Gross Profit Insurance: Revenue Protection Explained

When a fire, flood, or other disaster strikes your business, the immediate damage is only part of the problem. What often causes more financial harm is the loss of revenue during the recovery period. This is where gross profit insurance—also known as business interruption insurance—becomes invaluable. For UK businesses, this coverage can mean the difference between weathering a crisis and facing permanent closure.

What Is Gross Profit Insurance?

Gross profit insurance is a specialist form of business interruption cover that protects your company's revenue when operations are forced to stop or significantly reduce due to an insured peril. Unlike standard property insurance that covers the physical damage to buildings and contents, gross profit insurance focuses on the financial loss your business suffers when it cannot trade.

The policy reimburses you for lost profits and covers certain ongoing expenses that continue even when your business isn't operating—such as rent, salaries, utilities, and loan repayments. This ensures your business can survive the recovery period without depleting reserves or taking on emergency debt.

How Gross Profit Insurance Works

Understanding the mechanics of gross profit insurance helps you appreciate why it's so important for business continuity.

The Claims Process

When an insured event occurs—such as a fire at your premises or damage from flooding—your business interruption cover kicks in. The insurer calculates your claim based on the period of interruption, which is the time between the incident and when your business returns to normal trading levels.

The calculation typically uses your historical financial performance as a baseline. Insurers examine your accounts from the 12 months preceding the loss to establish your average gross profit and standing charges. They then apply this to the period during which your business was unable to operate at full capacity.

Indemnity Period

The indemnity period is the maximum length of time your policy will cover lost profits and expenses. Common indemnity periods range from 12 to 36 months, though some policies offer longer protection. Choosing the right indemnity period depends on your industry and how quickly you could realistically recover from a major disruption.

For example, a manufacturing business might need 24 months to rebuild after a major fire, while a retail shop might recover in 6-12 months. Your insurance broker can help determine the appropriate period for your specific circumstances.

What Does Gross Profit Insurance Cover?

Lost Gross Profit

This is the core of the cover. Gross profit is calculated as turnover minus the cost of goods sold. When your business cannot trade, you lose this profit. The policy reimburses you for this lost income, calculated on a daily or weekly basis depending on your policy terms.

Standing Charges

Standing charges are expenses that continue regardless of whether your business is operating. These typically include:

• Rent or mortgage payments on business premises
• Business rates and council tax
• Salaries and wages for key staff
• Loan and finance repayments
• Insurance premiums
• Utilities (electricity, gas, water)
• Maintenance contracts
• Professional fees (accountancy, legal)
• Advertising and marketing commitments

Your policy will specify which standing charges are covered, and there's usually a limit on how much can be claimed. It's essential to review this carefully with your broker to ensure adequate coverage.

Increased Cost of Working

Some policies include cover for the increased costs you might incur to resume trading faster. This could include temporary premises rental, overtime payments to accelerate repairs, or expedited delivery of replacement equipment. This extension can significantly reduce your overall recovery time.

What Isn't Covered?

Gross profit insurance has important exclusions you should understand:

• Uninsured Perils: If your property insurance doesn't cover the cause of the interruption, your business interruption won't either. Common exclusions include wear and tear, gradual deterioration, and certain weather events.
• Lack of Stock: If you can't trade because you've run out of stock (not due to an insured peril), the policy won't cover this.
• Supplier Failures: If your suppliers are affected and can't deliver to you, standard policies won't cover this loss. However, supplier contingency cover can be added.
• Pandemics and Epidemics: Many policies exclude losses from pandemics, though this can sometimes be added as an extension.
• Failure of Utilities: Unless you've added specific cover, interruption caused by failure of water, electricity, or gas supplies at your premises may not be covered.

Why Your Business Needs Gross Profit Insurance

Financial Survival

A significant business interruption can quickly drain cash reserves. Even profitable businesses can face insolvency if they can't cover fixed costs during a recovery period. Gross profit insurance ensures you can meet these obligations without resorting to emergency borrowing or depleting working capital needed for recovery.

Employee Retention

Keeping your team employed during an interruption—or at least maintaining their salaries—is crucial for business continuity. When you reopen, you want experienced staff ready to resume work, not a depleted team you must rebuild. Gross profit insurance helps you retain key personnel.

Customer Relationships

A prolonged closure can damage customer relationships. With business interruption cover, you can potentially maintain some level of service—perhaps from temporary premises—keeping customers engaged and preventing them from switching to competitors.

Creditor Confidence

Banks and suppliers are more confident in businesses that have adequate business interruption insurance. It demonstrates financial prudence and reduces the risk of default during a crisis.

Types of Businesses That Need This Cover

High-Risk Industries

Certain sectors face particular vulnerability to interruption:

• Manufacturing: Equipment damage or supply chain disruption can halt production for weeks or months.
• Hospitality: Pubs, restaurants, and hotels depend entirely on being able to serve customers. Even brief closures cause significant losses.
• Retail: A fire or flood can close a shop for months, during which rent and staff costs continue.
• Professional Services: Law firms, accountancies, and consultancies need their premises and systems operational to generate revenue.
• Healthcare: Clinics and private medical practices face substantial losses if forced to close.

All Businesses Benefit

While some sectors face higher risks, virtually every business benefits from gross profit insurance. Even a week-long interruption can create cash flow problems that take months to recover from.

Calculating Your Cover Level

Assess Your Gross Profit

Start with your annual accounts. Gross profit is turnover minus cost of goods sold. Divide this by 365 to get your daily gross profit figure. Multiply by the number of days you estimate recovery would take to get a baseline cover requirement.

Identify Standing Charges

List all expenses that would continue during an interruption. Total these monthly and multiply by the number of months your recovery might take. This gives you the standing charges cover needed.

Add a Buffer

Many businesses underestimate recovery time. Add 20-30% to your calculations to account for unexpected delays or complications.

Work with Your Broker

Your insurance broker can help refine these calculations using industry benchmarks and your specific circumstances. They'll ensure you're not underinsured, which could leave you with significant uncompensated losses.

Extensions and Additional Cover

Supplier Contingency

This covers losses if your key suppliers are forced to close due to an insured peril. If your supplier can't deliver materials, you can't trade—even if your own premises are undamaged.

Customer Contingency

If a major customer is forced to close, your revenue drops significantly. This extension covers that loss.

Utility Failure

Covers interruption caused by failure of electricity, gas, or water supplies to your premises.

Increased Cost of Working

Reimburses extra costs incurred to minimize the period of interruption, such as temporary premises or expedited repairs.

Common Mistakes to Avoid

Underestimating Recovery Time

Businesses often assume they'll recover quickly. In reality, obtaining replacement equipment, arranging repairs, and rebuilding stock takes time. Choose an indemnity period that reflects realistic recovery scenarios.

Failing to Update Cover

As your business grows, so should your cover. Review your gross profit insurance annually and update it if your turnover or standing charges have increased significantly.

Not Coordinating with Property Insurance

Ensure your property insurance covers all the perils that could interrupt your business. Gaps in property cover mean no business interruption cover for those events.

Ignoring Policy Conditions

Some policies require you to maintain certain standards—such as fire safety measures or regular maintenance—to remain fully covered. Failure to comply could result in claim rejection or reduced payouts.

Frequently Asked Questions

How much does gross profit insurance cost?

Premiums typically range from 5-15% of your property insurance premium, depending on your industry, claims history, and cover level. High-risk sectors pay more than low-risk ones.

Can I claim for loss of profit even if my building isn't damaged?

Only if the cause of interruption is covered by your policy. For example, if a fire at a neighbouring property forces you to evacuate, you can claim if your policy covers that scenario.

What if I'm only partially interrupted?

The policy covers the shortfall between your actual turnover and your expected turnover during the interruption period. If you operate at 50% capacity, you recover 50% of lost profits.

How long does a claim take to settle?

Simple claims might settle within weeks, but complex claims involving significant losses can take several months as insurers verify figures and assess the period of interruption.

Conclusion

Gross profit insurance is not a luxury—it's an essential part of comprehensive business protection. The financial impact of an unexpected interruption can be devastating, potentially forcing otherwise healthy businesses into closure. By securing adequate gross profit insurance, you protect not just your profits, but your employees' livelihoods, your customers' relationships, and your business's future.

The cost of premiums is minimal compared to the potential loss. Whether you run a small shop, a manufacturing facility, or a professional practice, gross profit insurance deserves a place in your risk management strategy. Speak with an insurance broker today to assess your needs and ensure you have the right level of cover for your business.