What this calculator does
Business interruption cover replaces the profit a business would have made had it not been stopped, and it is underinsured more often than almost any other class. Two mistakes account for most of it: using the gross profit from the accounts rather than the insurance definition, and choosing an indemnity period that is shorter than a real recovery takes.
The insurance definition is turnover less only the costs that genuinely stop when trading stops. Rent, most salaries, insurance and finance costs carry on whether or not the doors are open, so they belong inside the insured figure rather than outside it. That makes the insurable gross profit considerably larger than the accounting one.
The formula
Insurable gross profit is turnover minus the variable costs that would cease. Multiply by the indemnity period in years, then add an allowance for growth, because the sum insured has to cover the business you will have during the claim rather than the one you have now. A policy written today may be claimed on eleven months later and then run for its full indemnity period after that.
| Term | Meaning |
|---|---|
| Insurable gross profit | Turnover less only the costs that stop. Not the gross profit line in your accounts. |
| Variable costs | Purchases, freight, packaging, commissions. Costs that fall away with turnover. |
| Indemnity period | How long the policy will pay for. Chosen by you, and the most common thing to get wrong. |
| Gross profit rate | Insurable gross profit as a share of turnover. Usually much higher than the accounting gross margin. |
The inputs explained
| Field | What to enter |
|---|---|
| Annual turnover ($) | Annual turnover, estimated forward rather than taken from last year if the business is growing. |
| Variable costs that would stop ($) | Only the costs that would genuinely stop. Be strict: payroll, rent and finance costs usually continue and should not be deducted. |
| Indemnity period (months) | Indemnity period. Think about how long a full recovery would really take, including rebuilding, re-fitting, restocking and winning customers back. |
| Growth allowance over that period (%) | Expected growth across the period the cover must run, since the claim is settled on what the business would have earned. |
When to use it
Choosing an indemnity period honestly
Twelve months is the default and is frequently too short. Rebuilding premises alone can take that long before trading restarts, and customers do not all return on the first day. The twenty-four month figure is shown alongside for comparison.
Testing what the variable cost definition does
Move the variable costs and watch the sum insured. Treating payroll as variable when it would actually continue cuts the insurable gross profit substantially and leaves a gap exactly when it is needed.
Allowing for growth
A policy written now may be claimed against late in the period and then run for its full indemnity term, so the cover may need to carry a business two or three years larger than today's.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much does the indemnity period change the cover?
Only the indemnity period changes.
| Indemnity period | Sum insured | Gross profit at risk per month |
|---|---|---|
| 3 months | $210,000.00 | $66,666.67 |
| 6 months | $420,000.00 | $66,666.67 |
| 12 months | $840,000.00 | $66,666.67 |
| 18 months | $1,260,000.00 | $66,666.67 |
| 24 months | $1,680,000.00 | $66,666.67 |
What counts as a variable cost?
Only the costs treated as ceasing change.
| Variable costs | Sum insured | Insurable gross profit | Gross profit rate |
|---|---|---|---|
| $600k | $1,470,000.00 | $1,400,000.00 | 70.0% |
| $900k | $1,155,000.00 | $1,100,000.00 | 55.0% |
| $1200k | $840,000.00 | $800,000.00 | 40.0% |
| $1500k | $525,000.00 | $500,000.00 | 25.0% |
| $1800k | $210,000.00 | $200,000.00 | 10.0% |
Questions
Why is insurable gross profit higher than accounting gross profit?
Because the accounts deduct costs that would continue during a shutdown, such as production wages and premises costs. For insurance you deduct only the costs that actually stop, which leaves a bigger figure to protect.
How long should the indemnity period be?
Long enough to cover rebuilding, re-fitting, restocking and recovering trade, which for most businesses is longer than twelve months. Underinsurance here is not about the sum but about the period, and it cannot be fixed at claim time.
Should payroll be insured?
Usually yes for key staff you would need to retain, and policies handle it in different ways. Deducting all payroll as a variable cost is a common and expensive error.
Does this cover loss of profit from a supplier failing?
Only if the policy has been extended to cover it. Standard business interruption responds to damage at your own premises, and supplier, customer and utility extensions are bought separately.
Is the sum insured subject to average?
Commonly yes, so underinsurance reduces the claim proportionally rather than just capping it. The coinsurance penalty page shows the effect.
For how underinsurance is penalised at claim time, see coinsurance penalty. For the property side of the same risk there is rebuild cost sum insured, and break-even analysis covers the trading side.