Property and Business Interruption Insurance
Property cover
Candidates must understand fire, special perils, all-risks and theft covers, and the difference between indemnity (replacement less depreciation) and reinstatement (new-for-old) bases. Know day-one reinstatement, declaration-linked and floating sum insured arrangements. Understand removal, salvage, professional fees, debris removal and site clearance extensions.
Business interruption
BI responds to loss of profit and increased cost of working following an insured property loss. Key concepts: gross profit (turnover less variable costs), rate of gross profit, standard turnover, indemnity period, maximum indemnity period, trend clause, savings, denial of access extensions and wide area damage. Understand the accumulated and unexpired risk concept and the difference between gross profit and audit fee bases.
Traps in questions
- Confusing gross profit with net profit - gross profit includes standing charges.
- Forgetting that increased cost of working is limited to the amount saved in loss of gross profit.
- Assuming BI cover responds to a supplier's or customer's loss unless a supplier/customer extension is bought.
Worked example
Annual turnover £2,000,000; variable costs £1,200,000; gross profit 40%. A fire stops trading for four months. Standard turnover for the period is £700,000. Lost gross profit = £700,000 × 40% = £280,000, less any savings and plus any increased cost of working limited to the loss avoided.