured set too low reduces it.
Insurable gross profit is not the figure in your accounts
business.gov.au describes business interruption insurance as cover that pays your ongoing business costs if an insured event, such as a fire damaging your business property, interrupts your business. The policy measures that through gross profit, but it uses its own definition.
A common Australian definition starts with turnover, adjusts for the change in stock and work in progress, and then subtracts only the uninsured working expenses listed in the schedule. Those are the costs that fall away when sales stop, typically purchases of stock and materials, and sometimes freight, packaging or discounts. Everything else stays in: rent, salaries, loan repayments, insurance, advertising and net profit.
That is why insurable gross profit is usually higher than the gross profit line your accountant prepares. An accountant often deducts wages and other direct costs that a business interruption wording treats as continuing. If you set the sum insured from the accounting figure, you can be underinsured before anything goes wrong. Check how your own policy treats wages, since some wordings include them in gross profit and others insure them as a separate item with its own limit.
How is business interruption insurance calculated, step by step
Most wordings build the claim in three parts.
- Reduction in turnover. The turnover you would have earned is compared with what you actually earned during the indemnity period. The benchmark is usually the turnover for the matching months before the damage, adjusted for trends and circumstances that would have changed it anyway. The shortfall is multiplied by your rate of gross profit, which is gross profit as a percentage of turnover.
- Increased cost of working. Extra spending to keep trading and reduce the loss, such as temporary premises, hired equipment, overtime or outsourcing. It is commonly capped at the gross profit that spending saved. Some policies add a separate limit for extra costs above that cap.
- Savings. Insured costs that stop while you are closed, such as a cleaning contract you suspend, are deducted.
The result is limited by the sum insured and by the indemnity period, the maximum time the insurer pays for. Choosing that period is a separate decision, covered in our article on how long the indemnity period should be.
A worked example with round numbers
The figures below are made up to show the arithmetic. They do not describe a real business or a real claim, and your own wording may calculate some steps differently.
| Step | Illustration |
|---|---|
| Turnover in the 12 months before the damage | $1,000,000 |
| Uninsured working expenses (stock purchases) | $400,000 |
| Insurable gross profit, and rate of gross profit | $600,000, so 60% |
| Turnover actually earned over a 12 month indemnity period | $300,000 |
| Loss of gross profit: $700,000 shortfall at 60% | $420,000 |
| Increased cost of working: temporary site and fit out | $50,000 |
| Less savings: cleaning and security contracts stopped | $10,000 |
| Claim before any underinsurance adjustment and excess | $460,000 |
The temporary site earned $200,000 of the turnover that would otherwise have been lost. At 60% that saved $120,000 of gross profit, so the full $50,000 spent to earn it sits within the usual cap.
Now assume the sum insured was $450,000 instead of the $600,000 the business needed. Many wordings reduce the claim in proportion to the shortfall: $450,000 divided by $600,000 is 75%, and 75% of $460,000 is $345,000. The business carries the other $115,000 itself. Our article on underinsurance and setting sums insured explains how that provision works across a policy.
What sets the sum insured and the premium
The sum insured is your estimate of insurable gross profit for the year ahead, scaled up when the indemnity period is longer than 12 months. A growing business should declare where it is heading, not where it was last year. Some policies are written on a declaration basis, where you declare an estimate at the start and adjust it once the actual figures are known.
Insurers set the premium from that sum insured and the indemnity period, along with your trade, your premises and your claims history. The same calculation logic applies whether the cover sits in a business pack or in a larger property policy.
Records the calculation depends on
Every number above has to be proved. The Insurance Council of Australia’s guidance on business interruption claims lists what insurers commonly ask for:
- BAS lodgements with ATO receipts for the last year, used to verify gross profit.
- Financial year profit and loss statements, including a detailed trading account.
- Quarterly, monthly and, where needed, weekly trading figures if you have them.
- Evidence of payroll costs, if the policy covers payroll.
- Your lease, any franchise agreement, and correspondence with the landlord about rent relief.
The same guidance says insurers may want figures for earlier years too, along with when and why the business closed and whether it could still trade at reduced capacity. The ATO requires most business records to be kept for five years and stored in a way that protects them from being damaged. A fire that triggers the claim can also destroy the paperwork, so keep copies off site or in cloud accounting software.
What FRS does
We rebuild your insurable gross profit from your accounts using the definition in your wording, test the sum insured against the indemnity period you hold, and flag where wages or other costs are treated differently from what you expect. After a loss, we work with you and your accountant on the figures the insurer needs and stay involved through the claims process.
To review your own settings, see our business interruption insurance page.
Frequently asked questions
Is business interruption calculated on revenue or on profit?
On gross profit as your policy defines it, not on revenue and not on net profit. The usual definition takes turnover and subtracts only the uninsured working expenses, such as stock purchases. Continuing costs like rent and salaries stay inside the figure, which is why the insurable amount is often higher than the gross profit in your accounts.
Are staff wages included in a business interruption claim?
It depends on the wording. Some policies include wages inside gross profit, so they are paid as part of the lost gross profit. Others insure wages as a separate item, sometimes with a shorter period or a lower limit. Check the schedule, because the way wages are treated changes the sum insured you need.
What happens if my business interruption sum insured is too low?
Many wordings reduce the claim in proportion. If the business needed $600,000 of cover and insured $450,000, an insurer applying that provision would pay 75% of the assessed loss. The shortfall stays with you. Review the figure at every renewal, especially after growth, a new site or a change in how you buy stock.
How is the claim worked out if sales were growing?
Most wordings let the benchmark turnover be adjusted for trends and circumstances that would have affected the business anyway. If sales were rising before the damage, the expected turnover is lifted to reflect that. You will need evidence, such as monthly trading figures, signed contracts or new customers already won, so keep those records current.
Questions about your own cover? Call 03 7046 3766 on weekdays between 9:30am and 6pm, or send us an enquiry.
