The Answer in 60 Seconds

In business interruption (BI) insurance, "gross profit" does not mean what it means in your accounts. Insurable gross profit is turnover minus only the variable working expenses that the policy names as uninsured (the costs that stop when trading stops, like stock purchases). Everything else stays in: rent, salaries, financing, and your net profit. So insurable gross profit can differ from the gross profit on your profit-and-loss statement, in either direction: the accounts may put costs the policy keeps in (such as production wages and factory overheads) into cost of sales, and the policy may list as uninsured costs the accounts show below gross profit (such as carriage or bad debts).

That gap is where SMEs go wrong. They read "gross profit basis", copy the gross profit line from their accounts, and set a BI sum insured that does not match the policy's definition, which can leave it too low. When a fire or flood stops the business, the average clause then cuts the payout in proportion to the under-insurance. The same proportional penalty that applies to property cover under the condition of average applies to BI, measured against insurable gross profit rather than asset value.

Two further levers decide whether the cover holds: the indemnity period (how many months of lost gross profit the policy will fund, where 12 months is often too short to rebuild and recover) and annual revaluation of the figure as the business grows. This article sets out how the gross profit basis is built, how the indemnity period is chosen, how average bites on BI, and how to set the number so the cover responds.

The Sourced Detail

Business interruption cover does not replace your building or your stock. The property section of the policy does that. BI replaces the trading result you lose while the business is shut or running below normal after insured physical damage. The mechanics are accounting mechanics, not statute, so the language is technical and the room for error is large. The single most important idea is that the word "gross profit" carries a specific insurance meaning that diverges from the accounting one.

Insurable gross profit is not accounting gross profit

In your management accounts, gross profit is usually turnover minus cost of goods sold. In a BI policy, insurable gross profit is defined the other way around. It is turnover less only the specified working expenses that the policy lists as uninsured: the variable costs that genuinely fall away when the business stops trading.

On the "difference" basis, as a Singapore wording such as Etiqa's defines it, gross profit is:

Insurable gross profit = (Turnover + Closing stock) minus (Opening stock + Specified working expenses)

The "addition" basis builds the figure from the other end, as net profit plus the insured standing charges.

The only items removed are costs that vanish in lock-step with lost sales, typically:

  • Purchases of stock, raw materials and goods bought for resale.
  • Carriage, packing and freight on those goods.
  • Bad debts and discounts allowed (in some wordings).
  • Certain bought-in services that stop entirely when the business stops.

Everything else stays inside the figure, because everything else keeps costing you money after the loss:

  • Rent, rates and service charges on premises you cannot use.
  • Salaries and wages of staff you retain.
  • Financing and lease costs.
  • Insurance, audit and other standing overheads.
  • Net profit the business would have earned.

This is why insurable gross profit and accounting gross profit are different figures. Accounting gross profit is revenue less cost of sales; rent, administrative salaries and other overheads come after it, but a manufacturer's cost of sales includes production wages and factory overheads, which BI keeps in because they continue while turnover collapses. Copy the accounting figure into the BI declaration and you can under-insure by those costs.

Why fixed costs are the whole point

When a covered fire or burst pipe closes your premises, two things happen at once. Your turnover falls, often to zero. Your fixed costs do not. The landlord still invoices the rent. Staff still expect salaries. The bank still draws the loan instalment. BI on the gross profit basis is built to keep paying those continuing costs and the net profit you would have made, so that the business emerges from the loss in the financial position it would have held if nothing had happened. That principle of restoring the trading result, not over-indemnifying it, is the same indemnity logic the worked example in BI versus contingent BI walks through.

Building the sum insured from the gross profit basis

Setting the BI sum insured is a two-step calculation.

Step one: establish the annual insurable gross profit. Take the most recent full year of turnover, deduct only the named uninsured working expenses, and then adjust for the trend. If the business is growing, the figure must be projected forward to the period the policy will actually respond in, not the historical year. A business turning over more each year that insures last year's gross profit is under-insured before the ink dries.

Step two: scale it to the indemnity period. Where the indemnity period is 12 months or more, the sum insured is the annual insurable gross profit multiplied by the indemnity period expressed in years. Where it is shorter, the sum insured is still the full annual figure, because the average clause compares the sum insured with a full year's gross profit.

BI sum insured = Annual insurable gross profit x (Indemnity period in months / 12), for an indemnity period of 12 months or more

A worked example. An SME has turnover of S$5,000,000. Its uninsured variable working expenses (stock, freight, packing) are S$2,000,000. Insurable gross profit is therefore S$3,000,000. If the chosen indemnity period is 12 months, the sum insured is S$3,000,000. If the indemnity period is 24 months, the sum insured must be S$6,000,000, because the policy may be funding lost gross profit across two full trading years.

The error to avoid: if this SME is a manufacturer whose cost of sales carries production wages and factory overheads, its accounting gross profit might be, say, S$1,200,000. Declaring S$1,200,000 instead of S$3,000,000 leaves the cover at 40% of the true insurable figure. The average clause will then treat any partial BI loss accordingly.

The indemnity period: why 12 months is often too short

The indemnity period is the maximum length of time, from the date of damage, over which the policy will pay for lost gross profit. It is not the time to repair the building. It is the time for the trading result to recover to where it would have been, which is almost always longer.

Consider the real sequence after a serious fire. Debris clearance and loss adjustment take weeks. Rebuilding or refitting takes months. Re-equipping, re-stocking and re-hiring take more. Then, even with the doors open again, customers who went elsewhere do not all return on day one. Revenue ramps back up over a further period. A business that picks a 12-month indemnity period because the landlord said the unit can be rebuilt in a year may find the cover stops paying while turnover is still depressed.

For this reason a business with specialised premises, long fit-out lead times, regulated facilities, or sticky customer relationships may need 18, 24 or 36 months. The indemnity period is a deliberate underwriting choice, and above 12 months it scales the sum insured, as the calculation above shows. The companion piece on waiting periods covers the other end of the timeline, the deductible at the start of the claim, which is a separate lever from the indemnity period at the end.

How the average clause bites on BI

The condition of average is standard in BI wordings, just as it is in property wordings. It reduces a partial-loss payment in proportion to under-insurance. On BI, the comparison is not asset value against sum insured. It is the sum insured against the rate of gross profit applied to the annual turnover, with that figure increased in proportion where the maximum indemnity period exceeds 12 months.

The formula mirrors the property version set out in detail in the average clause article:

BI claim paid = Loss of gross profit x (Sum insured / (Annual gross profit x Indemnity period in months / 12)), where the indemnity period is over 12 months; otherwise the denominator is the annual gross profit

Take the SME above, on a 12-month indemnity period, with true annual insurable gross profit of S$3,000,000 and a sum insured of only S$1,800,000 (60%). A covered event causes a gross profit loss of S$900,000 over the indemnity period. Average reduces the claim:

Claim paid = S$900,000 x (S$1,800,000 / S$3,000,000) = S$900,000 x 0.60 = S$540,000

The business absorbs S$360,000 of genuine lost profit out of its own cash, on top of any time-excess deductible, at the worst possible moment. The under-insurance was invisible right up until the claim, which is the defining trap of average on BI.

The declaration-linked alternative

Some BI wordings offer a declaration-linked basis instead of a flat sum insured. The insured declares an estimated gross profit at the start of the year and the actual figure at the end, the premium is adjusted to the actual figure, and the limit is 133.33% of the estimate with no average clause. The practical effect is a buffer against growth. It does not remove the duty to estimate honestly, and a loss above the uplifted limit is not covered. Whether a policy is on a sum-insured or declaration-linked basis is one of the first things to confirm in the schedule.

Wages: a separate decision inside the figure

One sub-decision deserves its own line. Wages can be treated as a fully insured standing cost (kept entirely inside gross profit) or carved out on a dual-wages basis, where only a portion is insured for the full indemnity period and the rest for a shorter initial window. The choice changes both the premium and the size of the sum insured. An SME that intends to retain skilled staff through a long closure needs wages fully inside the figure. Getting this wrong is a quieter cousin of the headline gross-profit error.

Common Mistakes / What Goes Wrong

  1. Declaring accounting gross profit as the BI sum insured. The policy defines gross profit differently from the accounts, and the two figures can differ in either direction.

  2. Treating insurable gross profit as net profit. It is net profit plus all the continuing fixed costs, not net profit alone.

  3. Insuring last year's figure for a growing business. The basis must be projected to the period the cover will respond in.

  4. Choosing a 12-month indemnity period by default. Recovery to normal trading routinely runs longer than the rebuild.

  5. Forgetting to scale the sum insured to the indemnity period. A 24-month period needs roughly double the annual gross profit figure.

  6. Assuming average does not apply to BI. It applies to BI on a sum-insured basis as standard, measured against a full year's gross profit, scaled up where the indemnity period exceeds 12 months.

  7. Carving wages out without understanding the dual-wages mechanic. A short wages window can leave retained staff costs unfunded mid-claim.

  8. Confusing the time-excess deductible with the indemnity period. One sits at the start of the claim, the other caps its length.

  9. Not knowing whether the policy is sum-insured or declaration-linked. The two behave very differently at claim.

  10. No documentation of how the gross profit figure was built. Hard to defend the declaration when the loss adjuster recalculates it.

What This Means for Your Business

  1. Rebuild the figure from turnover, not from your accounts. Start with turnover, deduct only the named uninsured working expenses, and keep every fixed cost in.

  2. Project forward. Use the gross profit you expect in the cover year, not the one in last year's audited accounts.

  3. Choose the indemnity period from recovery time, not rebuild time. Map the realistic path back to normal trading and pick 18, 24 or 36 months if the rebuild-plus-recovery sequence demands it.

  4. Scale the sum insured to that period. For an indemnity period of 12 months or more, multiply annual insurable gross profit by the indemnity period in years; a shorter period still needs the full annual figure.

  5. Revalue every renewal. Treat the BI figure with the same discipline as property values, as flagged in the average clause guidance.

  6. Check sum-insured versus declaration-linked, and use the declaration-linked buffer if your turnover is volatile or growing.

  7. Decide the wages basis deliberately, matching the insured wages window to how long you would actually retain staff through a closure.

  8. Keep the calculation in the policy folder. A documented build of the gross profit figure is your defence when the adjuster recalculates at claim, as the BI claim deep-dive shows happens in practice.

Questions to Ask Your Adviser

  1. How is our BI sum insured built, and does it use insurable gross profit (turnover less uninsured working expenses) rather than accounting gross profit?
  2. What is our indemnity period, and does it reflect realistic recovery to normal trading, not just the rebuild time?
  3. Is the sum insured scaled correctly to that indemnity period?
  4. Is our policy on a sum-insured or declaration-linked basis, and what buffer does it carry against growth?
  5. How are wages treated, and would retained-staff costs be funded for the full closure?
  6. Given our projected gross profit this year, is there any under-insurance that would trigger the average clause at claim?

Related Information

Published 31 May 2026. Source verified 31 May 2026.