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Introduction to the Business Interruption Insurance


Why to subscribe a Business Interruption Insurance? What does it cover? How to subscribe this insurance? How to make a complaint? How to settle an incident? How to draw an insurance policy that maximizes the interests of the company?

Read the Insurance Policy. (General, Special and Specific Conditions) LINK FOR DOWNLOAD
(The terms and definitions used have a precise meaning, as described in the Policy General Conditions.)
Attached you can find a copy the Business Interruption Policy General Conditions of Tranquilidade, S. A. Insurance Company (for consultation and follow-up) available for download.

Business Interruption Policy
Fixed Costs
Variable Costs
Gross Profit
Increased Cost of Working
Activate a Business Interruption Policy
How to calculate the Loss on turnover?
Adjustment clause
Other issues

Business Interruption Policy
From a conceptual point of view, the Business Interruption Policy is very simple.
It covers the loss of GROSS PROFIT and the INCREASE IN COST OF WORKING (ICOW).
This methodology ensures that the Insured will be put in the same trading position after the interruption, as he would have been had the loss not occurred.

Fixed Costs
The Fixed Costs are the costs that tend to remain constant during the indemnity period subscribed despite the loss on the company’s activity (rents, a major part of personnel costs, financial costs) and that are important to protect.

Variable Costs
The Variable Costs are the costs that tend to vary in proportion to the activity of the insured business (consumption of raw materials, cost of goods sold) and which disappear or decrease with the interruption or decrease of the activity.

Gross Profit
The Gross Profit can be determined in two ways:
Addition = Total sum of the Fixed Costs with the Net Profit, defined in the Policy Terms (most used variant in Portugal)
Subtraction= Turnover + Closing Stock and Work in Progress less the Variable Costs + Opening Stock and Work in Progress (most common variant in Europe)

Increased Cost of Working
The Increase in Cost of Working (ICOW) occurred within the Policy terms (necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the loss of Gross Profit, needing to also be economic) is acceptable as eligible for indemnity.

Activate a Business Interruption Policy
In order to activate a Business Interruption Policy there usually has to be a Base Policy that covers the direct damages against determined risks (for example, a fire) or machinery breakdown, in the insured facilities, and an incident considered eligible by the Insurance Company must occur.
However, that incident has to affect the Insured’s activity, usually measured through its turnover).
The Business Interruption Policy covers the period of time in which the business is affected, or the maximum period subscribed if inferior (Indemnity Period).

How to calculate the Loss on Sales?
The turnover during the Indemnity Period is subtracted from the turnover in the same period of the previous year (Reference turnover).
The reduction of turnover is multiplied by the percentage of Gross Profit (GP %).
The Percentage of Gross Profit is calculated dividing the Gross Profit (GP) by the turnover of the previous year of the Incident.
The application of the GP % to the loss of turnover represents the LOSS OF GROSS PROFIT (GP).

Adjustment Clause
The basic rule is the comparison with the previous year (same period) but the company may face an upward or downward trend, and the expectable in the indemnity period would be to invoice more or less the same amount as in the previous year; besides, other circumstances could justify an adjustment in the indemnity calculation. All of this is stated in the Adjustment clause.

Example of the Gross Profit Loss calculation with adjustment clause
Interruption Period → 1-3-2013 a 31-3-2013
Sales from 1-3-2012 to 31-3-2012 → 150 000 €
Upward Trend → 20%
Total → 180 000 €
Actual sales from 1-3-2013 to 31-3-2013 → 20 000 €
Total Sales reduction →160 000 €
GP % in 2012 → 30%
Gross Profit Loss → 48 000 €

Other issues
To create a Business Interruption Insurance contract it is of primary importance to:
• Know the business
• Correctly determine the amount to be insured
• Carefully choose the indemnity period
• Gather the additional coverages and clauses that in a balanced way defend the Insured’s interests
• Correctly define the amount to be insured in the Base Policies