StudyingRES5

Switch exam

Financial advisory

Capital markets products

CM-SIPSpecified Investment Products: Derivatives & Collective Investment Schemes M8Collective Investment Schemes M8ACollective Investment Schemes II CM-EIPExcluded Investment Products: Securities, Collective Investment Schemes & Foreign Exchange

Insurance

M9Life Insurance & Investment-Linked Policies M9AStructured Products & Structured ILPs HIHealth Insurance PGIPersonal General Insurance CGICommercial General Insurance BCPBasic Insurance Concepts & Principles

Securities & derivatives dealers (IBF)

RES 1ASecurities Exchange Dealers RES 1BSecurities Dealers of Non-Exchange Members RES 2BDerivatives Dealers of Non-Exchange Members RES 2ADerivatives Exchange Dealers RES 12BSecurities & Derivatives Dealers of Non-Exchange Members

← All study notes

CGI — Commercial General Insurance

Business Interruption Insurance

Business interruption (BI) insurance, also called consequential loss or loss-of-profits cover, indemnifies a business for the loss of earnings and the extra costs it suffers while trading is disrupted following material damage to insured property, filling the financial gap that a fire or property policy — which pays only for the physical damage itself — leaves behind.

8 sections~5 min read

Must-know for the exam

Business interruption (BI) insurance — also called consequential loss or loss-of-profits cover — indemnifies a business for lost earnings and extra costs while trading is disrupted after insured material damage.
BI meets the INDIRECT/consequential loss; the material damage (property/fire) policy meets only the DIRECT physical damage.
The MATERIAL DAMAGE PROVISO requires that physical damage has occurred AND that a material damage policy was in force and admitted (paid) the claim — otherwise the BI claim generally fails.
BI is triggered by the SAME insured perils as the underlying material damage policy; the two covers should be aligned peril-for-peril.
The insured figure is GROSS PROFIT on the insurance (difference) basis: turnover adjusted for stock, less variable 'uninsured working expenses'.
Insurance gross profit = NET PROFIT + insured STANDING CHARGES, so BI restores both the profit and the fixed overheads that continue during the interruption.
STANDING CHARGES are fixed continuing costs (rent, rates, key salaries, loan interest, professional fees) that carry on even when turnover falls.
UNINSURED WORKING EXPENSES are variable costs (raw materials, purchases) that fall away with turnover and are deducted in arriving at gross profit.
The INDEMNITY PERIOD runs from the date of damage until the business recovers to normal, capped by the chosen MAXIMUM INDEMNITY PERIOD (e.g. 12, 18, 24, 36 months).
The indemnity period covers full business recovery (customers, turnover), NOT just the time to rebuild the premises — choosing it too short is a common under-insurance error.
INCREASED COST OF WORKING (ICOW) covers extra costs to keep trading, but under gross-profit cover only up to the gross profit it saves (the economic limit).
ADDITIONAL increased cost of working (AICOW) pays reasonable extra costs to maintain the business even beyond the gross profit saved, up to a separate sum insured.
A BI claim = loss of gross profit + increased cost of working (subject to economic limit) - savings in insured standing charges.
AVERAGE applies to under-insured gross profit; a DECLARATION-LINKED basis with automatic uplift is commonly used to reduce under-insurance risk and often waives average within the uplift.

Why business interruption cover exists

When a fire, flood or other insured event damages a commercial building, plant or stock, the direct property (material damage) policy pays to repair or replace what was physically destroyed. But the physical loss is only half the story: while the premises are being rebuilt and machinery replaced, the business cannot trade normally, yet its income falls away while many of its costs continue. This CONSEQUENTIAL or 'indirect' loss is precisely what business interruption insurance is designed to meet.

Business interruption insurance is known by several names that all describe the same idea:

•BUSINESS INTERRUPTION (BI) — the modern, most common term.
•CONSEQUENTIAL LOSS — emphasising that the loss flows as a consequence of the material damage rather than being the damage itself.
•LOSS OF PROFITS — highlighting the reduction in earnings the cover restores.

The purpose is to put the business back into the financial position it would have enjoyed had the interruption not happened — an application of the principle of INDEMNITY to earnings rather than to property. Without BI cover, an otherwise well-insured business can still fail after a major loss because it runs out of cash before it can resume normal trading.

Material damage as the trigger and the material damage proviso

A standard BI policy does not respond to just any fall in turnover. It responds only where the interruption is caused by PHYSICAL DAMAGE to insured property at the premises by a peril that is itself insured. In other words, BI cover is built on top of, and is dependent on, an underlying material damage (property/fire) policy.

This dependency is enforced through the MATERIAL DAMAGE PROVISO (also called the material damage warranty). It is a condition of the BI policy that, for a BI claim to be payable, TWO things must be satisfied:

•There must be actual physical damage to property used by the business at the premises; and
•That damage must be insured — a material damage policy covering the property must be in force at the time of the loss and the insurer under it must have admitted (paid or accepted) liability for the damage.

Premium

Every note. Every question. One pass.

6 more sections of this note are part of Premium.

Every section of every study note
13,000+ questions across every CMFAS module
Full timed mock exams
A worked explanation on every question
Your full mistake bank and weak-area review

Unlock with Premium

From ≈$14.83/mo on the 6-month pass

Traps that cost marks

Confusing BI with the underlying property/fire cover or with unrelated liability lines.
Thinking BI pays for the physical damage rather than the resulting loss of income.
Assuming any drop in turnover triggers BI, ignoring the required admitted material damage claim.
Believing the reality of the income loss overrides the proviso requirement.
Thinking BI is a standalone all-risks income cover independent of the property perils.
Assuming the standard BI policy covers loss from damage away from the insured's own premises.
Confusing access denial with supplier failure or with the property's own damage.
Assuming utility failure is automatically covered by a standard BI policy.

Ready to test yourself?

Drill exam questions on Business Interruption Insurance and lock it in, or sit the free CMFAS mock exam with no sign-up.

Practise this topic →

Exam-style questions

Which of the following is NOT one of the recognised BI extensions for income lost from events away from the insured's own premises?Answer explained →

← PreviousFire & Commercial Property Insurance Next →Commercial Liability Insurance