A Practical Methodology for Business Interruption Insurance

A step-by-step approach to identifying a mine's revenue-generating processes, quantifying potential financial losses from disruption, and determining an appropriate insurance limit and indemnity period.

Methodology — Roger Donaldson, Director, MineTrans Insurance Brokers

Overview diagram of the BI methodology: value chain and assets (SAG mill, crushers, tertiary crusher, mills, primary crusher, maximum foreseeable loss) feeding into quantification and sum insured (gross profit at risk, increased cost of working, formula-based sizing) — The methodology at a glance — value chain and assets through to quantification and sum insured

1. Understand the Mining Operation

Document the complete mining value chain:

Exploration (if applicable)
Drilling and blasting
Loading and hauling
Crushing and screening
Processing / beneficiation
Tailings management
Stockpiling
Rail / road transport
Port / export facilities

Identify: annual production (tons), commodity sold, revenue streams, major customers, critical assets.

2. Identify Business Interruption Triggers

Determine events that could stop or reduce production: fire, explosion, flood, slope failure, conveyor collapse, processing plant damage, power failure, tailings dam incident, equipment breakdown (if insured), natural catastrophes.

3. Identify Critical Assets

Rank equipment according to impact on production. Example:

Asset	Production Impact	Replacement Time
Primary crusher	100%	10 months
SAG mill	100%	14 months
Ball mill	60%	8 months
Main conveyor	90%	7 months
Substation	100%	9 months

These assets generally dictate the required indemnity period.

4. Determine Maximum Foreseeable Loss (MFL)

Estimate the worst realistic insured event — e.g. fire destroys the processing plant, production stops completely, rebuilding takes 16 months. This becomes the basis of the BI scenario.

5. Calculate Gross Profit at Risk

The insurance definition of Gross Profit differs from accounting gross profit.

Gross Profit = Turnover − Uninsured Variable Costs

Variable costs often include royalties, freight, export charges, fuel linked directly to production, consumables directly related to output.

Fixed costs remain insured: salaries, administration, debt servicing, depreciation (depending on policy), lease costs, security, maintenance staff.

Item	Value (USD)
Annual revenue	500 million
Variable costs	180 million
Gross Profit	320 million

6. Determine Maximum Downtime

Estimate debris removal, engineering, procurement, manufacturing, shipping, customs, construction, commissioning, ramp-up. Example:

Activity	Months
Investigation	1
Design	2
Procurement	6
Shipping	3
Installation	3
Commissioning	2
Total	17 months

Choose an indemnity period longer than the expected recovery.

7. Estimate Reduction in Turnover

Month	Production	Revenue Loss
1–6	0%	100%
7–12	40%	60%
13–18	80%	20%

8. Calculate Increased Cost of Working (ICOW)

Estimate additional costs incurred to reduce the interruption: hiring mobile crushers, contract mining, temporary generators, equipment rental, alternative haul routes, outsourced processing, air freight of spare parts. These costs are generally recoverable if economically justified.

9. Consider Supply Chain Dependencies

Evaluate single-source suppliers, explosives supply, electricity provider, water supply, rail network, port facilities, fuel suppliers. Also assess contingent business interruption exposures where available.

10. Assess Risk Mitigation Measures

Document redundant conveyors, spare transformers, backup generators, critical spare parts, duplicate pumps, preventive maintenance, emergency response plans, fire protection systems, stockpile capacity. These measures can reduce BI exposure.

11. Select an Appropriate Indemnity Period

Mine Type	Typical Indemnity Period
Quarry	12 months
Coal mine	18 months
Gold mine	24 months
Copper mine	24–36 months
Iron ore mine	24 months
Smelter	24–36 months

Long-lead items such as mills or transformers often justify longer periods.

12. Determine the BI Sum Insured

BI Sum Insured = Annual Gross Profit × (Indemnity Period ÷ 12) + ICOW

Example: Annual Gross Profit USD 320m, Indemnity Period 18 months, ICOW USD 25m → (320 × 1.5) + 25 = USD 505 million

Scenario Analysis

Model several credible scenarios to test adequacy of cover:

Scenario	Downtime	Estimated BI Loss
Crusher fire	6 months	USD 140 million
Mill explosion	18 months	USD 470 million
Tailings failure	24 months	USD 620 million
Substation fire	10 months	USD 210 million
Conveyor collapse	8 months	USD 170 million

The largest credible insured loss should guide the BI limit.

Final Deliverables

A robust BI insurance assessment for a mining facility should include:

Description of the mining process and critical operations
Asset criticality ranking and production bottlenecks
Maximum Foreseeable Loss (MFL) scenario
Gross Profit calculation based on policy wording
Production interruption and recovery model
Increased Cost of Working assessment
Supply chain and utility dependency analysis
Recommended indemnity period with justification
Recommended Business Interruption sum insured
Scenario-based BI loss estimates
Key assumptions, exclusions, and sensitivity analysis

This methodology aligns with common practices used by mining companies, insurers, brokers and risk engineers to establish appropriate Business Interruption insurance limits and support underwriting decisions.

The methodology is taught in full, with worked examples, on the Advanced Mining Insurance Training course.

Apply this to your operation

Working through the twelve steps against a live mine takes production data, a critical-asset view and claims history. Send your details and a MineTrans advisor will apply the methodology to your operation and come back with an indicative indemnity period and BI sum insured — no obligation.