A business interruption claim can be accepted in principle and still become a substantial dispute over the numbers. The important issue is not simply which side has the larger spreadsheet. It is whether the calculation follows the policy wording and uses assumptions that can be supported by the evidence.

How is a business interruption claim calculated?

There is no single formula that safely applies to every business interruption policy. The starting point is the actual wording of the policy. Many UK gross-profit wordings, however, calculate loss by looking at the reduction in turnover during the relevant indemnity period, applying the policy's rate of gross profit, then dealing with insured increased costs and savings. CII material on UK gross-profit wordings describes standard turnover as the turnover in the corresponding pre-incident period, subject to adjustments for the trend of the business.^[1]

The apparent simplicity is deceptive. Disputes commonly arise because the parties disagree about one or more inputs rather than the arithmetic itself.

Before doing the maths: identify the basis of settlement

First find the business interruption section, schedule and endorsements. Check whether the policy is written on a gross-profit, gross-revenue, fees, rent, increased-cost-only or another basis. A calculator built for one basis can be misleading when applied to another.

Also identify the maximum indemnity period, the sum insured or declared value, the definition of gross profit, the specified or uninsured working expenses, any trends or other-circumstances wording, and the rules governing increased cost of working.

1. Establish the comparable or “standard” turnover

A common starting point is the turnover achieved during the equivalent period before the insured incident. If a four-month interruption is being measured, that may mean looking at the corresponding four months before the loss, subject to the policy wording.

This matters because using a simple annual average can distort a seasonal business. A hotel, retailer, construction business or events company may earn very different amounts at different times of year. The correct benchmark should reflect the period being measured and the policy's chosen methodology.

2. Apply trends and other circumstances carefully

Many business interruption wordings allow the historic benchmark to be adjusted so that it reflects, as closely as reasonably practicable, what the business would have achieved had the insured event not occurred. That is often referred to as the trends or other-circumstances adjustment.^[1]

An insurer may point to falling demand, loss of a major customer or an existing decline. The business may point to signed contracts, a stronger order book, additional capacity or demonstrable pre-loss growth. The important issue is the evidence that existed around the time of the loss — not a convenient percentage chosen afterwards.

3. Calculate the reduction in turnover

Once the adjusted expected turnover has been established, compare it with the turnover actually achieved during the relevant period. The difference is the reduction in turnover used in the next part of the calculation.

If actual turnover exceeds the adjusted benchmark, a simple reduction-in-turnover calculation will ordinarily produce no turnover shortfall for that period. That does not answer every possible policy issue, but it is why the benchmark and period need to be selected correctly.

4. Apply the correct insurance gross-profit rate

Insurance gross profit is not automatically the same as accounting gross profit. The policy may define gross profit by reference to turnover plus or minus specified items or uninsured working expenses. CII training material continues to highlight that the insurance meaning of gross profit can differ from the accounting meaning.^[2]

A calculation can therefore be materially wrong even where the turnover figures are agreed. If your accountant, insurer and loss adjuster are using different gross-profit rates, ask each of them to identify the exact policy definition applied.

5. Add qualifying increased cost of working

Businesses often spend money to reduce the interruption: temporary premises, hired machinery, alternative suppliers, outsourced production, emergency transport, additional staffing or other mitigation measures.

Whether that expenditure is recoverable depends on the policy. Standard increased-cost provisions may contain an economic test or other limits, while additional increased cost of working may be separately insured. That is why the calculator above adds the figure you enter but expressly does not decide whether it is recoverable.

6. Deduct expenses that were genuinely saved

If an insured expense stopped or reduced because the business was interrupted, the saving may need to be reflected in the claim. But lower turnover does not mean all overheads disappeared. Rent, salaries, finance, software, insurance and other commitments may have continued.

Where a saving has been deducted, ask a simple evidential question: was that cost actually saved during the relevant period? Payroll, invoices, bank records and management accounts should help answer it.

7. Do not confuse reopening with recovery

The indemnity period is central to many disputes. A business may reopen while still operating at reduced capacity, from temporary premises, with damaged machinery, disrupted suppliers or lost customers. The financial effect can therefore continue after the physical doors open.

The claim must still remain within the policy's defined and maximum indemnity period. The point is not to extend a claim indefinitely; it is to identify the point at which the insured interruption stopped causing the financial loss being claimed.

8. Check underinsurance, limits and declarations

A technically correct loss calculation can still be reduced if the business interruption sum insured or declared value is inadequate, an average provision applies, a sub-limit restricts a particular extension or the maximum indemnity period is too short. FOS guidance on commercial underinsurance also identifies business interruption figures and the way they were established as potentially relevant material in a complaint.^[3]

Keep the underlying loss calculation separate from any subsequent policy reduction. Otherwise it becomes difficult to see whether the disagreement concerns the amount of the loss, the adequacy of the cover purchased, or both.

Why might the insurer's calculation be lower?

Two calculations can produce very different results even though both appear mathematically sound. The real disagreement is often one of these:

• the insurer has used a lower turnover benchmark;
• a downward trends adjustment has been made;
• the interruption period has been shortened;
• a different insurance gross-profit rate has been applied;
• some increased costs have been excluded or capped;
• larger savings have been deducted;
• underinsurance, average, a sub-limit or the sum insured has reduced the result; or
• the insurer and business are using different interpretations of the policy wording.

The most useful way to analyse the difference is to place the calculations side by side and isolate each variable. Do not argue only about the final total.

What evidence should you gather?

For a meaningful review, try to obtain the documents that explain both the policy and the numbers:

• the complete policy wording, schedule and endorsements;
• the insurer or loss adjuster's detailed business interruption calculation;
• monthly or weekly turnover data for the relevant pre-loss and post-loss periods;
• management accounts and annual accounts;
• budgets, forecasts, signed contracts, order books or pipeline evidence supporting any growth assumption;
• invoices and evidence for increased costs of working;
• evidence showing which expenses continued and which were actually saved; and
• a clear chronology of the interruption, partial reopening and recovery.

Ask the insurer to show its workings

If the insurer has made a settlement offer but you cannot see how it arrived at the figure, ask for the calculation, assumptions and deductions in enough detail to understand them. FCA claims-handling rules require insurers within scope of those rules to handle claims promptly and fairly, provide appropriate progress information, not unreasonably reject claims and settle promptly once settlement terms are agreed.^[4]

A detailed calculation is not automatically a correct one. But without the workings, it is much harder to identify whether the dispute concerns the policy definition, financial evidence, trends, recovery period, mitigation or a policy limit.

Frequently asked questions

Sources and further reading

1. Chartered Insurance Institute — Business Interruption Policy Wordings: Challenges Highlighted by Claims Experience
2. CII local institute — How to set correct business interruption sums insured
3. Financial Ombudsman Service — underinsurance guidance including commercial business interruption information
4. FCA Handbook — ICOBS 8 Claims handling
5. Financial Ombudsman Service — business protection insurance complaints

This article and calculator provide general information only and do not constitute legal, accounting or loss-adjusting advice. Business interruption policies vary considerably. The appropriate calculation and dispute route depend on the individual wording, facts, financial evidence and circumstances.