Fire Insurance Policy Covers loss or material damage of Insured Property due to Operation of Insured Perils. Loss of Profit Policy (LOP)deals with loss of earning Power consequent upon damage/ destruction to the capital assets or stocks. Here the Subject matter of Insurance is business of the Insured. LOP Policy can be Issued only If there is a Material damage Policy. Perils covered, conditions and warranties shall be similar to Material Damage policy. Claim under LOP Policy admitted only when liability is admitted under Material Damage policy.
Scope of Cover
1. To make good the loss of net profit due to stoppage of business as a result of an insured peril.
2. To pay the standing charges which continue to accrue in spite of stoppage of business. Standing charges refer to those fixed expenses which are incurred irrespective of the reduction in turnover.
3 .Increased Cost of Working: To pay the additional expenditure incurred by the insured to reduce shortage in turnover economically. (Example: Overtime wages to repair damages, Hire of machinery until the effected one is repaired. increased cost of working cannot be more than the gross profit saved during the period
List of Standing Charges: Interest on loans, bank overdrafts and debentures, including brokerage on deposits, Bank charges and guarantee commission, Rents, rates and taxes, Duties, licenses and patent fees, Directors fees and remuneration, Pension, Legal, auditing and other professional fees and expenses Insurance Premiums, Advertising and publicity expenses, Conveyance, stationary, postage, telephone, telefax expenses, Research and development expenses, Laboratory expenses, Office and general establishment expenses, Dividends on preference shares, Heating, lighting and power charges, Depreciation of buildings, machinery, plant, fixtures, fittings and motor vehicles, Repairs and renewals chargeable to revenue account
Indemnity Period: Period during which the business is affected totally or partially arising out of the damage or destruction to the property by an insured peril. Chosen by the Insured at the time of inception of the policy. Starts from the time when the business/ production activities get affected. Ends when the activities are restored to the pre-loss situation. Minimum Indemnity period is 3 months &maximum Indemnity period is 36 months.
Time exclusion period / Time excess: Insurers are not liable for the amount equivalent to the rate of gross profit applied to the standard output / turnover during the period of Time excess in terms of __ days stated in the schedule.
Gross profit: Net Profit+ Insured Standing Charges.
Net Profit--- Net profit of the financial year immediately preceding the year of loss after making due provisions for all the expenses but before tax. It relates to profit earned on the Business Turnover only and does not include income or expenditure from investments or capital items.
Annual Turnover: The turnover during the twelve months immediately before the date of damage
Standard Turnover: The turnover during that period on the twelve months immediately before the date of damage which corresponds with the Indemnity period.
Rate of Gross Profit: Gross Profit/turnover during the financial year immediately before the date of damage.
All three to be adjusted as per trend
Steps in the calculation of Loss
Calculate the Rate of Gross Profit =Gross Profit/turn Over X100
Calculate the Reduction in Turnover = Standard Turn over – annual turn over
Claim= Rate of G.P.X Reduction in Turn over
Add: Additional Expenditure incurred to avoid or diminish Reduction in Turn over (limited to the G.P. earned by it and if any Standing Charges are not insured then paid in proportion to Net Profit+ Insured Standing Charges/Net Profit+ Total Standing charges.
If Sum Insured is less than Insurable amount=Gross Profit Rate X Annual turnover, then Underinsurance will apply
Sum Insured:
Annual gross Profit is the minimum Sum insured. Gross Profit should be the estimated future Gross profit based on trend of the industry. If the Indemnity period is more than one year then sum insured will be annual GP x Period of insurance.