Business Interruption Insurance for Malaysian Factories: How BI Coverage Protects Your Revenue

Your factory catches fire. Your IAR policy covers the rebuilding cost. But who covers the 12 months of lost revenue while the factory is being rebuilt? That's the RM question that separates insured factories from financially devastated ones. Business Interruption (BI) insurance covers the gap between physical damage repair and revenue recovery.

This guide explains how BI works as a P&E add-on to your IAR or Fire insurance: how it triggers, how gross profit is calculated, how to select the right indemnity period, and the critical average clause that can slash your claim payout if you're underinsured.

This guide covers:

• How BI works as an add-on to IAR/Fire (not a standalone product)
• The material damage trigger and what it means for claims
• Gross profit basis and how to calculate your sum insured
• Indemnity period selection for Malaysian factory scenarios
• The average clause and underinsurance penalty
• Declaration-linked policies for growing businesses
• BI vs MLOP vs BOLOP vs ILOP: which loss-of-profits policy covers what
• Common factory scenarios: fire, flood, monsoon shutdown

Disclaimer: This article provides general guidance on insurance coverage available in the Malaysian market as of February 2026. Policy terms, conditions, and availability vary by insurer. Always review your specific policy wording or consult a qualified insurance professional before making coverage decisions.

What Is Business Interruption Insurance?

Business Interruption (BI) insurance covers the loss of gross profit when insured property damage forces your factory to shut down or operate at reduced capacity. It is not a standalone policy. BI is an add-on (extension) to your Fire insurance or Industrial All Risks (IAR) policy. It only responds when the underlying property policy pays a valid material damage claim.

The core principle: BI puts you back in the financial position you would have been in had the property damage not occurred. It covers the revenue you lose during the interruption and the extra costs you incur to minimise that loss.

BI Element	Description
Policy type	Consequential loss extension to Fire/IAR (not standalone)
Trigger	Valid material damage claim under the underlying Fire/IAR policy
What it covers	Loss of gross profit + increased cost of working during the interruption period
Basis	Gross profit (turnover less specified working expenses) or Revenue basis
Indemnity period	Maximum coverage period: 12, 18, 24, or 36 months
Sum insured	Gross profit for the selected indemnity period
Key danger	Average clause: underinsurance triggers proportional reduction in claim payout

The Material Damage Trigger: How BI Activates

BI does not cover all business interruptions. It only covers interruptions caused by physical damage to insured property from perils covered under your Fire/IAR policy. No property damage claim means no BI claim. This is the material damage proviso, and it's the most important condition in any BI policy.

Scenario	BI Covered?	Reason
Fire destroys your production hall; factory shut down for 12 months rebuild	Yes	Fire is a covered peril under Fire/IAR; material damage claim is valid
Monsoon flood damages warehouse and stock; 3-month cleanup and restoration	Yes (if flood is covered)	Flood covered under IAR or Fire + Special Perils extension
Lightning strike damages electrical switchboard; production halted for 6 weeks	Yes	Lightning is a standard covered peril
Machine breaks down mechanically; production stops for 2 months	No	Machinery breakdown is not a Fire/IAR peril; this is an MLOP claim (attached to MB policy)
Key customer cancels contract; revenue drops 50%	No	No physical damage; business risk, not insurable under BI
Government orders factory shutdown (MCO/pandemic)	No	No physical damage to insured property
Power failure from TNB grid outage; production stops for 3 days	No	No physical damage to your insured property (damage is at the utility's premises)
Boiler explodes; production halted for 4 months	No	Boiler explosion is a BPV peril, not Fire/IAR; this is a BOLOP claim (attached to BPV policy)

This table illustrates why factories need multiple loss-of-profits policies. BI only covers interruptions from Fire/IAR perils. Machinery breakdown losses need MLOP. Boiler explosions need BOLOP. Electronic equipment failure needs ILOP. Each has its own trigger, and no single policy covers all causes of production interruption.

Gross Profit Basis vs Revenue Basis

BI policies can be written on a gross profit basis or a revenue basis. The choice affects your sum insured, premium, and how claims are calculated. Most Malaysian factory BI policies use the gross profit basis.

Feature	Gross Profit Basis	Revenue Basis
Sum insured	Turnover minus specified working expenses	Total turnover (no deductions)
Premium	Lower (sum insured is lower)	Higher (sum insured is full revenue)
Calculation complexity	More complex (must define and agree specified working expenses)	Simpler (just insure total revenue)
Average clause risk	Higher risk of accidental underinsurance (gross profit calculation errors)	Lower risk (revenue is easy to verify from accounts)
Best for	Factories with high material cost ratio (materials = large % of revenue)	Service businesses or businesses with low variable costs

Calculating Insurance Gross Profit for BI

Insurance gross profit for BI follows the same logic as MLOP: turnover minus specified working expenses. The calculation is identical because both policies protect the same financial quantity (gross profit) from different perils.

Component	Treatment	Explanation
Annual turnover	Starting point	Total annual sales revenue
Raw materials and consumables	Deducted	Variable cost that stops when production stops
Packaging materials	Deducted	Variable cost tied to output volume
Outward freight and delivery	Deducted	No production means nothing to deliver
Variable utility costs	Partially deducted	Production-related energy reduces; base load continues
Permanent staff salaries	Included	You continue paying permanent staff even when factory is shut
Rent, rates, property tax	Included	Fixed costs continue regardless of production
Loan repayments, interest	Included	Banks don't pause loans because your factory burned down
Insurance premiums	Included	Annual premiums continue
Net profit	Included	The actual profit you would have earned

Sum insured = Insurance gross profit x (Indemnity period in months / 12)

If your annual insurance gross profit is RM20 million and your indemnity period is 18 months, your BI sum insured should be RM30 million (RM20M x 18/12).

Selecting the Right Indemnity Period

The indemnity period is the maximum duration your BI policy will cover lost profits. It starts from the date of the physical damage and runs until your business returns to the turnover level it would have achieved had the damage not occurred, or until the indemnity period expires, whichever comes first.

What Must the Indemnity Period Cover?

Phase	Description	Typical Duration (Factory Fire)
Emergency response and assessment	BOMBA investigation, damage assessment, loss adjusting	2-6 weeks
Site clearance and demolition	Removing damaged structures and debris	4-8 weeks
Design and planning	Architect/engineer redesign, authority approvals, building permits	8-16 weeks
Reconstruction	Rebuilding the factory structure	6-12 months
Machinery replacement	Ordering, delivery, installation of new production equipment	3-9 months (may overlap with reconstruction)
Testing and commissioning	Equipment testing, quality assurance, authority inspections	4-8 weeks
Production ramp-up	Gradual return to full production capacity	4-12 weeks
Customer recovery	Winning back customers who switched to competitors	3-6 months

For a total factory fire requiring complete reconstruction, the realistic timeline from damage to full revenue recovery is typically 18-30 months. A 12-month indemnity period would leave 6-18 months of uninsured revenue loss. This is why most brokers recommend a minimum 18-month indemnity period for manufacturing facilities, and 24-36 months for factories with long reconstruction timelines or specialised equipment.

Malaysian-Specific Considerations

• Monsoon season: If fire damage occurs before the northeast monsoon, outdoor reconstruction work may be delayed 2-3 months
• Authority approvals: PBT, BOMBA, and DOSH approvals for factory reconstruction can add significant time
• Import lead times: Specialised machinery from Europe, Japan, or the US may have 6-9 month delivery lead times
• Labour availability: Post-disaster construction demand can strain local contractor availability

The Average Clause: The Underinsurance Penalty

The average clause is the most dangerous provision in any BI policy. If your BI sum insured is less than your actual insurance gross profit for the indemnity period, the insurer pays only a proportionate share of your claim. This applies even to partial losses.

How the Average Clause Works

Scenario	Adequately Insured	50% Underinsured
Actual annual gross profit	RM20 million	RM20 million
Indemnity period	12 months	12 months
Required sum insured	RM20 million	RM20 million
Actual sum insured	RM20 million	RM10 million
Actual gross profit loss from 3-month interruption	RM5 million	RM5 million
BI claim payout	RM5 million (100%)	RM2.5 million (50%)
Shortfall (out of pocket)	Zero	RM2.5 million

In the underinsured scenario, the claim was only RM5 million, well within the RM10 million sum insured. But because the sum insured was only 50% of the required amount, the insurer applies the average clause and pays only 50% of the claim. The factory pays RM2.5 million out of pocket even though it had BI insurance.

This is why getting the BI sum insured right is critical. Underinsurance doesn't just affect total loss claims; it reduces payouts on every claim, even small ones.

Declaration-Linked Policies

Declaration-linked BI policies address the underinsurance risk for growing businesses. Instead of a fixed sum insured, you declare your estimated gross profit at inception, and the sum insured is automatically set at 133.33% (or another agreed percentage) of that estimate. You then declare your actual gross profit at each renewal, and the premium is adjusted accordingly.

Feature	Standard BI	Declaration-Linked BI
Sum insured basis	Fixed amount chosen at inception	133.33% of estimated gross profit (provides 33% buffer)
Average clause	Applies if sum insured is less than actual GP	Only applies if actual GP exceeds 133.33% of declared estimate
Premium	Fixed for the year	Provisional premium paid upfront; adjusted at year-end based on actual GP
Growth protection	None (if revenue grows beyond SI, you're underinsured)	Automatic 33% buffer absorbs normal growth
Best for	Stable businesses with predictable revenue	Growing businesses where revenue may increase during the policy year

Declaration-linked policies cost slightly more in premium but provide significant protection against inadvertent underinsurance. For Malaysian factories experiencing revenue growth, this structure is worth the additional cost.

BI vs MLOP vs BOLOP vs ILOP: Complete Revenue Protection

BI is one of five loss-of-profits policies available in Malaysian P&E insurance. Each covers revenue loss from a different cause. A comprehensive factory insurance programme needs the right combination based on the factory's risk profile.

Loss-of-Profits Policy	Parent Policy	Covers Revenue Loss From	Do You Need It?
BI	Fire / IAR	Fire, flood, storm, explosion, all-risks property damage	Yes (every factory with IAR/Fire should have BI)
MLOP	MB	Mechanical/electrical machinery breakdown	Yes if you have production-critical machinery
BOLOP	BPV	Boiler/pressure vessel explosion or collapse	Yes if production depends on boilers/pressure vessels
ILOP	EEI	Electronic equipment/IT system failure	Yes if operations depend on IT/electronic systems
DSU	CAR / EAR	Construction/installation damage delays project start	Yes for new factory/plant construction projects

The Typical Factory Coverage Gap

Most Malaysian factories have IAR + BI. Many also have MB. But the common gap is: MB without MLOP. This means fire losses have revenue protection (BI), but machinery breakdown losses don't. Since machinery breakdown is statistically more frequent than fire, this gap leaves the most common cause of production interruption without revenue protection.

The complete revenue protection programme for a Malaysian manufacturing factory:

• IAR + BI (property damage and fire/flood revenue loss)
• MB + MLOP (machinery breakdown and revenue loss)
• BPV + BOLOP (boiler/pressure vessel failure and revenue loss, if applicable)
• EEI + ILOP (electronic equipment failure and revenue loss, if applicable)

Malaysian Factory BI Scenarios

Scenario 1: Factory Fire and Complete Rebuild

Detail	Value
Industry	Furniture manufacturer, Muar, Johor
Event	Electrical fault in spray booth causes fire; spreads to production hall and warehouse
Material damage	70% of factory destroyed; production hall, spray booth, and finished goods warehouse
Rebuild timeline	16 months (3 months demolition/planning + 10 months construction + 3 months fit-out)
Customer recovery	4 months to regain export orders lost to competitors
Total interruption	20 months to full pre-loss turnover
BI indemnity period needed	24 months minimum
Key lesson	12-month indemnity period would have left 8 months of uninsured revenue loss

Scenario 2: Monsoon Flood Shutdown

Detail	Value
Industry	Electronics assembly factory, Shah Alam, Selangor
Event	December monsoon flooding; 1.2m water level damages ground floor machinery, raw materials, and WIP
Material damage	Production equipment contaminated; raw material stock destroyed; building electrical system damaged
Repair timeline	4 months (cleanup + equipment servicing + electrical rewiring + stock replacement)
BI coverage	Covered under IAR + BI (flood is an IAR peril) or Fire + Special Perils + BI
Increased cost of working	Temporary relocation of critical assembly lines to rented facility; air freight for urgent component orders
Key lesson	Flood is one of the most common BI triggers in Malaysia; ensure your IAR/Fire policy includes flood cover

Scenario 3: Lightning Strike Damages Main Switchboard

Detail	Value
Industry	Food processing factory, Perak
Event	Lightning strike damages main switchboard and transformer; entire factory loses power
Material damage	Switchboard replacement; transformer rewind; surge damage to sensitive control equipment
Repair timeline	8 weeks (custom switchboard: 6-week lead time; 2 weeks installation and commissioning)
BI coverage	Lightning is a standard covered peril under Fire/IAR; BI responds
Increased cost of working	Generator rental to power partial production; cold storage rental for perishable stock
Key lesson	Malaysia has one of the highest lightning strike frequencies in the world; switchboard failures from lightning are a common BI trigger

BI Extensions

Standard BI policies can be extended to cover additional scenarios beyond damage to your own premises.

Extension	What It Covers	When You Need It
Suppliers extension	BI loss when your key supplier's premises are damaged and they can't supply you	If you depend on a single supplier or limited supplier base
Customers extension	BI loss when your key customer's premises are damaged and they can't accept your goods	If you depend on a single customer or limited customer base
Denial of access	BI loss when damage to neighbouring property prevents access to your premises	If access to your factory depends on roads or infrastructure shared with others
Utilities extension	BI loss when damage to utility company premises (TNB, water supply) cuts off your supply	If your production depends on external utilities with no backup
Additional increased cost of working	Extra costs beyond the standard economic test (insurer pays even if cost exceeds gross profit saved)	When maintaining production at any cost is essential (e.g., contractual obligations)

Common Mistakes in BI Insurance

Mistake	Consequence	How to Avoid
No BI at all (IAR/Fire only)	Building gets rebuilt; revenue loss during 12-24 months of reconstruction comes entirely from your pocket	Always pair IAR/Fire with BI; physical recovery without revenue recovery can still bankrupt a business
Sum insured based on accounting gross profit	Underinsurance; average clause reduces every claim payout	Use insurance gross profit (turnover minus specified working expenses); work with your broker and accountant
Indemnity period too short (12 months)	Coverage expires before factory is rebuilt and revenue recovers	Model worst-case reconstruction timeline; add customer recovery time; 18-24 months minimum for most factories
Assuming BI covers machinery breakdown	Machine breaks down; BI claim declined because MB is not a Fire/IAR peril	BI covers Fire/IAR perils only; buy MLOP for machinery breakdown revenue protection
Not updating sum insured for business growth	Revenue grows but BI sum insured stays the same; average clause penalty at claim time	Review BI sum insured annually; consider declaration-linked policy for growing businesses
Fire policy excludes flood (no Special Perils)	Monsoon floods factory; property claim declined; BI can't trigger without valid material damage claim	Ensure IAR or Fire + Special Perils extension includes flood; BI can only cover perils that the parent policy covers
Ignoring customer recovery time in indemnity period	Factory rebuilt and running, but customers have switched to competitors; lost revenue not covered	Indemnity period must cover time until turnover returns to pre-loss level, not just until factory reopens

BI Self-Assessment Checklist

Item	Status
BI extension purchased alongside IAR/Fire insurance	☐
Sum insured based on insurance gross profit (not accounting gross profit)	☐
Sum insured calculated for full indemnity period (not just 12 months)	☐
Indemnity period covers: rebuild + equipment + testing + ramp-up + customer recovery	☐
Underlying IAR/Fire policy covers flood (Special Perils or IAR all-risks)	☐
Average clause implications understood; sum insured adequate to avoid underinsurance penalty	☐
Sum insured reviewed and updated annually	☐
Declaration-linked policy considered if business revenue is growing	☐
MLOP also in place for machinery breakdown revenue protection (not just BI)	☐
Supplier/customer extensions considered if supply chain is concentrated	☐

FAQ

What is the difference between BI and MLOP insurance?

BI covers revenue loss from fire, flood, and property damage perils (attached to your Fire/IAR policy). MLOP covers revenue loss from machinery breakdown (attached to your MB policy). They cover different causes of production interruption. A factory needs both for comprehensive revenue protection because machinery breakdown is more frequent than fire, but fire causes longer shutdowns.

Can I buy BI insurance as a standalone policy?

No. BI is an add-on to your Fire or IAR insurance policy. It requires a valid material damage claim under the parent policy to trigger. Without a Fire/IAR policy, you cannot purchase BI. The two work together: Fire/IAR covers the physical repair, BI covers the revenue loss during the repair period.

What is the average clause in BI insurance?

The average clause means that if your sum insured is less than your actual insurance gross profit, the insurer reduces your claim payout proportionally. If you're 50% underinsured, you receive only 50% of your claim. This applies to every claim, including partial losses. Getting your sum insured right is critical to avoid this penalty.

How long should my BI indemnity period be?

For most Malaysian factories, a minimum of 18 months is recommended. Major fire damage requiring complete factory reconstruction typically takes 12-16 months for the physical rebuild, plus 4-8 months for customer recovery. A 12-month period is often insufficient. For large or complex facilities, consider 24-36 months.

Does BI cover flood damage in Malaysia?

BI covers revenue loss from any peril covered under your parent Fire/IAR policy. If your policy includes flood coverage (either through IAR all-risks or Fire + Special Perils extension), then yes, flood-related BI is covered. If your Fire policy doesn't include flood, neither does your BI.

What is a declaration-linked BI policy?

A declaration-linked policy automatically sets your sum insured at 133.33% of your declared estimated gross profit, providing a 33% buffer against underinsurance. You pay a provisional premium based on your estimate, which is adjusted at year-end based on your actual gross profit. This protects growing businesses from inadvertent underinsurance.

Does BI cover lost revenue from power outages?

Standard BI only covers interruptions caused by physical damage to your insured premises. A TNB power outage caused by damage at the utility's premises (not yours) is not covered under standard BI. You can add a utilities extension to cover this scenario, which responds when physical damage at the utility's premises disrupts your power supply.

What is "increased cost of working" in BI?

Increased cost of working covers extra expenses you incur to reduce the interruption loss. Examples: renting temporary premises, outsourcing production, hiring generators. The insurer pays these costs, but only up to the amount of gross profit they save. If renting a generator costs RM50,000/month but saves RM200,000/month in gross profit, the generator rental is covered.

Is BI insurance expensive for Malaysian factories?

BI premium is calculated as a percentage of the sum insured (gross profit for the indemnity period). The rate depends on the underlying Fire/IAR rating of your premises. For well-protected factories, BI adds a relatively modest cost on top of your IAR/Fire premium. The cost of BI is small compared to the potential revenue loss from even a moderate fire or flood event.

Can my BI claim exceed my material damage claim?

Yes, and this is common. A factory fire might cause RM3 million in property damage but RM10 million in lost revenue over the 18-month rebuild period. The BI claim is based on lost gross profit, which for profitable, high-turnover businesses often far exceeds the physical damage. This is exactly why BI exists: the revenue loss is usually the larger financial impact.

Foundation Conclusion

Property insurance rebuilds your factory. Business Interruption insurance keeps your business alive while that happens. Without BI, even a fully insured factory can face financial ruin because the 12-24 months of zero revenue during reconstruction drains cash reserves, triggers loan defaults, and sends customers to competitors.

Every Malaysian factory with IAR or Fire insurance should have BI. The calculation is simple: what is your gross profit, how long would reconstruction take, and can your business survive that duration without income? For most factories, the answer points clearly to BI with an adequate indemnity period and a sum insured that reflects your actual gross profit, not an underestimate that triggers the average clause at the worst possible moment.

Talk to our risk specialists about structuring your BI programme