Pharmacy Water Damage Claims: Why Your Business Interruption Cover May Not Replace Lost Revenue

Key Takeaways:

• Business interruption cover does not automatically replace lost income. Some business packs only cover the cost of working (ICOW, or standalone AICOW) - the extra costs of staying open - not the gross profit you lose when sales don’t happen.
• Water can come in from a neighbouring tenancy through no fault of your own. It’s a shared-building risk for any retailer, a pharmacy included, and it doesn’t take a fire to shut part of a shop down.
• Knowing which basis sits on your policy (a cost-of-working basis, or one that also includes loss of gross profit) is the single thing that decides what you get paid when a register goes down.

A water pipe lets go in the tenancy above your pharmacy overnight. By morning, water has tracked down through the ceiling, soaked the flooring, swollen the cabinets, and stained the plaster and paint. The register nearest the leak is down. And you’re heading into one of your busiest trading periods of the year.

It doesn’t take a dramatic fire to cause this kind of damage. A leak from next door will do it. And here’s the part worth checking: the “business interruption” line on your business pack might not replace the trade you lose while you sort it out.

This article walks through what really happens in a water-damage claim like this, the difference between cover that pays your extra costs and cover that replaces your lost gross profit, and how to check what your own cover actually pays.

What actually happens when water damage hits a pharmacy?

Water damage doesn’t always start where you’d expect. When it comes from a neighbouring tenancy rather than from inside the shop itself, the business is simply downstream of someone else’s problem. Like a lot of retailers, pharmacies sit in strips and shopping centres, packed wall-to-wall with other tenants, so a pipe, a hot-water unit, or an air-conditioning line that fails upstairs or next door can end up causing the damage.

Once water gets in from above, gravity does the rest. It tends to damage:

• Flooring and cabinetry, which are among the most expensive things to replace
• Plaster and paint, which stain and need redoing
• Stock and fittings sitting in the path of the water
• A point-of-sale register, which can be knocked out entirely

Then there’s the operational hit. A section of the shop gets closed off while it dries out and gets repaired, so trade slows or stops in that part of the pharmacy.

In a recent anonymised claim from our pharmacy book, a pharmacy had a water leakage event from a neighbouring tenancy that damaged flooring, cabinets, plaster and paint, and knocked out a register during a peak trading period. The property side of the claim was reasonably clear. The lesson came from a different part of the policy entirely: the business interruption section.

Example: Picture a community pharmacy in a suburban shopping centre. The cafe two doors up has a burst supply line on a Saturday night. By Monday, the pharmacy’s front-left corner, including one of its registers, is taped off for repairs. Customers still come in, but the queue is slower, the closed section can’t trade, and scripts are being dispensed around the disruption. The repairs themselves are covered. The question is what happens to the income lost while the corner is shut.

For the broader picture of what pharmacies claim on, see our guide to common pharmacy claims. This article stays on one mechanism those posts don’t unpack: what your business interruption section actually pays.

Cost of working vs loss of gross profit: the distinction that decides your payout

This is the core of it. Business interruption cover does two very different jobs, and a business pack can be written with one, the other, or both.

Cost of working covers the extra money you spend to keep trading after an insured event. In policy wording this is Increased Cost of Working (ICOW) and, where it’s written as a standalone item with its own sum insured, Additional Increased Cost of Working (AICOW). Either way, it funds continuity, not lost margin.

Loss of gross profit is the other job. Gross profit is your margin: the turnover you lose, multiplied by your rate of gross profit, less any costs that fall away when you’re not making those sales. People loosely call this “lost revenue”, but it isn’t revenue - it’s the profit on the revenue you didn’t earn. The two bases are not the same thing, and the gap between them is exactly the variable costs you save when sales stop.

The cost-of-working side is the money you spend so you can keep the doors open: hiring temporary equipment, paying staff overtime, setting up a temporary fit-out or relocating the dispensary function while repairs happen, extra cleaning. The logic is that the insurer would often rather help you keep trading than carry the full loss of margin, because keeping you open can cost less overall.

Loss of gross profit is different. It indemnifies the margin you lost because sales didn’t happen. If the closed-off corner of the pharmacy would normally have produced a certain amount of gross profit over those weeks, this is the section that responds to that gap. A cost-of-working basis on its own will help you pay to keep going, but it won’t make up the margin on the sales that simply never happened.

Here’s why this matters in practice. In the anonymised claim above, the business interruption section responded on a cost-of-working basis: it covered the extra costs of keeping the pharmacy trading through the disruption, but not the gross profit lost while a register was down. Whether a policy labels that ICOW or AICOW, the practical effect for the owner is the same - continuity is funded, lost margin is not.

That’s not a defect in the policy. It’s simply the basis that was on the cover, and the owner needs to know which basis they hold before something goes wrong.

What it covers	Cost of working (ICOW / AICOW)	Loss of Gross Profit
The idea behind it	Extra money to keep trading	The margin you lost on sales that didn’t happen
Typical examples	Temporary fit-out, hire equipment, staff overtime, relocating the dispensary, extra cleaning	Turnover you lost, multiplied by your rate of gross profit, less the costs you saved
What it does NOT do	Make up the margin on lost sales	Pay your extra costs of staying open (that’s cost of working)
When a pharmacy feels the gap	Rarely, if extra costs are low	When real trade is lost during a busy period

The takeaway isn’t that one basis is right and the other is wrong. It’s that “business interruption cover” on a quote summary tells you almost nothing on its own. The basis of settlement underneath it is what counts.

Why does this matter most during peak trading?

A cost-of-working-only gap bites hardest when you lose real trade during a peak period, because that’s exactly when the margin you can’t earn is at its highest and the extra costs of staying open are least able to make up for it.

Pharmacies have clear peaks: cold and flu season, the lead-up to public holidays when scripts get filled before the doors close for a few days, end-of-year shopping in centre locations. If a leak takes out a register or closes a section during one of those windows, the lost trade is far larger than it would be in a quiet fortnight.

With a cost-of-working basis, the insurer helps you spend money to keep going. Useful, but it doesn’t replace the gross profit on the prescriptions and front-of-shop sales you simply couldn’t process. With a basis that includes loss of gross profit, that lost margin is the thing the section is designed to address. The disruption is identical in both cases, but the financial outcome is not.

This is the scenario worth picturing before you renew, not after a claim. A leak you didn’t cause, during the worst possible week, with a register down. Knowing in advance which side of that line your cover sits on changes how exposed you are.

Why does claims service decide the outcome, not just the wording?

Two pharmacies can hold near-identical wording and have very different claim experiences, because how an insurer handles the claim matters as much as what the policy says on paper. A water-damage claim has moving parts: assessing the property damage, scoping repairs, dealing with the neighbouring tenancy’s insurer, and keeping the pharmacy trading throughout. The insurer’s claims team is what holds that together.

This is one reason the insurer behind your business pack matters. Across our portfolio, our experience placing and managing claims with Vero has been positive, and that on-the-ground experience matches the recognition Vero has received for claims service. Vero won the 2025 Gold Mansfield Award for claims excellence, its sixth consecutive win. The Mansfield Awards recognise insurers for the quality of their claims handling, so a sixth straight Gold is a meaningful signal.

To be clear, that’s a portfolio-level and external-recognition point, separate from any single claim. The reason we raise it is practical: when you’re mid-claim with a register down and a shopfront half-shut, the difference between a slow claims process and a responsive one is felt in real money and real stress. For a step-by-step on the process itself, see our guide to making a claim.

We currently look after more than 50 pharmacy clients across Australia, from independent community pharmacies to franchise locations, so we have a clear view of how these business packs are put together and where the gaps tend to sit.

How can you check what your pharmacy is actually covered for?

The way to confirm this is by reading the business interruption section of your business pack, not just the cover summary, and checking the basis of settlement and the indemnity period. The cover summary will often say “business interruption” with a sum insured next to it. That figure doesn’t tell you whether it’s a cost-of-working basis only or whether it also includes loss of gross profit.

A few things worth confirming at renewal:

1. The basis of settlement. Does the business interruption section cover increased cost of working only (sometimes written as additional increased cost of working), or does it also include loss of gross profit? This is the single most important line to understand.
2. The indemnity period. This is how long the cover responds after an event. A water-damage repair plus refit can take longer than the indemnity period allows, so cover can run out before trade fully recovers.
3. How the sum insured was set. If it was based on figures from a few years ago, it may not reflect current turnover or rebuild costs.
4. Neighbouring-tenancy water damage specifically. It’s worth confirming how the property and business interruption sections respond when the water comes from someone else’s tenancy, because that situation can raise questions about which policy responds and when.

If you’re not sure where to find any of this, that’s normal. The basis of settlement is often buried in the policy wording rather than spelled out on the schedule. It’s worth confirming whether your business pack reflects how your pharmacy actually trades, rather than assuming “business interruption” means everything’s replaced. For a sense of what cover typically runs to, see what pharmacy insurance costs.

If you want the background on how business interruption works in general, our primer on business interruption insurance is a good starting point. This post goes a layer deeper on the one distinction that primer doesn’t fully separate: ICOW versus loss of gross profit.

Frequently Asked Questions

Does business interruption insurance cover lost revenue?

Not always. Business interruption only replaces the income you lost if your policy includes a loss of gross profit basis. Some business packs cover only the cost of working (Increased Cost of Working, or standalone Additional Increased Cost of Working), which pays the extra costs of staying open but not the margin on the sales you couldn’t make. Check the basis of settlement in your policy wording to see which applies.

What is Increased Costs of Working?

Increased Cost of Working (ICOW) is the part of business interruption cover that pays the additional costs you incur to keep trading after an insured event - temporary fit-out, hiring equipment, staff overtime, or relocating the dispensary while repairs are completed. When it’s written as a standalone item with its own sum insured, it’s called Additional Increased Cost of Working (AICOW). Either way, it funds continuity; it does not pay you the margin on sales you couldn’t make.

Who pays if water damage comes from a neighbouring tenancy?

Where the water originates next door, your own business pack typically responds to your property damage and any business interruption you hold, and your insurer may then pursue the responsible party or their insurer to recover costs. You generally claim through your own cover first rather than waiting on the neighbouring tenant, which is why your own policy basis matters so much.

Does a pharmacy business pack cover water damage?

A pharmacy business pack usually covers water damage to property, stock and fittings under its property section, subject to the policy terms and exclusions. Whether you’re also covered for the income lost while you’re disrupted depends on the business interruption section and its basis of settlement. The two are separate parts of the policy.

Should I tell my insurer about a leak even if the damage looks minor?

It’s generally better to notify early rather than wait, because water damage can develop over days and prompt notification keeps the claim on record. What you must report and when is set out in your policy, so it’s worth confirming your notification obligations rather than guessing. If in doubt, a quick call to your broker is usually the simplest path.

Getting the right cover for your pharmacy

A water leak from the tenancy next door is the kind of loss that has nothing to do with how well you run your pharmacy, and the part that decides what you actually get paid is the basis of your business interruption cover. A cost-of-working basis keeps you trading. It doesn’t replace the margin you lose. Knowing which basis you hold, before something goes wrong, is the whole game.

If you’re not sure what your pharmacy’s business interruption section actually pays, it’s worth a look before your next renewal rather than mid-claim. If you’re renewing a pharmacy business pack in 2026, the basis of settlement is the line worth checking first.

Want to know what your pharmacy is really covered for? Tank Insurance looks after pharmacy clients across Australia and can get your business pack reviewed so you understand exactly how your business interruption cover responds. Reach out at 02 9000 1155 or [email protected] to discuss your situation.

This is general information only and does not take into account your objectives, financial situation, or needs. You should consider whether the information is appropriate for you and read the relevant Product Disclosure Statement (PDS) before making any decisions about insurance products.