The BI policy that looked right three years ago

End of financial year is when Australian businesses close their books, reconcile their numbers and confirm what the past twelve months actually looked like. It is also, for many businesses, the moment business interruption insurance gets quietly carried over without anyone checking whether it still reflects the business those numbers describe.

That oversight is becoming more costly. Australian commercial insurance premiums have been easing since 2024 and are now at their most competitive in years. For many businesses the instinct is to hold cover steady and take the saving. With 30 June approaching, that instinct is worth pausing on.

The issue is not premium level. It is whether the underlying policy still reflects the business it is meant to protect. For businesses across construction, professional services, distribution and manufacturing, EOFY is the clearest moment in the calendar to ask that question – before a claim forces it.

What it looks like in practice

The following scenario is composite and illustrative.

A Melbourne-based metal fabrication business hits its stride between 2021 and 2024. Revenue grows from $3.8 million to $6.1 million. New contracts, a larger crew, a second production supervisor brought on to handle the load. Each year at renewal the broker runs through the checklist.

Anything changed? Not really. Same premises, same work and same policy.

Then a fire guts the workshop. Tools, materials and vehicles. The property claim settles however the business interruption claim does not go the same way.

The BI policy had declared gross profit of $1.6 million. The actual figure at the time of the loss was $2.7 million. The insurer applied the average clause, a mechanism that does not simply reduce the payout. On a $600,000 loss, the business received $444,000. It funded the remaining $156,000 itself, on top of managing the rebuild and keeping clients from walking.

The policy wording had not changed but the business had.

What the average clause actually does

This is the mechanism most business owners have never seen explained clearly.

Most commercial BI policies contain a co-insurance or average clause. If the declared gross profit is less than 80% of the actual figure, the insurer reduces the claim payout by the same proportion. The precise threshold and calculation method varies between policies, confirm the basis that applies to your policy with your broker.

The formula below illustrates how the clause commonly operates:

(Sum insured ÷ 80% of actual gross profit) × loss = claim payment

Here is what that looks like with real numbers:

At claim time on a $600,000 loss:

$1.6m ÷ $2.16m × $600,000 = $444,000 paid

The business funds the remaining $156,000 itself

The clause is not buried in fine print. It is standard in most commercial BI policies in Australia. Most business owners encounter it for the first time during a claim.

There is a second layer of complexity that makes the problem worse: the gross profit figure used for insurance purposes is not the same as the figure in your accounts. Many BI policies define gross profit by stripping out variable costs that would cease if trading stopped, including raw materials, packaging and freight, though definitions vary between policy wordings.

What remains requires deliberate calculation, not a lift from the Profit & Loss. Businesses that declare their accounting gross profit without adjusting for the correct insurance definition are often underinsured from day one, before revenue growth is factored in at all.

The indemnity period is the other number that matters

Revenue is one variable. The indemnity period is the other and it is where the real exposure often sits.

Twelve months is the most common default. It is also, in many cases, the figure a broker puts in front of a client because it is the standard option, not because anyone has modelled what recovery would actually look like for that specific business. Most owners accept it without question. It rarely comes up again until a claim.

Specialist fabrication and processing equipment can run to twelve to eighteen months for delivery. Commercial rebuild programmes in metropolitan areas are routinely delayed by planning approvals and contractor availability. A business that takes fifteen months to restore full capacity has three months of lost income with no insurer behind it.

That gap does not announce itself at renewal. It appears at claim time.