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A beginners Guide to Business interruption Insurance

One of the most important insurance cover for any business is that of loss of profit. Business interruption insurance covers the loss to gross profit. Theoretically speaking, this loss can be calculated in terms of the reduction in turn over and increased cost of working. But, intangible aspects of the business might make complicate things a bit.

To begin with, it is worth noting that property damage insurance and business interruption insurance are generally included in one insurance policy. The later is triggered by physical damage to insured property. The maximum period of indemnity and the insured gross profit will have to be agreed at the time of inception only.

How to calculate reduction in turnover?

For calculating the reduction in turnover, subtract the turnover during the period of interruption from the turnover achieved last year during the same time period.

This is particularly true for the manufacturing business. When there is a reduction in the turnover, the cost of the business also a decline. For instance, the cost of material, packaging and freight all go down. To accommodate these reduced costs, the rate of gross profit is then multiplied by the reduction in the turnover.

What is rate of gross profit? It is the percentage of the business turnover, which was the gross profit in the last finical year.  Taking the sum total of the reduction in turnover and the rate of gross profit will give you the value of claim.

But, as simple as it sounds, there are a number of broad adjustments clauses included in the definitions of the standard turnover that play an important role in determining the claim value.

How to calculate the rate of gross profit?

The simple formula for calculating the gross profit is (based on the previous year stats):

[Turnover x closing stock] – [uninsured working costs x opening stock] = Gross Profit

It is important to calculate the gross profit and the rate of gross profit because it is going to have a huge bearing on the insurance outcome. Insurance brokers in Melbourne will work this out for you. There are some policies that will list the uninsured working costs, but the other might not do that. In general uninsured working costs are referred to the costs are directly proportionate to the turnover. For instance, if business operation comes to standstill, there will be no packaging costs too.

The real problem arises when the uninsured working costs are not clearly listed. What has to be considered and what has to be left out, has to be carefully seen through. It becomes tricky for even the most experienced insurance consultants when there are huge changes in the working costs over the last year. For instance, if the costs of the goods have increased significantly over the past one year, so much so that it makes the rate of gross profit drop down drastically, there is every possibility that the ultimate claim response goes lower. In case, the cost of the goods sold has reduced, who knows the same rate of gross profit might increase manifold.

The business interruption insurance cover seems to be a tad bit more complicated than other insurance covers; therefore, it is advisable to seek expert advice on Industrial special risks insurance before making any claims.