Our policy covers business interruption but I am unsure on the sum we should be insuring. Please could you advise on an appropriate level and how we should calculate this?
A: Business Interruption can be made up of different types of cover, such as Loss of Gross Revenue and Increased Cost of Working, but can also have varying levels of cover for certain perils occurring.
Giving you a magic method of determining this figure is hard, but start by looking at your current gross income. Then work forwards, making certain assumptions about growth, such as a predicted 5% growth in income over the next 12 months.
An example would be, your gross income is £100,000 with a 5% growth rate built in – £105,000 over the next 12 months. You then have to understand that the loss could occur on the last day of your insurance, so for a 12-month indemnity period policy you would assume you have reached that 5% growth and you expect 5% the following year. Therefore, you should be insuring for £105,000 plus 5%, which is £110,250. The same principle can be applied for a policy with a 24-month indemnity period.