Business Interruption Insurance in Australia: Gross Profit, Indemnity Periods and Claims

Property insurance pays to rebuild what was damaged. Business interruption insurance pays for what the business loses while that happens: the profit that would have been earned, the costs that keep running, and the extra spending needed to keep customers. For an operator whose earnings depend on a processing plant, a workshop or a single critical machine, the second figure is often larger than the first.

It is also the cover most often set up wrongly, because the numbers it relies on — insurable gross profit, the indemnity period, the uninsured working expenses — are defined by the policy rather than by the accounts. This guide sits within BCS Broking's broader coverage of commercial insurance for Australian construction and mining, and it is written from the point at which those definitions are tested: the claim. A note on roles: cover is provided by APRA-regulated underwriters; BCS arranges and structures it, and acts for the client in presenting a claim. BCS is the broker, not the risk carrier.

Who is this for?

Finance directors and owners of Australian businesses, typically turning over $20M or more, whose revenue depends on physical assets: mine and quarry operators with fixed processing plant, construction and civil companies with yards, workshops, precast or batching plants, fabricators and manufacturers supplying construction and resources, and multi-site operators whose sites depend on one another.

What does business interruption insurance cover?

Business interruption cover — also called consequential loss or loss of profits cover — responds when insured physical damage interrupts the business. It typically pays:

1. Loss of gross profit — the reduction in turnover during the indemnity period, multiplied by the rate of gross profit, less any costs that stop because trading stopped.
2. Increased cost of working — extra expenditure incurred to reduce the loss of turnover, such as hiring replacement plant, outsourcing production or working overtime, generally up to the amount of loss it avoids.
3. Additional increased cost of working — where taken, extra costs beyond that economic limit, up to a separate sum insured.
4. Claims preparation costs — where the extension is included, the fees of the insured's own accountants in preparing the claim.

The trigger matters. In most wordings the interruption must result from physical loss or damage that is itself covered by the property section of the policy, a condition often called the material damage proviso. Loss of income that does not flow from insured physical damage — a lost contract, a downturn in commodity prices, or most regulatory shutdowns — generally sits outside the cover.

What is insurable gross profit, and why is it not the figure in the accounts?

This is a frequent source of underinsurance. Accounting gross profit is turnover less cost of sales, and cost of sales often includes direct labour, plant running costs and site overheads. Insurable gross profit is calculated differently: turnover, adjusted for stock movements, less only those expenses the policy lists as uninsured working expenses — typically purchases of materials and some direct variable costs that genuinely stop when trading stops.

Everything not listed as uninsured is treated as insured. That means wages, salaries, depreciation, rent, finance costs, insurance and net profit all sit inside insurable gross profit, because they continue — or must be earned — while the business is down.

These figures are illustrative only. The point is the gap: a business that set its sum insured from the accounting figure would be insuring less than half of what the policy is designed to protect.

The list of uninsured working expenses also deserves scrutiny. Labour is the usual example. A mining services company or a fabricator rarely lays off skilled staff during a six-month rebuild, because it would struggle to rehire them. Treating wages as uninsured saves premium and removes cover for a cost that does not stop.

How long should the indemnity period be?

The indemnity period is the maximum time, measured from the date of the damage, over which the policy pays for the loss. It is not the same as the waiting period or time excess, which is the initial period the business bears itself. Common choices are 12, 18, 24 or 36 months.

The right length depends on how long it would take the business to return to the trading position it would otherwise have reached — not merely to repair the asset. The factors that drive it:

A twelve-month period is common and frequently too short for a business built around one or two critical assets. The representative case in mine site insurance: open-cut vs underground — an indemnity period of twelve months against a realistic recovery of eighteen to twenty-four — is a pattern seen well beyond mining.

How is the sum insured set, and what happens if it is too low?

The sum insured is generally based on the insurable gross profit projected for the coming year, including expected growth, and scaled to the indemnity period. For an indemnity period longer than twelve months, the sum insured is typically the annual figure multiplied by the number of months divided by twelve, so a 24-month period requires roughly twice the annual gross profit.

Where the sum insured is lower than the policy requires, many wordings reduce the claim in proportion to the shortfall. The mechanism differs between wordings — some apply a threshold, some apply proportionate reduction from the first dollar, and some allow the premium to be adjusted against a declaration of actual gross profit after year end. Which applies is determined by the wording, and it is worth knowing before a loss rather than after.

Which extensions matter for construction and mining operators?

The core cover responds to damage at the insured's own premises. Many of the interruptions that hurt construction and resources businesses start somewhere else.

Sub-limits on these extensions are often set low by default. Testing them against real dependencies — which supplier, which power line, which port — is more useful than accepting the standard figure.

What about projects under construction?

A business's own interruption cover generally responds to damage to its existing operating assets. It does not respond to the delayed revenue from a new plant, mine expansion or facility that is damaged while being built.

That exposure is covered separately by advance loss of profits cover, also called delay in start-up, which is usually arranged alongside the project's contract works or construction all risks policy and taken by the owner or principal. It responds when insured damage during construction delays completion and therefore delays the revenue the project was built to earn. The mechanics of the underlying project cover are set out in contract works insurance in Australia.

The contractor's side is different again. Liquidated damages a contractor owes the principal for late completion are a contractual liability, and are generally not covered by business interruption or contract works insurance.

Why do business interruption claims fall short?

The reasons recur:

1. The sum insured was set from accounting gross profit rather than insurable gross profit.
2. The indemnity period was shorter than the real recovery time, particularly where long-lead plant was involved.
3. Costs that do not stop were listed as uninsured, most often wages.
4. The interruption started off-site — at a supplier, a customer or a utility — and the relevant extension was absent or sub-limited.
5. The cause was breakdown rather than damage, and machinery breakdown interruption cover had not been taken.
6. Records could not support the claim. The loss is measured against what the business would have earned, so budgets, order books, contracts and management accounts are the evidence.
7. Increased costs were incurred without agreement and were later questioned as not reducing the loss.

How is a business interruption claim prepared?

1. Notify the insurer and broker promptly, and record the date and cause of the damage.
2. Act to reduce the loss. Hiring replacement plant or outsourcing production is usually what the policy expects; seek the insurer's agreement to significant spending where practical.
3. Preserve the financial evidence — management accounts, budgets, forecasts, the order book and contracts in force.
4. Expect a loss adjuster and forensic accountant to be appointed by the insurer. Where claims preparation costs are covered, the business's own accountants can prepare its side.
5. Seek interim payments during a long interruption rather than waiting for a final settlement.
6. Agree the standard turnover and rate of gross profit, generally based on the corresponding period before the damage and adjusted for trends.

The quality of the claim is largely determined before the loss, by how the cover was set up.

A checklist before renewal

1. Recalculate insurable gross profit from the policy definition, not the accounts.
2. Review the uninsured working expenses list and remove costs that would continue during an interruption.
3. Test the indemnity period against the longest realistic recovery for the most critical asset.
4. Project gross profit forward for growth across the full indemnity period.
5. Map dependencies — key suppliers, customers, utilities and access routes — against the extensions and sub-limits.
6. Confirm whether machinery breakdown interruption cover is in place for critical plant.
7. For any project under construction, confirm whether advance loss of profits cover is needed and who is arranging it.

FAQ

What does business interruption insurance cover?

It covers the loss of gross profit, and the increased costs of working, that follow when insured physical damage interrupts a business. It responds over a chosen indemnity period, and generally only where the damage is itself covered by the property section of the policy.

Is business interruption included in property insurance?

For larger businesses it is usually written as a section of an industrial special risks policy, alongside the property damage section. It is a separate section with its own sum insured, so it is not automatically included at an adequate level.

What is insurable gross profit?

It is turnover, adjusted for stock movements, less only the expenses listed in the policy as uninsured working expenses. It is usually considerably higher than accounting gross profit, because wages, overheads and net profit sit inside it.

How long should a business interruption indemnity period be?

Long enough for the business to return to the trading position it would otherwise have reached, which includes sourcing and installing plant, approvals, recommissioning and recovering customers. For businesses that depend on long-lead plant, twelve months is often too short.

What is the difference between the indemnity period and the waiting period?

The indemnity period is the maximum time over which losses are paid, measured from the date of damage. The waiting period, or time excess, is the initial period of loss the business bears itself before the cover responds.

Does business interruption insurance cover a power outage?

Only where a public utilities extension applies, and many such extensions require physical damage at the supply facility, with sub-limits and short waiting periods. An outage without physical damage may fall outside the cover.

Does business interruption cover delays to a project under construction?

Generally not. Delayed revenue from a new facility damaged during construction is covered by advance loss of profits, or delay in start-up, cover arranged alongside the project's contract works policy.

Can business interruption insurance be bought on its own?

It is uncommon. Because the cover usually depends on the damage being insured under a property policy, underwriters generally write it together with property cover rather than as a stand-alone product.

Where to next

This article sits within BCS Broking's broader commercial insurance for Australian construction and mining coverage. To go deeper:

• Property and business interruption sets out how BCS structures these programs
• Mine site insurance: open-cut vs underground covers how interruption exposure differs by operation
• Mining and resources insurance covers the wider mining program
• Contract works insurance in Australia covers the project-side cover that advance loss of profits attaches to
• Contractors plant and equipment insurance covers mobile plant

For general background on the main types of business insurance, business.gov.au maintains a plain-language summary, and the National Insurance Brokers Association publishes guidance on working with a broker.

If you would like your interruption cover tested against how long your business would really take to recover, contact BCS Broking. BCS acts as a specialist broker and negotiates across the market as the client's dedicated advocate, including when a claim is made.

This information is general in nature and does not consider any specific objectives, financial situation or needs. Consider whether the information is appropriate before acting on it. Policy terms vary between underwriters — what a specific program covers, and how a claim is measured, is determined by its wording. Cover is provided by APRA-regulated underwriters; BCS Broking Pty Ltd is an authorised insurance broker and arranges and structures the cover (AFSL details on the Financial Services Guide).