What Brokers Need to Know About Business Interruption Insurance

Business interruption insurance is one of the most commonly placed commercial covers and one of the most consistently understructured. According to the Chartered Institute of Loss Adjusters, 43% of business interruption claims reviewed are underinsured by an average of 53%. In practical terms, nearly half of commercial clients who make a BI claim discover their cover falls significantly short of their actual loss, and they discover it at the worst possible time.

The problem is rarely the policy. It is almost always the placement. The indemnity period was chosen to minimise the premium. The sum insured was calculated on the wrong gross profit figure. The renewal came and went without anyone asking whether either was still appropriate.

Understanding where business interruption placements go wrong, and what brokers can do to prevent it, is one of the most valuable things a commercial lines broker can offer their clients.

What Business Interruption Insurance Covers

Business interruption insurance, also referred to as loss of profit insurance, covers the income a business loses when it cannot operate normally following an insured event. It does not cover the physical damage itself. That is what commercial property insurance is for. Business interruption insurance covers what comes after the physical damage, the period during which the business cannot function and the financial consequences of that.

Cover under a standard business interruption policy generally includes three elements.

Lost revenue
The income the business would have earned during the period it could not operate. This is calculated based on the business’s trading history and a projection of what it would likely have earned had the interruption not occurred.

Fixed ongoing expenses
Certain costs continue even when a business is closed. Rent, employee salaries, insurance premiums, and loan repayments do not stop because the business cannot trade. Business interruption insurance covers these expenses during the indemnity period, which is the primary reason the sum insured basis matters so much.

Additional costs of working
Many policies cover reasonable additional costs a business incurs to continue operating at a reduced capacity or from a temporary location while the primary premises are being restored. Cover applies to the extent that these additional costs do not exceed the loss in gross profit being avoided. The policy will not pay more to save a rand than it would have paid to replace it.

The Indemnity Period — Where Most Placements Fall Short

Businesses commonly choose short indemnity periods, six or twelve months, without considering realistic recovery timelines. Recovery is rarely predictable.

The indemnity period is the maximum time the insurer will pay out following a loss. It runs from the date of the insured event to the point at which the business returns to its pre-loss trading position, up to the maximum specified in the policy. If a client chooses a twelve-month indemnity period and reinstatement takes eighteen months, the business carries the final six months of loss from its own reserves.

Several factors routinely extend recovery beyond the most optimistic estimate.

Building reinstatement involves regulatory approvals, plan submissions, contractor availability, and construction timelines that consistently take longer than anticipated. Specialist or imported equipment can carry lead times of several months. Investigations by the insurer, involvement of labour or government bodies following casualties, and legal processes can add further months. Customer recovery, the time it takes to rebuild the client base that went elsewhere during the closure, is often not accounted for at all.

For complex businesses, 18 to 24 months is a prudent default indemnity period. For a business operating from a straightforward commercial premises with standard equipment, twelve months may be adequate. For a manufacturer relying on imported specialist machinery, a hospitality business with a purpose-built commercial kitchen, or a professional practice occupying a multi-storey building, twelve months is rarely sufficient.

Brokers should be asking specifically: how long would it realistically take this client’s business to return to its pre-loss trading position in a worst-case scenario? The indemnity period should reflect the honest answer to that question, not the most affordable option.

Insurance Gross Profit vs Accounting Gross Profit

This is the distinction that creates the most significant underinsurance in business interruption claims and the one most frequently misunderstood at placement.

The sum insured on a business interruption policy must be calculated on the basis of insurance gross profit, not accounting gross profit. Financial gross profit takes account of various direct manufacturing costs including wages, factory overheads, water and electricity, and similar variable expenses. Insurance gross profit takes account of only the uninsured costs as chosen by the client, typically purchases, bad debts, and discounts received and allowed.

Because insurance gross profit excludes only the costs that would genuinely cease if the business were not operating, it retains the fixed costs, wages, overheads and rent, that the policy needs to be able to cover during the indemnity period. The insurance gross profit figure is therefore higher than the accounting gross profit figure, and using the accounting figure to set the sum insured almost always results in the business being underinsured.

When average is applied at claim time to an underinsured BI policy, the insurer pays only the proportionate share of the loss. A client insured for half their actual insurance gross profit receives, at best, half their actual claim settlement.

There is a further complication that is less commonly addressed. The sum insured should be based on projected figures reflecting anticipated financial results, not the previous financial year’s accounts. Using last year’s turnover without accounting for growth, inflation, or planned changes to the business’s operations may result in even a correctly calculated insurance gross profit figure falling short of what the business was actually generating at the time of the loss.

For brokers, this means the BI sum insured conversation at renewal is not simply a matter of confirming the previous year’s figure. It requires understanding the client’s financial trajectory and ensuring the declared figure reflects where the business is heading, not where it has been.

What Business Interruption Insurance Does Not Cover

Understanding the limits of the cover is as important as understanding what the policy includes, particularly when clients make assumptions about what will be paid.

Interruptions not caused by an insured event
Business interruption insurance follows the commercial property policy. If the cause of the interruption is not covered under the property policy, the BI claim will not be paid. A pandemic, a supplier failure, or a loss of power from the public grid are not covered under a standard business interruption policy. The COVID-19 litigation that generated significant legal proceedings across the market confirmed this position for most standard policy wordings.

Losses outside the indemnity period
Once the indemnity period ends, cover stops regardless of whether the business has fully recovered. The client carries any remaining loss from their own resources.

Businesses without a trading history
Calculating a BI claim requires a trading history against which to measure the loss. New businesses or those with limited financial records face challenges at claims assessment.

Losses where the link to property damage cannot be established
BI cover is contingent on an underlying property damage claim. Where the cause of the income loss cannot be directly connected to a covered property damage event, the BI policy will not respond.

A Hypothetical Scenario Worth Considering

A retail business takes out commercial property and business interruption cover at inception. The indemnity period is twelve months, chosen to keep the premium manageable. The sum insured is based on the previous year’s net profit figure, which the client supplied without clarification that insurance gross profit was required.

A fire destroys the premises. Reinstatement takes fifteen months. During the claim, the insurer’s loss adjuster calculates the insurance gross profit and finds the declared figure is significantly lower. Average is applied. The claim settlement is reduced proportionally to reflect the underinsured sum. The indemnity period ends at twelve months. The business carries three months of unrecovered loss at the point when it is least able to.

The broker had placed the cover in good faith. The problem was not bad intent. It was a placement conversation that did not go deep enough.

A BI review that asked the right questions at inception, what is your insurance gross profit, what would a realistic worst-case recovery look like, what are your projected figures for the coming year, would have produced a meaningfully different outcome.

What a Thorough BI Review Looks Like

For brokers managing commercial books, the business interruption review is one of the most consequential conversations at renewal. Not confirming what is already on the policy, but genuinely working through whether the placement is still fit for purpose.

At renewal, the following questions are worth asking specifically. Has the client’s turnover changed materially since the policy was last reviewed? Are the insured values still based on insurance gross profit rather than accounting gross profit? Have there been any changes to the business’s premises, equipment, or operations that would affect the recovery timeline? Does the indemnity period genuinely reflect how long it would take this specific business to return to its pre-loss position?

Documenting these conversations matters. A broker who can demonstrate that the BI placement was reviewed thoroughly, that the indemnity period was discussed specifically, and that the sum insured was calculated on the correct basis is in a substantially different position if a claim is later disputed.

In our experience, the BI placements that generate the most difficult conversations at claims time are the ones where the renewal was processed without those conversations having been had. The cover was technically in place. It simply was not set up to do what the client needed it to do.

If you have commercial clients whose business interruption cover has not been thoroughly reviewed recently, Polico Africa works with brokers to ensure commercial insurance is administered correctly throughout the policy period. Call us on +27 11 482 9288 or contact us here.