Business interruption insurance claims often give rise to disputes. Business interruption clauses are often difficult for non-specialists to understand, increasing the likelihood that policyholders will be disappointed when they suffer a loss and find that their cover is not as extensive as they might have expected. Even experienced insurance professionals can find them difficult to follow.
In this article, we look at some issues that have recently arisen in business interruption claims and how the courts have dealt with them, with a particular focus upon business interruption claims resulting from cyber events.
Common issues in business interruption insurance
The quote introducing this article comes from an article the reinsurer Swiss Re published on business interruption insurance after holding a series of ‘masterclass’ workshops with more than 400 risk professionals and insurance brokers. It was apparent from those workshops that business interruption claims were viewed as especially challenging.
Business interruption cover is not merely a useful add-on. Swiss Re reported that business interruption losses often comprise well over half the value of claims for property damage. The business interruption element of material damage and business interruption (known as MDBI) policies may therefore be more important than what might traditionally be seen as the primary cover.
In part, this may be due to the effects of supply chain interdependencies and their limitations. One example Swiss Re gives is the consequences of damage to a large industrial electrical transformer. These transformers, while not especially high in value, are usually bespoke and are not readily interchangeable. With a production lead time of around 18 months, the loss of a transformer in a critical part of a business can result in a lengthy delay and a business interruption loss that is out of proportion to the value of the insured transformer.
This article does not attempt to provide a comprehensive explanation of how business interruption insurance policies work. Instead, it discusses some key issues that commonly arise.
Turnover
The purpose of business interruption cover, in general, is to put the insured in the same financial position in terms of profit and loss that it would have been in but for the loss of the insured asset (or other insured loss) that has given rise to the claim.
Typical business interruption policy wording, such as the Industrial Special Risks wording commonly used in MDBI policies in New Zealand and Australia, begins with an assessment of the insured’s “Turnover”. The starting point is normally known as Standard Turnover, which is the insured’s actual turnover in the period corresponding to the indemnity period in the 12-month period prior to the loss. Establishing this figure is the first step in setting a baseline in a period that was unaffected by the loss event.
The Standard Turnover figure from the previous year may not reflect the turnover the insured business would have had if the loss event had not occurred. Nothing in business stays the same, and various factors may have increased or decreased turnover from the previous year. Because of this, adjustments to the Standard Turnover are necessary. These may be expressed in different ways in policy wording, but they normally provide for adjustments to reflect the “trend” of the business and circumstances that would have affected it in the year of the loss, so that the turnover is adjusted to reflect what the business would have experienced after the loss event.
The question of what adjustments are necessary is often contentious. Business owners often have a rosy view of how well their business would have performed had it not been for the insured event, whereas insurers are typically more conservative in their assessments.
The policy wording is important in this respect. Some policies exclude trends that would have operated in the insured’s favour, which will disadvantage an insured that is experiencing an upward trend in turnover. Disputes with insurers can also arise as to whether, even where an insured’s turnover would have remained constant had it not been for the loss event, this would have been the net result of both positive and negative circumstances affecting the business, and whether the insurer is entitled to reduce cover because of the former.
A recent case that considered the effect of a trend cause was the decision of the UK Supreme Court in the well-known Covid-19 test cases, reported as Financial Conduct Authority v Arch Insurance (UK) & Ors [2021] 1 UKSC 1. One of the many issues in that case was whether, as the insurers argued, the “trends” clauses in the business interruption policies reduced policyholders’ entitlements because the uninsured effects of the Covid-19 pandemic would have reduced their turnover some time before the insured consequences of the pandemic took effect. For example, where a policy insured a business only when it was compelled to close, but the Covid-19 pandemic had caused a loss of custom well before that date, the insurers argued that the business was suffering a downward trend, so the starting point for its turnover had to be adjusted down accordingly. These were referred to in the judgment as “pre-trigger” losses. The Court rejected the insurers’ argument, holding that to reduce the insureds’ entitlement to reflect a reduction in turnover caused by uninsured effects of the pandemic would amount to a refusal to indemnify the insured for loss caused by the insured peril. The Court’s reasoning was that the loss was proximately caused by both uninsured (but non-excluded) and insured perils with the same originating cause.
Another interesting case involved a claim against an insurance broker, Eurokey Recycling Ltd v Giles Insurance Brokers Ltd [2014] EWHC 2989 (Comm). There, the insured was a waste recycling company whose premises were damaged by a fire in May 2010. Its turnover had risen dramatically, from GBP3.2 million in 2005, to GBP8.18 million in the financial year ended August 2007 and to GBP16.8 million in the financial year ended August 2009. It claimed that it would have achieved an even higher turnover of GBP25 million to August 2010, had it not been for the fire. The problem was that the broker had placed cover on the basis of turnover of only GBP11 million. The claim in this respect turned largely on factual issues as to what the insured had told the broker, and the claim failed on the basis that the broker had given a sufficient explanation of how the cover worked and was bound to follow the insured’s instructions to place cover for a turnover of GBP11 million. The Court observed that a broker is not generally expected to conduct a detailed investigation into a client's business, particularly where a client appears to be well-informed about their own business.
Policyholders should be aware that satisfying their insurer as to the turnover they would have experienced had it not been for the loss event may be challenging, and they will need to have sufficient evidence to show how any relevant trends or circumstances would have affected the business. Statistics New Zealand publishes some useful information about credit card spending on particular classes of business that may be of use in some claims.
Gross Profit
Another issue that arose in Eurokey was the meaning of “Gross Profit” in a business interruption policy. In that case, the insured claimed that the broker had not given a sufficient explanation of the term, but the Court found that this criticism was not justified.
It is important to understand that Gross Profit in a business interruption policy is not the same as gross profit in accounting. A typical policy definition will look something like this:
Gross Profit is the amount by which:
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the sum of the Turnover and the amount of the Closing Stock and Work in Progress shall exceed
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the sum of the amount of the Opening Stock and Work in Progress and the amount of the Uninsured Working Expenses as set out in the Schedule.
This formula takes Turnover as a starting point and then adjusts it by the difference between opening and closing stock and WIP to net off the effect of any difference. There is then a further adjustment for Uninsured Working Expenses. These are costs of the business which will not be incurred if it is not operating, so the insured does not need business interruption insurance to cover the lost revenue that would have covered those costs, and the sum insured may be reduced to save premium. These costs may include, for instance, the cost of power for a business that uses power when operating, salaries and wages of staff who can be laid off when the business is closed, and the cost of raw materials that will not be purchased while the business is closed. It will be important for the insured to make an accurate assessment of the costs it will save if the business is not operating. If it does not estimate this accurately, it risks being underinsured, or paying an unnecessarily high premium for cover it does not need.
Deferred revenue
Some businesses, particularly those dealing with non-urgent work that customers may defer if the business cannot perform it, may experience difficulties in satisfying insurers that their revenue was permanently lost, rather than merely deferred, with customers returning to after the period of interruption ends. That is a challenge for businesses that do not have unlimited resources and would have been busy with work in any event.
Another area in which difficulties can arise is where businesses accept advance bookings, such as the hospitality industry. A hotel operator will commonly accept bookings months in advance. A loss event such as a cyber event may prevent bookings from being accepted for a period of time. The loss from these missed bookings will not be incurred immediately, but will be spread over time, as bookings would have been made at various times in advance. This may result in lost bookings not being covered by the business interruption cover, as the indemnity period in a cyber policy is typically much shorter than it is under an MDBI policy, as we discuss below.
Cyber business interruption policies
In a report issued in September 2025, the insurer Allianz reported that business interruption losses account for over 50% of cyber claim values. This is not surprising, as cyber events do not normally cause physical damage, although the costs of expert assistance to reinstate IT systems can be substantial.
Business interruption cover in cyber insurance policies often features different terminology to that used in MDBI policies. One explanation we have seen for this is that many cyber policies are developed from US wording [1]. The authors of that commentary express the view that some cyber business interruption policy wording is unclear and recommend that insurers and brokers review their wording. Certainly, it is unhelpful that cyber business interruption policies use different wording, and take a different approach, to traditional MDBI policies.
The primary difference is that whereas MDBI policies normally provide cover based on an assessment of Gross Profit, as discussed above, cyber policies often insure “Net Profit”, sometimes called “Business Income”. Gross Profit, in short, equates to business revenue less avoidable costs; the insurer assesses the revenue the business would have earned but for the event and deducts its saved costs. Net Profit is different – it essentially equates to Gross Profit less operating expenses, which are then insured as a separate line item. It is commonly dealt with in terms such as the following:
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Net Income (Net Profit or Loss before income taxes) that would have been earned; and
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Continuing normal operating expenses incurred.
The normal operating expenses that are also covered should include those that are necessary to resume the operations of the business, although the usual separate cover for increased cost of working is also normally present.
Whether cover is provided on the basis of Gross Profit or Net Profit wording, the cover should be the same. Issues can arise, however, where insurers dispute what operating expenses are covered by the cyber wording.
Cyber business interruption insurance also typically features the following differences from traditional MDBI cover:
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The waiting period is often shorter, sometimes as little as six hours, whereas a traditional policy might have a waiting period of 72 hours. Cyber events can be short and sharp, and loss usually begins immediately.
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The insured period is often shorter as well. Cyber events can be enormously disruptive but they can also be shorter in duration. Some policies limit cover to only three months, whereas MDBI policies may extend cover for two or more years.
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Some care may go into defining when the affected period comes to an end. It may be less clear when the effects of a cyber event end, compared with property damage causing a loss of business.
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It may also be challenging to identify the effects of the cyber breach. Some custom may be lost through a loss of confidence in the business that has been affected by the cyber event.
Concluding remarks
Business interruption insurance is a complex and challenging insurance product. The traditional Gross Profit assessment provided for in MDBI policies can be confusing, not least because it uses terminology in a way that differs from the way in which the same terms are used in accounting practice. The different approach taken to business interruption cover in many cyber policies adds to the complexity and potential for confusion. While it is always ambitious to suggest a wholesale departure from tried and tested terms that are well understood by the market, if not by customers, it may be time to take a fresh look at business interruption insurance.
Footnote:
[1] Clyde & Co LLP, Business Interruption - all is not as it seems, 31 July 2019
