7 min read
Updated on Jan 12, 2023
Consequential losses to the insured business are specifically excluded under a standard Fire and Special Perils Insurance policy that covers only physical damage to the assets. This is where a Loss of Profit Insurance policy is useful, as it covers the loss of Gross Profit of a business arising from an insured loss under its Fire Loss of Profit Insurance Policy.
A major accident at business premises cannot only destroy the assets but also bring the business to a standstill, leading to loss of gross profit. Depending on the size and nature of the business, it can be several months before the business can get back on track. This is usually a period of great financial stress for businesses, as fixed expenses such as rent, remuneration of employees, etc. continue to accrue regardless of the extent of damage and production loss fire loss of profit insurance policy offers the best possible way to get recovered from the loss.
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To understand how Fire Loss of Profit Insurance Policy can help you mitigate risk and give protection from loss of net trading profit. Let’s check this example
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Net Profit + Standing Charges + Expenses incurred necessarily and reasonably to bring the business back on track
A Loss of Profit Policy may carry an excess/deductible expressed in a number of days. This indicates the days immediately after the loss, which would not be included while computing the reduction in Gross Profit.
The indemnity period is the maximum period required to put the business back into normal operation after damage to insured property by an insured peril. The indemnity period could vary from 6 months to 3 years.
For indemnity periods up to one year, the annual gross profit should be selected as the sum insured.
And for indemnity periods longer than one year, the Gross Profit (GP) should be proportionately increased.
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A standard Fire Insurance Plan called Fire Standard & Special Perils Policy provides coverage for all material damage done to the place or business which causes a financial loss.
So, what is loss of profit policy? However, it does not provide cover for the consequential losses due to the fire where the regular operation of the business takes a hit. In case of a fire outbreak, the turnover of the company could be affected and so payment to employees, vendors, etc. could be hampered.
These consequential losses are not covered under the regular Fire Insurance Plan. This is where the Fire Loss of Profit Insurance Policy comes into place.
Note: A Fire Loss of Profit Insurance Policy can only be taken provided a Fire Standard & Special Perils Policy is already taken.
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Fire is an unfortunate accident, that can happen to anyone at any time. Given below is a list of individuals, firms, institutions, organizations, and entities who should buy a fire insurance policy.
When a company takes up a project and there are delays in infrastructure or construction, it may have to bear financial losses. While averting such a situation may not always be possible, however, with Advance Loss of Profit Insurance such unfortunate incidents can be covered. ALOP will offer compensation in case the insured company faces lost profits when an undertaken project takes a much longer time to complete than initially expected.
|Indemnity Period||Calculation of Sum Insured|
|1 year (12 months)||Annual Gross Profit × 1|
|2 years (24 months)||Annual Gross Profit × 2|
|2.5 years (30 months)||Annual Gross Profit × 2.5|
|3 years (36 months)||Annual Gross Profit × 3|
For the purpose of Loss of Profit insurance, Gross Profit (GP) is commonly understood to be the net Trading Profit plus Standing Charges (fixed charges). Usually, insurance companies will cover only those Standing Charges which have been specifically declared at the time of proposal.
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Premium depends upon the annual gross profit, the chosen indemnity period and the selected extensions.
Add: Increased Cost of Working (ICOW) and amounts towards additional coverage
Less: Any savings during the period
A Loss of Profit insurance claim will normally be assessed at the end of the interruption period or the indemnity period, whichever is earlier. The insured is required to produce all documents necessary to establish the reduction in turnover/output/revenue.
An independent Loss Adjuster, usually a Chartered Accountant is appointed to examine the books of account and verify the insured’s claim of loss of profits and insured expenses.
Maintaining clear documentary records of all transactions for the period of indemnity helps speed up the assessment and ensures quick payment of a claim.
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Lost profits can also be called consequential damages. Such a loss happens when there is a breach of contract and the innocent party has to seek to recover the money that was agreed upon by the other party, as per the contract.
Profit is calculated on the average turnover and profit from 2 preceding 12 months from the date of the fire and then extrapolated using an insurance actuarial calculation for the same.
For illustration purposes, here is the calculation for the loss of profit policy formula:
(However, you need to check with your insurer about their method of calculation before opting for the same)
In case you need to claim fire insurance follow the steps given below:
Inform your insurer as soon as possible
An appointed surveyor from the company will come to analyse the fire and the damages
Submit the Claim Form along with all required documents and photographs
Generally, companies settle the claim in 15-30 days if all formalities are duly completed
To claim for loss of profit plan, you need to inform the insurer and file the claim documents of the Fire Standard & Special Perils. Once that is passed, you can file for the Loss of Profit insurance.
Damages to the property would be payable by the Fire Standard & Special Perils plan which is a pre-requisite to opt for a Fire Loss of Profit Insurance Policy.
Insurance companies offer different types of fire insurance such as Specific Policy, Comprehensive Policy, Valued Policy, Floating Policy, Consequential Loss Policy, Replacement Policy.
A comprehensive insurance policy provides not only fire-related coverage but also other damages due to robbery, civil rampage, burglary etc.
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