Business Interruption Insurance Claims

Business interruption insurance covers the financial loss a business suffers when it can't trade normally because of an insured event. A fire destroys the premises. A flood closes the factory. A pandemic shuts down the high street. The policy is supposed to put the business back in the position it would have been in had the event not occurred. But quantifying that loss is rarely straightforward - and that's where forensic accountants come in.

This guide explains how business interruption insurance claims work, how losses are calculated, and how forensic accountants support solicitors and policyholders through the claims process and into litigation if needed.

What is a business interruption insurance claim?

Business interruption (BI) insurance is typically purchased alongside property insurance. It covers the consequential financial loss that follows from an insured peril - not the physical damage itself (that's the material damage claim), but the loss of income and additional costs incurred while the business recovers.

The key components of a BI policy are:

• Insured perils. The events covered by the policy - fire, flood, storm, impact, theft, or (in some policies) disease, denial of access, or prevention of access.
• Indemnity period. The maximum period for which the policy pays out, typically 12, 18, or 24 months from the date of the insured event. The choice of indemnity period is critical: a 12-month period may be inadequate if the business takes 18 months to recover.
• Gross profit. Most BI policies define "gross profit" differently from the accounting definition. The policy definition typically means turnover less variable costs (cost of goods, variable overheads). Understanding the policy definition is essential for calculating the claim correctly.
• Standard turnover. The turnover the business would have achieved during the indemnity period had the insured event not occurred. This is the counterfactual - and it's where most disputes arise.

The basic calculation is: (standard turnover minus actual turnover) multiplied by the rate of gross profit, adjusted for trends and savings. In practice, real cases are more complex. Seasonal variations, growth trends, new contracts, and market changes all affect the calculation.

How forensic accountants quantify business interruption losses

Quantifying a business interruption claim requires the forensic accountant to model two scenarios: what actually happened, and what would have happened without the insured event.

Standard turnover. The forensic accountant analyses historical trading data to project what the business would have earned during the indemnity period. This involves reviewing monthly management accounts, VAT returns, bank statements, and any forward-looking information such as budgets, order books, and signed contracts. Seasonal patterns must be identified and reflected in the projection.

Actual turnover. The turnover the business actually achieved during the indemnity period, including any revenue generated from temporary arrangements (trading from alternative premises, online sales, reduced-capacity operations).

Rate of gross profit. The ratio of insured gross profit to turnover. The forensic accountant calculates this from historical data, adjusting for any anticipated changes in the cost base.

Savings. Fixed costs that the business didn't incur because of the interruption - rent on premises not occupied, salaries not paid, utilities not used. These are deducted from the claim because the policyholder hasn't incurred them.

Increased cost of working (ICOW). Additional costs the business incurred to keep trading during the interruption - temporary premises, overtime, equipment hire, additional transport costs. ICOW is recoverable to the extent that it reduces the BI loss. If spending GBP 50,000 on a temporary premises enables the business to earn GBP 200,000 that it would otherwise have lost, the GBP 50,000 is claimable. If the ICOW exceeds the revenue it generates, the excess isn't covered.

Trends adjustments. The policy's trends clause requires the claim to reflect what would have happened to the business anyway, regardless of the insured event. If the wider market was declining, standard turnover should be adjusted downward. If the business had secured a major new contract, standard turnover should be adjusted upward. This is often the most contentious element of the calculation.

The FCA test case and its impact on BI claims

The FCA test case - FCA v Arch Insurance [2021] UKSC 1 - fundamentally changed the landscape for business interruption insurance claims in the UK.

The case arose from the COVID-19 pandemic. Thousands of businesses had BI policies with disease clauses, prevention of access clauses, or hybrid wordings. Insurers largely declined claims, arguing that the pandemic was a single, global event and that individual policyholders couldn't prove their loss was caused by COVID-19 occurring within the policy's specified radius.

The Supreme Court ruled broadly in favour of policyholders. Key findings:

• Disease clauses. For policies covering disease within a specified radius (typically 25 miles), each case of COVID-19 within the radius was a separate occurrence of the disease. The policyholder didn't need to prove that a specific case caused their loss - the disease's occurrence within the radius was sufficient.
• Prevention of access. Government-mandated closures constituted prevention of access. Businesses forced to close by regulation were entitled to claim.
• Trends clauses. Insurers couldn't use the trends clause to strip out losses caused by the pandemic itself. The counterfactual had to assume the insured peril didn't occur - which meant assuming the pandemic didn't happen.
• Orient Express principle overruled. The pre-existing Orient Express Hotels v Assicurazioni Generali [2010] decision - which had allowed insurers to argue that the business would have suffered the same loss anyway due to the wider event - was overruled.

For forensic accountants, the FCA test case confirmed that modelling the counterfactual correctly is critical. The "but for" scenario must assume the insured peril didn't occur. This applies not just to pandemic claims but to all BI claims going forward.

Preparing a business interruption claim

A well-prepared BI claim requires thorough documentation and clear presentation. Forensic accountants help policyholders and their solicitors assemble the evidence and present the claim in a form that maximises the prospect of recovery.

Documents typically required include:

• Management accounts for at least 3 years prior to the loss (monthly, if available)
• Annual statutory accounts for the same period
• VAT returns
• Bank statements for all business accounts
• Budgets, forecasts, and business plans
• Order books, contracts, and sales pipeline data
• Payroll records
• Details of any temporary arrangements made to continue trading
• Records of additional costs incurred (ICOW)
• The policy wording (essential for understanding the defined terms and basis of settlement)

The forensic accountant reviews this material, calculates the claim, and prepares a detailed claims schedule. The schedule should be transparent, well-referenced, and supported by clear workings. Insurers respond better to claims that are professional and well-evidenced. A poorly presented claim invites challenge.

The tax treatment of BI insurance proceeds varies depending on the business structure and the nature of the loss. For advice on the tax implications, mtd.digital can advise on the specifics.

Common disputes in business interruption claims

BI claims are frequently disputed. Insurers have experienced adjusters and forensic accountants reviewing claims from their side. Common areas of dispute include:

Pre-existing decline. The insurer argues that the business was already in decline before the insured event, so the standard turnover projection is too high. The forensic accountant must separate genuine pre-existing trends from the effects of the insured event. This requires careful analysis of historical performance and any external factors affecting the business.

Failure to mitigate. The policyholder has a duty to take reasonable steps to minimise the loss. Insurers may argue that the business could have resumed trading sooner, moved to temporary premises, or taken orders online. The forensic accountant assesses whether the mitigation steps taken were reasonable and what additional steps might have reduced the loss.

Policy exclusions. The insurer invokes an exclusion clause - for example, excluding losses caused by a notifiable disease, or requiring "material damage" as a trigger for the BI claim. The forensic accountant's role here is to present the financial evidence; the legal arguments on policy construction are for the solicitors and barristers.

Aggregation. In cases with multiple insured events (for example, a flood followed by a separate fire), the insurer may argue that the losses should be aggregated under a single policy limit. The forensic accountant must be able to separate and quantify the losses attributable to each event.

Underinsurance. If the sum insured is less than the actual gross profit of the business, the average (or "condition of average") clause applies. The claim is reduced proportionately. The forensic accountant calculates the rate of underinsurance and its impact on the payout. This is a painful discovery for policyholders who didn't review their cover.

Acting as expert witness in BI disputes

When a BI claim can't be resolved by negotiation, it goes to litigation. The forensic accountant's role shifts from claims preparation to expert witness evidence.

In quantum proceedings, the forensic accountant prepares a formal expert report under CPR Part 35. The report sets out the methodology for calculating the loss, the data relied upon, the assumptions made, and the resulting figure. The report must be balanced - acknowledging uncertainties and presenting the range of possible outcomes, not just the figure most favourable to the instructing party.

Where both sides have instructed forensic experts, the court will direct a joint expert meeting. The experts discuss the methodology, the assumptions, and the figures. They produce a joint statement identifying what they agree on (perhaps the rate of gross profit) and what they disagree on (perhaps the standard turnover projection or the trends adjustment). The joint statement is disclosed to the court and often narrows the dispute significantly.

At trial, the forensic accountant gives oral evidence. Cross-examination in BI cases tends to focus on the assumptions underlying the standard turnover projection: what growth rate was assumed? What evidence supports that rate? What about the competitor that opened down the road? What about the contract that was lost before the insured event? The forensic accountant must know their numbers inside out and be able to justify every assumption.

For litigation support in business interruption disputes, early instruction is essential. The forensic accountant needs time to review the documents, build the model, and prepare a report that will withstand challenge.

Choosing a forensic accountant for your BI claim

Business interruption claims require specific expertise. Not every forensic accountant has experience with insurance claims, and the methodology for BI quantification is different from (for example) a loss of profits claim in breach of contract proceedings.

When choosing a forensic accountant for a BI claim, solicitors should look for:

• Insurance claims experience. Have they prepared or challenged BI claims before? Do they understand policy wordings, the standard approach to calculating insured gross profit, and how trends clauses work?
• Sector knowledge. A forensic accountant who understands the hospitality sector will be more effective on a restaurant BI claim than one whose experience is entirely in manufacturing. Sector knowledge affects the quality of the standard turnover projection and the ability to anticipate insurer challenges.
• Court experience. If the claim is likely to be disputed, the forensic accountant must be someone who can give oral evidence. Ask about their experience of cross-examination in insurance disputes.
• Availability. BI claims are time-sensitive. The policy imposes notification deadlines, and evidence (particularly management accounts and operational records) becomes harder to obtain as time passes. Instruct early.

Jack Ross Chartered Accountants has direct experience in business interruption claims across hospitality, retail, and professional services. If you need forensic support for a BI claim - whether at the claims preparation stage or in litigation - contact our forensic team to discuss your case.