Business Interruption(BI) or Consequential Loss(CL) or Loss of Profits Policy
In the event of an accident, the property owner, particularly the business people and Industrialists are hit by two kinds of loss:
- Material Damage: The building, plant and machinery, stock etc. will be damaged/lost. To repair and/or reinstate the property, capital expenditure will be required.
- Loss of Profits: Loss or damage to building, plant and machinery etc., will not only entail in expenditure to reinstate the damaged property but also there will be cessation of work partially or fully till the machinery damaged is repaired and the business activity restarts. So long as the business is interrupted because of the damage to building/plant& machinery and/or stock, the revenue also will be absent or reduced. The short fall in turn over or output will impact the financial results of the company.
Material damage is covered by Fire and Special perils policy, IAR policy, MB policy and the like. The policies are called Material Damage policies and pay for the loss or damage to assets. The MD policies do not cover any kind of consequential losses. Therefore, the loss of Gross Profit as a result of revenue/output loss because of partial or complete interruption of the business needs to be separately covered.
The loss of gross profit resulting from reduction of turnover/output can be covered by Business interruption/Consequential loss Policy.
BI/CL policy can be issued only when there is a material damage policy in place. This policy follows the coverages of the MD policy. Loss under this policy is payable only when the MD claim is admissible.
The coverage and add on covers for both the MD and CL policies should be same barring a few kinds of losses peculiar only to BI. Such losses are covered by granting extensions like FOUS and Customer/Supplier premises extensions.
The sum insured under this policy is estimated Gross Profit for the indemnity period chosen by the Insured. Indemnity period is such period during which the business actually gets partially or fully interrupted due to accidental loss to the property insured, or the maximum number of days mentioned in the policy whichever is less. The indemnity period starts from the day of accident and ends on the day on which business is restored to 100% level or the end of the indemnity period chosen whichever occurs first.
The loss of gross profit on account of BI is computed by applying the Rate of Gross Profit (GPR) to the difference between the standard turn over and the actual turn over during the interruption period. The standard turnover is the turn over achieved during the identical period in the previous financial year.
Increased cost of working to maintain the level of turnover/output during the interruption period is also covered in this policy subject to actuals or the saving of gross profit achieved whichever is less.
Gross profit for the purpose of this policy is defined as Net profit + Standing charges. Even if the company does not make any profits, the standing charges incurred during the interruption period subject to compliance with all other conditions of the policy, will be payable as claim
The period of indemnity needs to be selected by the Insured. The period should be based on the number of days the insured is likely to get back to 100% operations level, in the event of loss or damage to any critical item of machinery. For example, if the manufacture is dependent on an imported machinery, the time required for procuring the machinery from its original manufacturers should be the indemnity period. If there are spare machineries and readily available machinery the indemnity period can be minimal.
The Consequential loss arising out of Fire group of perils is an in built cover under IAR policy. Consequential loss arising out of machinery break down loss is optional under IAR policy.
