When the business stops: how does business interruption insurance calculate the loss?

Property insurance covers the oven that burned down. But while the kitchen stays closed for two months, rent, staff salaries and other fixed payments continue, and no profit comes in. Insurance designed to close this gap is called insurance against business interruption (a stoppage of production or activity).

Key points

This insurance covers not the damaged property but the interrupted income: lost profit and fixed costs that continue even during the stoppage
The calculation basis is set in the contract. In the example below it is the amount left after variable costs are deducted from revenue: if revenue is 90 mln and variable costs are 54 mln, the basis is 36 mln
The contract sets an indemnity period, for example 3 months. A stoppage longer than that is at your own expense
The contract may also set a waiting period (a time deductible): the first few days are not covered
Which event counts as an insured event and under what conditions payment is made is written in the policy: read the conditions in your own policy in advance
When setting the sum insured, do not understate the basis amount: the indemnity is limited to that sum
A claim will require revenue and cost data for previous periods. The cleaner the accounting records, the easier it is to prove the indemnity

Example: the "Shirin lavash" eatery

Amounts are hypothetical. Monthly revenue is 90 000 000 soum, variable costs 54 000 000 soum, fixed costs 24 000 000 soum, profit 12 000 000 soum. Basis: 90 − 54 = 36 mln soum a month, that is, 1 200 000 soum a day in a 30-day month. The policy has an indemnity period of 90 days and a waiting period of 3 days (in the example, the waiting period is counted within the indemnity period).

Situation	Days closed	Loss	Covered	At own expense
Closed for two months	60	60 × 1 200 000 = 72 000 000	(60 − 3) × 1 200 000 = 68 400 000	3 600 000
Closed for four months	120	120 × 1 200 000 = 144 000 000	(90 − 3) × 1 200 000 = 104 400 000	39 600 000

In the first situation, 48 mln (24 × 2) of the 72 mln soum loss is fixed costs and 24 mln (12 × 2) is profit. The second situation shows that, when choosing the indemnity period, you need to think about how long repairs and bringing in new equipment will really take.

Test yourself

5 questions on this topic: pick an option or reveal the answer.

According to the insurer's statistics, the probability that one such rural house is completely destroyed by fire within a year is 0.003. The house is insured for 80 000 000 soum. Taking into account only this risk and only total loss, and without adding the insurer's expenses and profit, what is the expected loss (risk part of the net premium = probability × sum insured)?

At the beginning of the month, 6510 "Insurance payments" had a credit balance of 1 800 000 soum. During the month, insurance payments of 2 400 000 soum were charged to expenses and 3 000 000 soum was transferred to the insurer from the settlement account. What is the balance at month end and what does it mean?

"Chirchiq kimyo" LLC insured its property with two insurance companies under three separate contracts in total. Under NAS No. 21, how is analytical accounting kept for the accounts of group 6500 (including 6510 "Insurance payments")?

Bakery equipment with an actual value of 50 000 000 soum is insured for 40 000 000 soum. The contract has a proportional liability system and an unconditional deductible of 500 000 soum; the deductible is subtracted from the proportionally calculated amount. The loss is 10 000 000 soum. How much does the insurer pay?

An insurance expense was accrued for the building of a kindergarten (a service facility) on the factory's balance sheet. What journal entry is made under NAS No. 21?

Answered: 0 / 50 of 5 correct

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