Dear Friends,
We know that Fire Insurance Policies are designed to provide protection in respect of loss of or damage to buildings, machine rides, furniture & fixtures ,goods and merchandise, etc., against fire and other specified perils or risks mentioned in the policy documents. The fire insurance affords cover for ' Material Damage', but it does not cover losses suffered by the insured due to stoppage of its business due to insured perils i.e. ,the loss of business and loss of profit due to stoppage of business.
A fire in the business premises not only damage assets insured as mentioned above but also contributes in stoppage of business and loss of profit by business during the period from the date of fire and date business again starts. In second case i.e. in case of loss of profit simple fire insurance policy does not provide any relief to the business.
Any interruption in business operations caused by fire or other special perils, resulting in a financial loss of various kinds is called consequential loss. A consequential loss insurance policy for fire or other special perils financially compensates the owner for the lost business income due to fire.
In this case 'Consequential Loss', Insurance Policy comes into play and it is a policy to make good these losses (i.e. loss of of profit) and it also covers standing charges and increased cost of working.
Consequential Loss Policy is generally meant for;
i) SMEs;
ii) Corporates who wants to protect their business against unforeseen perils or events;
LET'S CONSIDER SOME IMPORTANT ASPECTS
1. TURNOVER
Below mentioned important points to be considered while calculatingturnover of a business or enterprises;
I) Variable Charges: these are expenses incurred in producing the goods;
II) Standing Charges: these expenses are fixed in amount irrespective of volume of business transacted;
III) Net Profit: this comes after deducting Variable as well as standing charges from the turnover;
IV) Gross Profit: will be calculated ( Standing Charges + Net Profit) or ( Turnover- Variable Charges);
2. INDEMNITY PERIOD
The Consequential Loss/Profit Policy provides indemnity inrespect of loss of Gross Profits during the period which is elected by the insured. The period may be chosen by the insured and vary 3(three) months to 3(three) years.
The Indemnity Period is to be distinguished from the period of insurance which is usually a period of one year. The insured peril must occur during the period of insurance and the indemnity period which commences on the date of loss and terminates when the business returns to normal level.
LET'S CONSIDER AN EXAMPLE;
Suppose M/s. XYZ Ltd., has taken a Consequential Fire Policy starting from 01/04/2020 and end on 31/03/2021. A fire has occurred in its premises on 30/06/2020 and its business again come to normal position of 25/04/2021.
Now in this case the period of insurance will be 01/04/2020-31/03/2021 and date of fire 30/06/2020 but indemnity period will be considered from 30/06/2020 to 25/04/2021.
GROSS PROFIT= STANDING CHARGES + NET PROFIT
3. THE SUM INSURED
Generally Sum Insured will be decided by the insured. As thispolicy provides indemnity in respect of loss of gross profits for the indemnity period ,the sum insured should represent the Gross Profits of the identity period selected. Where the indemnity period is 12 months or less, the sum insured should be the Annual Amount of Gross Profits ( Annual Amount of Standing Charges + Net Profit). Where the indemnity period is more than 24 months then Gross Profits will be calculated as twice amount of. Annual Gross Profits.
SOME EXAMPLES OF A STANDING CHARGES;
i) Interest on- loan, banks overdrafts, debentures, brokerage on deposits and other financial charges debited in PL of the company;
ii) Rent;
iii) Directors remuneration & fees;
iv) Legal, Audit & other professional fees and expenses;
v) Insurance Premiums;
vi) Advertisements /Sales Promotion expenses;
vii) Conveyance, Stationery ,Telephone, Electricity etc.;
viii) Office and General Expenses;
ix) Salaries & Wages, etc.
Please note that above is not an exhaustive list of standing expenses to be covered under the insurance policy, other administrative expenses will be covered to reach Gross Profits of the business entity.
PLEASE NOTE THAT
i) Generally its covers mostly administrative expenses which are fixed and debited in profit and loss account of the enterprise;
ii) The premium will depend on sum insured and same will be calculated by considering, the Gross Profits, Turnover, The period of indemnity chooses, and extension of period of indemnity etc.;
iii) Additional expenditure incurred to maintain normal business activity during the period or during indemnity period will also be considered and paid by insurance company;
iv) The compensation payable to employees due to retrenchment or layoff will also be paid;
v) Some companies provides riders in the policy such as unable to use public utility such as electricity, water etc.due to fire in business premises and halt of business due to insured peril;
4. LOSS BECOME PAYABLE UNDER BELOW MENTIONED CIRCUMSTANCES;
That if any building or other property or any part thereof used by the Insured as the Premises for the purpose of the Business, be destroyed or damaged by the perils covered under the Fire Policy, (destruction or damage so caused being hereinafter termed as Damage) and the Business carried on by the Insured at the Premises be in consequence thereof interrupted or interfered with, then the Company will pay to the Insured in respect of each item in the Schedule( generally mentioned in issued insurance policy) the amount of loss resulting from such interruption or interference in accordance with the provisions contained herein.
Provided that
1. Such Damage is caused at any time after payment of the Premium during the Period of Insurance named in the Schedule( generally mentioned in issued insurance policy) or of any subsequent period in respect of which the Insured shall have paid and the Company shall have accepted the premium required for the renewal of the Policy.
2. At the time of the happening of the damage there shall be in force a Fire Policy covering the interest of the insured in the property at the Premises against such damage and that payment shall have been made or liability admitted thereunder. However, this proviso shall not apply where payment is not made under Fire Policy, solely due to operation of a proviso in the Fire Policy excluding liability for losses below a specified amount.
3. The liability of the Company shall in no case exceed in respect of each item the sum expressed in the said Schedule( generally mentioned in issued insurance policy) to be insured thereon or in the whole the Total Sum Insured hereby or such other sum or sums as may hereafter be substituted therefore by memorandum duly signed by or on behalf of the Company.
Please note that payment of loss under Loss of Profit Policy is subject to payment or admission of liability of the loss under the material damage insurance i.e. Fire and Special Perils Policy.
5. EXCLUSIONS UNDER CONSEQUENTIAL LOSS INSURANCE POLICY
This insurance does not cover any loss resulting from damages occasioned by or through or in consequence, directly or indirectly, of any of the following occurrences, namely: -
i) War, Invasion, act of foreign enemy, hostilities or Warlike Operations (whether war be declared or not), Civil War;
ii) Mutiny, Civil Commotion assuming the proportion of or amounting to a popular rising, military rising, insurrection, rebellion, revolution, military or usurped power.
iii) In any action suit or other proceeding where the Company alleges that by reason of the provisions of this Condition any loss or damage is not covered by this Insurance, the burden of proving that such loss or damage is covered shall be upon the Insured.
DISCLAIMER: The above write up is only for information and knowledge of readers. The write has been prepared on the basis of material available at he time of preparation and utmost care has been taken. It is advisable to take professional advise and above will not be considered as advise of the author.
CAclubindia
