Let us assume that a restaurant generates £10,000 per week. The normal expenses are food 40% of sales i.e normally £4,000 per week, rent is £1,000, wages £3,000 and other expenses are £1,000 leaving a net profit of £1,000 per week for the owner.
In the event of water damage which reduces trade by 50% the business would move from a profit to a loss position as seen below. With a typical business interruption policy, the business would be paid £3,000 to put them back in the same position they would have been in but for the interruption to their business. (£2,000 to wipe out the loss and £1,000 to reinstate the net profit).
The second cause of a loss of insurable Gross Income or depending on the wording of the policy, Gross Profit, can be from increased costs of working being incurred by the business that are over an above the norm, to maintain production and supply your customer with stock. For example, say our same restaurant experiences an electrical power outage for a week due to a fire in a sub-station. Rather than shut their doors, the manager hires a generator for one week at a cost of £1,000. The financial position of the business would be that instead of the restaurant owners making £1,000 net profit they would break even this week. With the correct business interruption insurance the cost of hiring the generator would be met by the insurer. That is, the expected £1,000 net profit is reinstated.
As just shown, full Business Interruption Insurance covers both forms of financial loss. On the other hand, not having the cover can often lead to a much greater monetary loss than a property loss. For example, the interruption of a public utility may not cause any damage to property but could result in a significant loss of insurable Gross Income.
Example A: Insurance pays £3,000
Example B: Insurance pays £1,000