Business valuation for insurance and business interruption
Two different exercises share the name. Setting sums insured requires current market or reinstatement values for assets and a properly calculated insurable gross profit. Supporting a claim requires quantifying the loss that actually occurred, against what would have happened otherwise.
Underinsurance is discovered at claim time, when it is too late, and it is usually the result of values that were set years ago and indexed rather than assessed. Both problems — the sum insured and the claim — are valuation problems.
The brief
Who reads it, and what it has to satisfy
The purpose sets the standard of value, the level of documentation and the person the report has to convince. Getting that wrong is the most common reason a valuation is rejected.
Your broker and insurer when setting cover; the insurer’s loss adjuster when supporting a claim.
For assets, market value or reinstatement cost as the policy requires. For interruption, the loss actually suffered against a counterfactual.
Current, for sums insured. For a claim, the date of loss and the indemnity period following it.
What the report must contain for this purpose
- The basis of value the policy requires, stated and applied
- Assets scheduled individually, with age, condition and location
- The distinction between market value and reinstatement cost, made explicit
- For interruption, the gross profit definition the policy uses — not the accounting one
- A counterfactual: what the business would have earned but for the event
- Assumptions and limitations disclosed in full
Sequence
How an insurance valuation runs
The first question is always which document governs — the policy wording decides the basis, not general valuation practice.
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01
Read the policy
Basis of settlement, definitions of gross profit and indemnity period, coinsurance or average clauses, and what is excluded.
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02
Schedule and inspect the assets
Plant, equipment, stock, fit-out and property inspected and valued on the basis the policy requires.
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03
Calculate insurable gross profit
Using the policy’s definition, which differs from the accounting one and is where most underinsurance originates.
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04
Quantify the loss, where claiming
Actual results against a documented counterfactual, with increased costs of working and saved expenses treated separately.
Where it goes wrong
How businesses end up underinsured
Underinsurance is almost never deliberate. It accumulates quietly through the five mechanisms below.
What average actually does
Where a policy contains an average or coinsurance clause and the sum insured is below the required value, the insurer may reduce the payout proportionally — even on a partial loss. A business insured at 60 per cent of value can find a $500,000 claim settled at $300,000. A current valuation is the only reliable protection.
- Indexing instead of valuing A sum insured set eight years ago and indexed at CPI bears no relation to current reinstatement cost, particularly for building work and imported plant.
- Confusing market value with reinstatement Market value is what an asset would sell for; reinstatement is what it costs to replace new. For specialised plant and fit-out, the second is frequently multiples of the first.
- Using the accounting gross profit Policy gross profit is turnover less specified variable costs, defined by the wording. Using the accounting figure typically understates it substantially and triggers average.
- Too short an indemnity period Twelve months is the default and it is often wrong. Rebuilding a specialised facility, re-tooling and rebuilding a customer base regularly takes longer.
- Assets not on the schedule Fit-out, leasehold improvements, moulds, tooling and stock in transit are commonly missing entirely from the asset schedule.
What we need
Documents for this engagement
For sums insured, the asset schedule drives it. For a claim, the trading history and the counterfactual do.
Open the standard checklist →- The policy schedule and wording Basis of settlement, definitions and any average clause
- Asset register With locations, acquisition dates and condition
- Financial statements — three years To calculate insurable gross profit
- Management accounts Monthly, for trend and seasonality in a claim
- Details of the event Where a claim is being quantified: what happened and when
- Post-event trading records Actual results and increased costs of working incurred
Every two to three years for most businesses, and immediately after any material change — a fit-out, a plant purchase, a move, or a significant change in turnover. Indexation between formal reviews is reasonable; indexation instead of formal review is how underinsurance accumulates.
Market value is what the asset would realise in a sale in its current condition. Reinstatement cost is what it would cost to replace it new, including delivery, installation and commissioning. For specialised plant, fit-out and buildings the second is frequently far higher, and which one applies is determined by the policy wording, not by preference.
Because the policy defines it. Policy gross profit is generally turnover less specified variable costs, and it typically includes fixed costs and net profit that continue during the interruption. The accounting gross profit deducts all cost of sales and is almost always lower — using it is one of the most common causes of underinsurance in interruption cover.
Yes. Loss quantification requires a documented counterfactual — what the business would have earned but for the event — built from trading history, seasonality, market conditions and the specific circumstances. It is prepared to the same evidentiary standard as an expert report, because it will be tested by the insurer’s loss adjuster.
Yes, in-house. Asset Valuations Group holds Certified Asset Valuer accreditation and inspects the assets rather than working from a register, which is precisely what a defensible sum insured requires.
Reviewed by a Certified Practising Valuer
Reviewed by Jarrad Khoury, Director and Head of Valuations — Registered Valuer (QLD, Not Limited), Licensed Valuer (WA, Not Limited), CPV and CBV. Published by Business Valuations Brisbane, the business valuation division of Asset Valuations Group.
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