Bajaj Allianz General Insurance Co. Ltd.

LOSS OF PROFIT (FIRE) INSURANCE
V.P. Sharma

1

Bajaj Allianz General Insurance Co. Ltd.

Policy coverage:
This policy covers financial losses of the risk due to interruption in business following a loss or damage to insured property covered under material damage policy (Fire & Special Perils Policy).

2

Bajaj Allianz General Insurance Co. Ltd.

What we pay ?

Loss of Gross Profit due to reduction in T.O.
following an indemnifiable loss under

Concurrent Material damage policy.

3

Bajaj Allianz General Insurance Co. Ltd.

In other words we pay
 

Loss of Net Profit Continued fixed expenses – standing charges

Increased cost of working

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Fire policy in force. Ltd. 2) Unit should be earning Gross Profits.D. Who can be insured ? 1) Any risk having M.Bajaj Allianz General Insurance Co. 5 . 3) Net loss situations can also be covered but No policy to risks with Gross Loss.

Ltd.Bajaj Allianz General Insurance Co. What happens when a loss occurs? • • • • Loss arising out of damage to material Interruption in business Loss of Goodwill Loss of Market 6 .

• deterioration of undamaged stock after damage occurred • failure to recover debts of pre-damage trade owing to destruction of records 7 . Consequential losses not payable under FLOP policy • under-insurance under the material damage policy • difference in value of property at the time of damage and after repairs.Bajaj Allianz General Insurance Co. Ltd.

Ltd. • fine. damages and or penalties under contracts arising from breach of contract in consequence of damage • third-party claims other than referred above • loss of good will / loss of market • cost of preparation on insurance claims • litigation costs connected with insurance claims All the above are out side the purview of LOP policy 8 .Bajaj Allianz General Insurance Co.

Ltd.Bajaj Allianz General Insurance Co. 9 . Material Damage Proviso  There is a policy for PD against the same peril   PD insurer has admitted liability under the policy BI claim admissible even if property damage claim is not paid on account of Deductible.

Months thereafter during which the results of the business shall be affected in consequence of the damage”.. Ltd. Interruption period It starts from the date of loss & ends when the business resumes normal production levels.Bajaj Allianz General Insurance Co. 10 . Indemnity period • to be selected by insured at inception. • “The period beginning with the occurrence of the damage and ending not later than….

Bajaj Allianz General Insurance Co. Indemnity period Jan 1 Policy inception March 1 Date of loss POLICY PERIOD Dec 31 Expiry date INTERRUPTION PERIOD Feb 15 Business back to full stream INDEMNITY PERIOD CASE 2 – LOWER INDEMNITY PERIOD (9 months) 11 . Ltd.

Addition method G.P.Bajaj Allianz General Insurance Co. = (T. Sum Insured : It should represent Annual anticipated Gross Profit duly adjusted as per the trend of business.P = Net profit + Standing charges Standing charges alone can be covered or G.P. + Closing stocks) – ( Variable expenses + opening stocks) 12 . Difference method G.O.= Standing charges – net loss Standing charges alone should not be covered in Net loss situation. Ltd.

Ltd.Bajaj Allianz General Insurance Co. For indemnity period of 12 months or less ( min 3 months) – Sum insured should be Annual gross profit For indemnity period more than 12 months (Max 36 months) – Sum insured to be proportionately increased RATING TABLE 13 .

Bajaj Allianz General Insurance Co. 25% loading shall be applied for continuous operation Plants. Ltd. 14 . For Non Industrial Premise : LOP rate should not be less than 125% of the average fire rate of contents of whole premises. RATING: For Industrial Premise : LOP rate should not be less than 125% of the average fire rate of contents of process block.

Bajaj Allianz General Insurance Co. 15 . Ltd.

Fundamentals.P. Ltd.P.Bajaj Allianz General Insurance Co. the insured losses the turnover T and therefore does not incur V but keeps loosing economically both F and P G.P. = T – V . – F or N.F 16 .= G.P.P. Sale value of the goods ( turnover) Variable cost Fixed cost =T =V =F Net Profit T = V + F + N. =P When the plant comes to grinding halt. = T – V N.

M. cost. labour cost etc. Variable expenses: These vary with production levels. salaries. R. interest on loans. 17 . electricity. administrative costs. e. Depreciation. No cost incurred when no production.Bajaj Allianz General Insurance Co.g. e. freight inward. Ltd.g. Standing charges : Fixed expenses which continue to occur irrespective of production levels. rents. advertisement expenses etc.

18 .Bajaj Allianz General Insurance Co. Ltd. ANNUAL TURNOVER Annual turnover is defined as the turnover during the 12 months immediately before the date of damage. This is used in computing adequacy of sum insured STANDARD TURNOVER The turnover during that period in the twelve months immediately before the date of the damage which corresponds with the indemnity period”.

e. RATE OF GROSS PROFIT “The rate of gross profit earned on the turnover during the financial year immediately before the date of the damage” i.O. 19 . / Annual T. Ltd. G.Bajaj Allianz General Insurance Co.P.

INCREASE IN COST OF WORKING In respect of increase in cost of working. Ltd. with a proviso that such expenditure is not to exceed the sum produced by applying the rate of gross profit to the amount of the reduction thereby avoided. Increase in cost of = Rate of gross profit X working allowed < shortage in turnover avoided 20 .Bajaj Allianz General Insurance Co. the additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in turnover is considered under the policy during the indemnity period.

Computation os loss The rate of gross profit is the ratio between( P +F) and the turnover(T). In other words Rate of gross profit = P + F T This when multiplied with reduction in turnover produces the loss suffered by the insured as indicated below: Gross Profit loss = P + F T X T (reduction in turnover) 21 . Ltd.Bajaj Allianz General Insurance Co.

Bajaj Allianz General Insurance Co.L (Loss) From the above it can seen incase of reduction in turnover the insured suffers fixed cost .loss. if insurers cover only standing charges (fixed cost) the insured will gain more out of the policy than running the business since the loss he incurs is not adjusted in the claim 22 . THE PRINCIPLE OF THE STANDARD LOP POLICY In case of a loss making unit the turnover equation changes as under:T = V (variable) + F (fixed cost) . In other words the rate of gross profit = (F. Ltd.L)/ T The loss adjustment then becomes (F-L)X T ® T In a loss making concern.

factor ( after F.) = Sum Insured Actual G.O.Bajaj Allianz General Insurance Co.O. x I. Ltd.P.G.P U.P.I.Y. 23 .T. x A. factor ( during currency of policy) = Sum Insured Sum required to be insured sum required to be insured = R.I. Average clause: U.

EXTENSIONS The insured’s profit might not only depend upon the continued functioning his operations but also of the operations in the premises of his suppliers. customer etc.Bajaj Allianz General Insurance Co. gas works and water works 24 . The usual extensions that an LOP are • • • Suppliers premises Customers premises Electricity stations. Ltd.

Ltd. Premium for extension ( when only one supplier) = Basis rate + M x ( Av rate of supplier – basis rate of Insured‟s premises) M is the % to be taken from the table based on dependency. . 25 . of suppliers for similar goods. of suppliers for different goods. Supplier‟s extension • • • • • • Rating for Suppliers‟ Premises extension depends upon A) % dependence on supplier B) when there are more than one supplier –whether dependency is on no.whether dependency is on no.Bajaj Allianz General Insurance Co.

Table for rate calculation 26 . Premium for extension ( when two or more supplier supplying similar goods) = Basis rate + M x ( highest Av rate of suppliers – basis rate of Insured‟s premises) M is the % to be taken from the table based on dependency. Minimum rates for addition to be taken from the table if the difference is not significant. Ltd.Bajaj Allianz General Insurance Co.

Bajaj Allianz General Insurance Co.the difference between the highest of the respective average rates of the suppliers‟ premises and the basis rate for the Insured‟s premises loaded by 150% 27 . Ltd.the difference between the highest of the respective average rates of the suppliers‟ premises and the basis rate for the Insured‟s premises loaded by 100% Four Suppliers . SUPPLIER‟S‟S EXTENSION In the case of a number of separate suppliers supplying different components. the following additional rates should be charged:- Two Suppliers – the difference between the highest of the respectiv average rates of the suppliers‟ premises and the basis rate for the Insured‟s premises loaded by 50% Three Suppliers .

Ltd. exclusively manufactured for them. as a result of the operation of the insured perils at the customers‟ premises).Bajaj Allianz General Insurance Co. Premium will be 120% of supplier’s premises extension 28 . Extension to cover Customers’ premises The cover is against consequential loss to the insureds arising out of their customers not taking delivery of the products.

L (Fire ) Policy. Ltd. Note: 1) It is permissible for Insured to select perils to suit their requirements. 29 .5% per location subject to max. Coverage of Property stored at other locations: Additional premium to be charged @ 2. Extension to Cover Suppliers’ Premises and Customers’ Premises: Consequential Loss (Fire) Policy may be extended to Suppliers‟ Premises and Customers‟ Premises. 2) The indemnity period under the Suppliers/Customers extension shall be identical to that under the main Policy. of 20%. but extension may be granted only for those perils which are covered under C.Bajaj Allianz General Insurance Co.

Extension to cover loss due to accidental failure of public electricity/gas/water supply: Additional Rates (for each utility) Rate Standard Fire & Special Perils Policy 0.70 %o Standard Fire & Special Perils Policy less STFI 0.Bajaj Allianz General Insurance Co.30 %o 30 .45 %o Standard Fire & Special Perils Policy with earthquake extension 1. Ltd.55 %o Standard Fire & Special Perils Policy less RSMD & STFI 0.80 %o Standard Fire & Special Perils Policy less RSMD 0.

Bajaj Allianz General Insurance Co. 31 . Ltd. b) Utilities belonging to the insured‟s other units in the same compound may be treated at par with “Public utilities” for the purpose of granting utilities extension. Important norms a) 25% extra is to be charged on the above rates for continuous process plants. c) The rates for this extension are specific rates and have to be charged on a sum insured equivalent to the annual gross profit irrespective of the indemnity period selected under this extension or under the main policy.

Table 32 .Table B) Prorata basis – Wages can be insured for a selected period in weeks upto 52 weeks.Coverage is available for 100% indemnity for initial few weeks & reduced indemnity as selected for reminder of indemnity period.Bajaj Allianz General Insurance Co. COVERAGE OF WAGES A) DUAL WAGE BASIS . Wage table Option to consolidate provision . Ltd.

refund is 50% of premium collected. Ltd.P. is calculated & balance if refunded subject to Annual G. Return of Premium: Allowed when the actual annual G.P.P. is declared within 12 months of expiry of policy. declared with the result – refund is reduced. it is added to the G. if less than S. 33 . Actual premium of declared G. Max. - If a claim is paid.I.Bajaj Allianz General Insurance Co.P.

” 34 . the Insurers may. Accumulated Stock Clause: Where the insured maintains sufficient stock of finished goods from time to time as a matter of business policy. account shall be taken and an equitable allowance made if any shortage in turnover due to the damage is postponed by reason of the Turnover being temporarily maintained from accumulated stocks of finished goods in the Insured‟s warehouses. Ltd.Bajaj Allianz General Insurance Co. at their discretion. attach the following Clause to the Consequential Loss (Fire) Policy issued on Turnover Basis:“In adjusting any loss.

Bajaj Allianz General Insurance Co. Ltd. Memo 1: If during the Indemnity Period goods shall be sold or services shall be rendered elsewhere than at the premises for the benefit of the business either by the Insured or by others on his behalf the money paid or payable in respect of such sales or services shall be brought into account in arriving at the Turnover during the Indemnity Period. 35 .

Bajaj Allianz General Insurance Co. Ltd. Memo 2: UNDERINSURANCE If any Standing Charges of the business be not insured by this policy then in computing the amount recoverable hereunder as increase in Cost of Working that proportion only of the additional expenditure shall be brought into account which the sum of the Net Profit and the Insured Standing Charges bears to the sum of the Net Profit and all the Standing Charges. 36 .

O. 37 . + closing stocks) . Ltd.Bajaj Allianz General Insurance Co. Stock) e) New business clause. Basis of LOP policies a) Turnover basis b) Output basis c) Revenue basis d) Difference basis G. = (T.P.( Variable exp + open.

Bajaj Allianz General Insurance Co. Ltd. 38 .

Ltd. 39 .Bajaj Allianz General Insurance Co.

Ltd. Excess • • • • • Most BI policies carry a Excess Intention to avoid small losses Varies from industry to industry Can be either value or time In case of time – deduction is in terms of value equivalent to the time 40 .Bajaj Allianz General Insurance Co.

And liability for the damaged building/ machinery is admitted under a „Material Damage’ policy.Bajaj Allianz General Insurance Co. the business(covered) shall be affected. • • • Due to which damage/ destruction. 41 . causing shortage in turnover/ output Which shortage could not be made good subsequently within the maximum indemnity period. Ltd. LOSS ADJUSTMENT A valid claim under LOP policy arises when the following conditions are met with: • The building or other property insured and used by the insured at the insured premises for the purpose of the business must have been destroyed or damaged by the peril insured.

LOP rates in Petro Chemical Industries Indmn. 6 9 12 15 18 24 30 36 standard rate 225 270 300 290 285 270 255 240 (% of basis rate) LOP rates ( % of basis rate) based on LOP claims exp.Bajaj Allianz General Insurance Co. Ltd. For latest 5 policy periods ( exceeding 4 years). Per. Claim ratio Upto 20% Upto 50 % 6 9 12 15 18 24 30 36 100 108 120 117 114 108 100 100 42 .

Thanks & Best wishes Any Questions? V. Sharma 43 .Bajaj Allianz General Insurance Co. Ltd. P.

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