Many businesses choose Gross Profit basis for their business interruption insurance. This method protects against the loss of net profit that occurs when turnover decreases because of an insured event arising. It also accounts for ongoing costs and any extra expenses incurred while working during a disruption.

One of the key features of Gross Profit basis of Business Interruption Insurance is that businesses can specify certain costs to deduct when calculating their sums insured. These deductions are called variable costs or “uninsured working expenses” (UWEs). UWEs are costs that change directly with turnover; for example, if turnover drops by 40%, those costs also decrease by 40%.

The purpose of UWEs is to help businesses avoid insuring costs that would stop in the event of a loss. By choosing Gross Profit basis of cover and excluding UWEs, businesses can reduce the base amount used to calculate their insurance rate, which may lead to lower premiums.

However, one common issue is that many businesses struggle to accurately identify their UWEs. This can result in underinsurance, as they might not follow the necessary steps to determine these costs correctly.

Gross Profit basis of business interruption insurance was originally developed for businesses that have many costs that vary directly with sales, like those in manufacturing and retail. However it is important not to rely on general assumptions about different types of businesses. Policyholders should carefully consider what would happen if they experienced a loss: specifically, which costs would cease when that interruption occurs and which costs would still be incurred.

If, after considering potential losses, you find that there are few costs that vary directly with your sales, then using a different basis of business interruption cover, like loss of gross revenue, might be a better option. Gross revenue Business Interruption cover protects against the loss of turnover after an insured incident and it also covers any extra costs incurred during the recovery. This can help the Policyholder avoid some challenges that come with calculating gross profit and reduce the risk of being underinsured.

To determine the sum insured for gross revenue, Policyholders only need to know their total turnover for the period they need cover for. This approach sidesteps many common mistakes associated with gross profit calculations and can result in a more accurate insurance amount, especially for businesses that wouldn’t benefit much from gross profit basis of cover.

Increased cost of working basis is a basic form of business interruption insurance. It gives the Policyholder the additional funds they need to cover reasonable extra expenses that will assist in their recovery after an insured loss.

This type of coverage is best for businesses that have strong continuity planning and can quickly bounce back from a loss. For instance, some businesses can easily reduce the impact of a disruption and may only need extra cash to implement a well-prepared recovery plan.

Large multinational companies often prefer increased cost of working coverage because a loss at one location typically won’t have a significant effect on their overall operations. They usually have substantial cash reserves to draw on and can manage any lost capacity in other parts of their business.

Additional increased cost of working basis of business interruption covers costs that go beyond what is typically considered necessary for ongoing operations. This includes expenses that a business would not normally incur but needs to manage during a recovery phase. For example, if a business needs to pay a premium to expedite shipping from a supplier to meet demand, those extra costs would fall under AICOW.