Business Interruption & Loss of Profits Insurance

No Property Damage — No BI Indemnity

Business interruption insurance does not operate in isolation. The policy requires a qualifying property damage event — typically covered under a fire, material damage or machinery breakdown policy — before any BI indemnity is triggered. This is the Material Damage Proviso. The BI policy then responds to the financial consequences of that physical event: the period during which the business cannot operate at its pre-loss capacity.

Gross Profit Basis vs Revenue Basis

The definition of the sum insured in a BI policy determines how the indemnity is calculated — and how much premium is payable.

Gross Profit Basis — Standard Approach

The gross profit basis is the international standard and is used in most Turkish and London market wordings. The sum insured is defined as:

Fixed costs — salaries, rent, depreciation, loan interest — and net profit remain covered because they are the costs the business still faces even when revenue falls. Variable costs are excluded because, if goods are not manufactured or sold, those purchases are never made. This produces a more accurate sum insured and a lower premium.

Revenue Basis (Turnover Basis)

Under a revenue basis the entire turnover is insured including variable costs. This is sometimes used by service businesses where variable costs are very low. For manufacturing and trading businesses it typically results in over-insurance: the premium is inflated and the indemnity overpays variable costs that were never actually incurred.

Which Basis to Choose?

Manufacturers and businesses with material variable costs should almost always use the gross profit basis. For service businesses with negligible variable costs the two bases converge; the correct basis is confirmed by working through the calculation with the insurer's proposal form.

Maximum Indemnity Period

The indemnity period is the span of time following the damage during which the business remains entitled to indemnity — from the date of damage until the business returns to its pre-loss trading position, subject to the maximum period selected on the policy.

Factors Affecting the Required Indemnity Period

Deductible (Waiting) Period

The waiting period is the initial days of interruption that the insured retains — the BI policy only responds after this period has expired. Revenue lost during the waiting period is not covered.

• Common options: 3, 7, 14 or 30 days
• Shorter waiting period = higher premium; longer waiting period = lower premium
• For businesses with sufficient working capital to absorb a brief interruption, a 14–30 day period offers a cost-effective balance
• For critical production facilities where any stoppage is severe, a 0 or 3-day waiting period is appropriate
• Waiting period for utility failure extensions is usually longer (24–72 hours)

Increased Cost of Working (ICOW)

ICOW is one of the most commercially valuable elements of a BI policy. It covers the reasonable and necessary extra expenditure incurred by the insured to avoid or reduce the interruption to the business — expenditure that would not have been incurred but for the damage.

Typical ICOW expenditure includes:

• Renting temporary production premises or office space
• Outsourcing production to a third-party manufacturer or subcontractor
• Hiring alternative equipment to replace damaged machinery during repair
• Overtime, accelerated repair and expediting costs to shorten the recovery period
• Additional logistics, freight and distribution costs to maintain customer supply

Additional Increased Cost of Working (AICOW)

AICOW is distinct from ICOW. Where ICOW covers extra expenditure incurred during the indemnity period, AICOW covers costs incurred after the indemnity period ends, to return the business to its pre-loss operating capacity. Typical scenario: the factory is repaired and production resumes, but reaching full capacity requires further investment or temporary outsourcing beyond the indemnity period. AICOW is not automatically included in standard policies and must be specifically requested.

Contingent Business Interruption (CBI)

A standard BI policy responds only to physical damage at the insured's own premises. But if your sole-source supplier's factory burns down, or your largest customer suspends operations, your revenue is just as exposed. Contingent BI extends the policy to cover these indirect interruptions.

Types of Contingent BI

• Supplier Contingency: Damage at a supplier's premises preventing delivery of goods or services your business depends on to operate
• Customer Contingency: Damage at a key customer's premises preventing them from accepting your goods or services
• Leader Contingency: Damage at a major retail or anchor tenant whose presence drives traffic to your facility

The wording distinction between named (specific named suppliers) and unnamed (any supplier/customer within the scope) contingent BI is critical. Named CBI provides broader cover for the listed parties; unnamed CBI typically carries a sub-limit and a stricter loss trigger. Both require careful schedule maintenance.

Utility Failure (Service Interruption) Coverage

A failure in the public electricity grid, gas network, water supply or telecommunications infrastructure can halt operations entirely — without any physical damage to your premises. Standard BI policies do not respond to this scenario because there is no property damage at your location. A utility failure (or service interruption) extension covers revenue loss arising from interruption to specified utility services.

• Check whether the extension covers "off-premises" infrastructure failures or only damage to on-site infrastructure
• Distinguish between distribution company outages and damage to your private connection or sub-station
• A minimum interruption period (typically 24–72 hours) usually applies before the extension responds
• Sub-limits and specific utility exclusions should be reviewed carefully

Machinery Loss of Profits (MLOP)

A machinery breakdown policy pays for repairing or replacing damaged equipment — not for the revenue lost while the machine is out of service. MLOP fills that gap. It is triggered by a machinery breakdown loss, not a fire or natural catastrophe, and is typically arranged as an extension to a Machinery Breakdown (MB) policy.

• Trigger condition: An indemnifiable loss under the MB policy is generally required
• Indemnity period: Determined by the lead time to procure and install replacement machinery — can extend to 6–18 months for bespoke equipment
• Waiting period: May differ from standard BI; varies by insurer

Delay in Start-Up / Advance Loss of Profits (DSU / ALOP)

A facility under construction cannot be protected by standard BI insurance because it is not yet operating. If construction or erection is delayed by an insured loss, the anticipated revenue start date is pushed back, resulting in significant financial loss. DSU (Delay in Start-Up) or ALOP (Advance Loss of Profits) cover this exposure.

DSU/ALOP is arranged as an extension to a Contractors All Risks (CAR) or Erection All Risks (EAR) policy. The delay must result from a physical loss covered under the CAR/EAR. A waiting period of 14–30 days commonly applies; the indemnity period is tailored to the project's scale and anticipated delay.

Cargo DSU

Damage to project cargo in transit can delay delivery and defer a project's start date. Cargo DSU covers this delay-loss exposure and is arranged alongside a project cargo policy. It is particularly critical for large energy and infrastructure projects. See also: Cargo Insurance. For the project cargo side of this structure, see Marine Delay in Start-Up Insurance.

Prevention of Access (Denial of Access)

Even without physical damage to your premises, a competent authority may restrict access following a loss at a neighbouring property. Example: a fire at an adjacent building causes the street to be cordoned off for two weeks, preventing all access to your business. Standard BI does not respond because there is no damage at your own location.

A Prevention of Access extension covers revenue loss in such scenarios. It is not included in standard cover and must be specifically added. The scope — particularly the definition of "competent authority" and the type of incident that triggers the extension — varies significantly between insurers and wordings.

Non-Damage Business Interruption

Because standard BI is built on the material damage proviso, losses without physical damage fall outside the trigger. Non-Damage BI is a specialist cover category designed to fill this gap; it must be procured separately from standard BI.

Common Non-Damage BI triggers include:

• Cyber incident — network outage without physical damage (see: Cyber Insurance)
• Pandemic or epidemic — government-ordered closure
• Denial of access — no property damage, authority order only
• Supplier insolvency or contractual default

Parametric Business Interruption Solutions

Traditional BI indemnity requires actual loss assessment — a process that can be lengthy and contested. Parametric BI pays a pre-agreed fixed amount when a predefined trigger event occurs (for example: an earthquake above a specified magnitude, or a power outage exceeding a defined duration), without the need for a traditional loss adjustment.

• Rapid payment: settlement is not conditional on loss quantification
• Transparent trigger: objective, measurable parameter (meteorological data, grid outage records, etc.)
• Basis risk: the fixed payout may not precisely match the actual loss suffered

Parametric solutions in Turkey are primarily used for agricultural and climate risks. See: Parametric Insurance.

How the BI Indemnity is Calculated

The indemnity is the difference between the turnover (or gross profit) the business would have achieved had the damage not occurred and what it actually achieved during the indemnity period. The insurer constructs the counterfactual using pre-loss financial accounts, budget projections and sector trend data.

The quality and completeness of the insured's financial records is critical to a timely and fair settlement. Businesses with clear management accounts, revenue segmentation and documented fixed-versus-variable cost analysis are consistently better served at the claims stage.

Information Required to Place BI Cover

Insurers require the following to price and structure a business interruption policy. Accurate and complete information consistently produces more competitive terms:

• Three years of audited profit and loss accounts with turnover, gross profit and cost breakdown
• Projected turnover and gross profit for the current year
• Monthly revenue profile (seasonality analysis)
• Named key suppliers — percentage of purchases from each
• Named key customers — percentage of turnover from top five
• Whether production or sales could be partially maintained at an alternative location
• Existing business continuity plan (BCP) and date of last test
• Current property/machinery damage insurer and policy reference

BI Sum Insured and the BI Worksheet

Accurate calculation of the BI sum insured is critical to avoiding underinsurance at claim time. Insurers typically require a BI Worksheet based on 12 months of actual gross profit data.

• Payroll (staff costs): Fixed employment costs — wages, employer social security contributions — are included in the gross profit sum insured as standing charges; variable labour costs are assessed separately
• Claims preparation costs: Fees for accountants, loss adjusters and specialist advisers engaged to quantify the BI loss are covered as a separate item under some policies
• Average (underinsurance) clause: If the sum insured is below the actual gross profit, indemnity is reduced proportionately. For example, if the sum insured is 80% of actual gross profit, the indemnity paid is 80% of the calculated loss. The BI sum insured must be reviewed annually against current financial accounts

Business Interruption — FAQ

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