CONSEQUENTIAL LOSS /

BUSINESS INTERRUPTION
/ FIRE LOP
 SFSP Policy indemnifies only physical loss or
material damage to buildings, machinery,
fixtures, stocks etc. by fire and / or other
insured perils
However indemnity for material damage
does not provide protection to the insured for
trading losses due to total or partial stoppage
of his business following fire loss
The trading losses which result are :
Net profit
Standing charges
Increased cost of working
Basis of FLOP
The subject matter of fire insurance is material property
The subject matter of FLOP / Consequential Loss / Business
Interruption Policy is the business of the insured that is earning
capacity of the property
Key terms to understand the basis of profit insurance
Turnover is defined in the profits policy as the money paid or
payable to the insured for goods sold and delivered and for
services rendered in the course of the business at the premises
i.e. Sales
Variable charges
Standing charges
Net profit
Position After Fire Loss And
Claim Under FLOP
BEFORE FIRE RS. AFTER FIRE RS.

Turnover 50,00,000 25,00,000

Production Costs 35,00,000 (70%) 17,50,000 (70%)

Standing Charges 10,00,000 (20%) 10,00,000 (40%)

Net Profit 5,00,000 (10%) -

Net Loss - 2,50,000

Measure of Indemnity Under FLOP
Variable charges constitute 70% of turnover
Gross profit (standing charges plus net
profits) constitute 30% of the turnover
The proportion of gross profit bears to the
turnover is called rate of gross profit
Gross profit is the normal earning power of
the business expressed as a percentage
Measure of Indemnity
Measure of Indemnity = Rate of Gross Profit X
Reduction of Turnover During Interruption
Period
Rate of gross profit = (standing charges +
net profits) / turnover x 100
Rate of gross profit = 15,00,000/50,00,000 =
30%
Reduction in Turnover = 25 lacs
Hence claim payable = 30% x 25 lacs =
7,50,000
 SUBJECT MATTER
Fire Policy : Material Property
LOP : Business Of The Insured, Earning Capacity
Damage To Property Like Building, Machinery &
Stocks
Interuption To Normal Business Activity : Total Or
Partial
Reduction In Output / Turnover
Reduction In Profit
Increase In Cost Of Working
WHAT IS INSURED ?
Gross Profit

Standing Charges
Net Profit

Increase In Cost Of Working

PERILS COVERED
All Perils Covered Under The Material
Damage Policy

Additional Prerils If Covered Under Fire

Policy May Be Included (Optional).
 PERIOD OF INSURANCE
Period Of Insurance : The Annual Period During
Which The Insurance Company Bears The Risk e.g.
01.07.2007 To 31.07.2008

Indemnity Period: Represents Insureds Estimation

Of The Maximum Period Required For Normal
Business Operation To Be Restored Following A Loss

To Be Decided At The Time Of Inception

 Consequential Loss Policy
It is prerequisite that the property to be covered under
FLOP should have a material damage fire policy
Fire or other perils must occur at the insureds
premises
Property must be destroyed or damaged
Business must be interrupted or interfered with as a
consequence
The resulting loss is paid under FLOP
Material damage proviso. This clause states that the
insured must maintain a material damage fire policy
and the claim under C.L. Policy will be paid only if
material damage is paid or payable.
 FLOP Policy Schedule
The insured
The business
The premises
The sum insured
Period of indemnity
Period of insurance
Perils covered
Rate
Premium
 INDEMNITY PERIOD
Can Be Any Period Between 3 Months To 36
Months E.G. If Insured Opts For A I.P. Of 24 Months And
The Loss Takes Place On 30.7.2008, The Maximum Period
Of Interruption Insurer Can Pay Is Upto 29.7.2010.

Interruption Period : actual Period Of Interruption

Starting From The Date Of Loss/ Damage Till The Date
Normal Operation Has Been Restored.

Can Be More/Less Than The Chosen Indemnity Period

-But Insurers Liability Is Restricted To The Lower Of The
Two.
 FLOP Specifications / Terminologies
Items insured under the policy i.e., gross profit,
wages, auditor fees
Definitions
Net Profit
Gross Profit
Turnover
Indemnity Period
Rate of Gross Profit
Annual Turnover
Standard Turnover
Standing Charges
NET PROFIT
The net trading profit (exclusive of all capital receipts and
accretions and all outlay properly chargeable to capital)
resulting from the Business of Insured at the Premises after due
provision has been made for all standing and other charges
including depreciation, but before the deduction of any taxation
chargeable on profits.
Income Tax and Profits are included in net profit

GROSS PROFIT
Net profit + Insureds standing charges
If there be no profit the amount of the Insured Standing
Charges less such a proportion of the net trading loss as the
amount of the Insured Standing Charges bears to all the
Standing Charges of the business
TURNOVER
The money paid or payable to the insured for goods sold and delivered
and for services rendered in course of the business at the premises. In
other words, it is the Insureds income from trading including services
rendered

RATE OF GROSS PROFIT

The rate of Gross Profit earned on the turnover during the financial year
immediately before the date of the damage

ANNUAL TURNOVER
The turnover during the twelve months immediately before the date of
the damage

STANDARD TURNOVER
The Turnover during that period in the twelve months immediately before
the date of the damage which corresponds with the Indemnity Period
 Concept of Gross Profit When There
Is A Net Trading Loss
Particulars Rs.
Turnover 20,00,000
Production Cost 12,00,000
Standing Charges 10,00,000
Net Trading Loss 2,00,000
Insured Standing Charges 8,00,000
Standing Charges Not Insured 2,00,000
Total Standing Charges 10,00,000

ISC / TSC x NTL = Rs. 8,00,000 / 10,00,000 x 2,00,000 = 1,60,000

Gross Profit for the policy = Rs. 8,00,000 1,60,000 = 6,40,000

STANDING CHARGES
Do not vary in direct proportion to any
reduction in business. EXAMPLES ARE
*Salary, Wages, all social security contributions,
perquisites, Pension
Interest on loans, bank overdraft & Deb.
Rent, rates and taxes
Depreciation
Power / Electricity charges (Minimum charges),
Water, Heating, Lighting
Research and Development
STANDING CHARGES Contd
Advertisement and Publicity
Duties, licenses and patent fees
Directors fees and remuneration
Legal, Auditing and other professional fee
Insurance premium
Conveyance, Stationery, Communication
Office and general establishment
Repairs and Renewals
Misc. exp. not exceeding 5% of total of aforesaid insured
standing charges
List is not exhaustive
 31.3.14 30.9.14 31.3.15 30.9.15

IP
STO

1.4.15 ATO

31.12.15
1.1.15

LOSS
31.3.14

1.4.13 PP

TO
 RATING FACTORS
Premium Rating Depends On :

Average Rate Applicable To The Contents Of The

Process Blocks Of The Premises Under The Material
Damage Policy

Indemnity Period Chosen

Whether The Plant Is Continuous Or Not

 PREMIUM RATING
Basis Rate =
125 % loading on average contents rate under Fire
policy

Profits Rate : Basic Rate is adjusted for

Process involved : loading of 25% of continuous plants

(automatic or semi automatic process) : Example Cement
factories, distilleries, sugar factories, vegetable ghee factory.

Indemnity Period selected

RATING SLABS(Based on Process &
Indemnity Period)
Indemnity Period Continuous % Non-Continuous %
3 Months 89.06 72.50
6 Months 93.75 75.00
9 Months 112.50 90.00
12 Months 125.00 100.00
15 Months 121.87 97.50
18 Months 118.75 95.00
24 Months 112.50 90.00
30 Months 106.25 85.00
36 Months 100.00 80.00
 SUM INSURED
IF OPERATIG IN PROFIT
Standing Charges plus
Net Profit
IF OPERATING IN LOSS
Standing Charges Less
Net Loss
= Sum Insured (if Indemnity period is = or <12
Months)
X Indemnity Period / 12 months
(if Indemnity period is >12 Months)
 Example of premium working
Standing Charges 5,000,000,000

Net Trading Loss 1,000,000,000

Gross Profit 4,000,000,000

Indemnity Period 9 Months

Type of Plant Continuous

Fire Premium rate 2.00

Basis Rate 2 x 125% = 2.50

Profit Rate 2.50 X 112.50% = 2.8125

Premium Amount Rs. 11,25,0000

Clauses
Material Damage Provision
Departmental Clause : cost accounting
Return of Premium Clause : 50%
Accumulated Stocks Clause : shortage
postponed
Alternative Basis Clause : in Turnover basis
policy
Auditors fee clause
Trend Adjustment : Trend, Variations, Special
Circumstances
New Business Clause
TYPES OF BI COVERS
On Turnover Basis

On Output Basis

Difference Basis (Turnover)

Revenue Basis
 BASIS OF INSURANCE
Turnover Basis:

Useful For Organisations In Trading Activity Or Involved In

Manufacturing.

Supply Of Goods On Existing Basis With No Accumulation Of

Stocks

Reduction In Turnover Will Be Used To Arrive At The Indemnity.

(Hence In Case There Is Accumulation Of Stocks The Turnover

Level May Still Be Maintained )
BASIS OF INSURANCE
Output Basis:
Reduction In The Output Is Used To Arrive At
The Indemnity.
Thus Even If There Are Buffer Stocks The Loss
Can Be Worked Out As There Is Going To Be
Reduction In Output
Care To Be Taken In Case Of Multi Product
Unit
 BASIS OF INSURANCE
Difference Basis:
Gross Profit Is Arrived At On The Difference Basis.
Instead Of Standing Charges, Working Expenses Are
Specified.
All Purchases (Less Discounts Received), % Of
Annual Wage Roll, Power, Consumable Stores,
Carriage, Packing Material, Bad Debts, Discounts
Allowed, Any Other Expenses To Be Specified.
(Specification In This Difference Basis Are Used On Turnover
Basis, And Not On Output Basis )
 BASIS OF INSURANCE
Revenue Basis / Gross Fees:

Policy Broadly Follows The Pattern Of Turnover But Turnover Is

Replaced By Gross Revenue Or Gross Fees

Revenue Basis For Clubs, Hotels, Private Schools, Private Hospitals And
Nursing Homes; Gross Fees Basis For Professionals Like Solicitors,
Chartered Accountants.

Revenue : Money Paid Or Payable To The Insured For Services

Rendered In The Course Of The Business In The Premises

Fees : Money Paid Or Payable To The Insured For Services Rendered In

Course Of The Business Of The Insured.
 WHAT IS NOT COVERED
Under-insurance
Difference in value of stocks at the time of fire and
on subsequent replacement
Depreciation of undamaged stock after fire
Bad Debts
Loss of goodwill
Failure to recover book debts due to destruction of
records
Litigation costs or third party claims or consequential
loss claims generally
Claim Settlement Steps
1.Ascertain rate of gross profit based on the last audited financial accounts
2.Reduction in turnover during IP = STO actual turnover during IP
3.Apply rate of gross profit on reduction in turnover
4(a) Additional expenditure incurred to reduce reduction in turnover
The turnover maintained because of the additional expenditure and the
(b)
gross profit earned thereon
5.Additional expenditure (ICW) is subject to two adjustments :
a. Insured standing charges + net profit / all standing charges + net profit
b. Additional expenditure cannot exceed rate of GP x reduction in turnover avoided
6.Savings in insured standing charges
7.The amount of claim payable = 3+5-6
8.Rate of GP x annual turnover = insurable amount. This amount shall be
considered for application of average to penalize under insurance on
claim amount arrived at in 7
 Problem - 1
Gross Profit Insured for 6,00,000
Period of Indemnity 12 Months
Standard Turnover 20,00,000
Turnover during the period of interruption 12,00,000
Increased cost of working 1,25,000
Reduction in turnover saved by above cost 6,00,000
Gross Profit during the previous financial 6,00,000
year
Turnover during the previous financial year 24,00,000
Annual Turnover 30,00,000
NB1 : All standing charges are insured
NN2 : No standing charges are saved as a result of damage
Solution - 1
Step 1 6,00,000
------------ X 100 = 25% (Rate of GP)
24,00,000
Step 2 20,00,000
Less : 12,00,000
------------ (Reduction in turnover)
8,00,000
Step 3 25% of 8,00,000 = 2,00,000 (Amount Payable)
Step 4 25% of 6,00,000 = 1,50,000 (Less than Rs. 1,25,000/-)
Step 5 2,00,000+1,25,000 = 3,25,000
Step 6 25% of 30,00,000 = 7,50,000 (Sum insured is Rs.
6,00,000/- as against insurable amount of Rs.
7,50,000/-)
Amount Payable
6,00,000
------------ X 3,25,000 = 2,60,000
7,50,000
 Problem - 2
Policy Period 1.4.2015 31.3.2016
Sum Insured 8 Lacs
Indemnity Period 6 months
Date of Loss 01.01.2016
Period of Interruption 01.01.2016 30.04.2016 (4
months)
Accounts for financial year ending 31.03.2015
on
(a) Net profit 2.5 lacs (inclusive of non trading
income of Rs. 50,000/-)
(b) Standing Charges Rs. 10 lacs (including USC of Rs. 1
lac)
(c) Turnover Rs. 44 lacs
Turnover during period of Rs. 5 lacs
interruption 01.01.2016
30.04.2016 (4 months)
 Problem - 2
Turnover from 01.01.2015 Rs. 11 lacs
30.04.2015 (Standard Turnover)

Savings in ISC during interruption Rs. 7,000/-

Annual Turnover (12 months Rs. 50 lacs

backwards from 01.01.2016)

CALCULATE THE CLAIM PAYABLE

Solution
Net profit = 2.50 lacs
Less : Non Trading Income Rs. 0.50
Net Profit = Rs. 2 lacs
Standing Charges = Rs. 10 lacs
Less : UISC Rs. 1 lac
ISC = Rs. 9 lacs
Hence, Gross Profit is = Rs. 2.00 lacs + Rs. 9 lac = Rs. 11 lacs
Rate of Gross Profit = GP / TO x 100 = 11 / 44 x 100 = 25%
Reduction in Turnover = STO TO during IP = 11 lacs 5 lacs = Rs. 6
lacs
A) Loss of Gross Profit due to reduction in turnover = Rs. 6 lacs x
25% =
Rs. 1,50,000
Since all standing charges are not insured, ICW is
worked out as
B) NP + ISC / NP + ASC x ICW = 2 + 9 / 2 + 10 x
36,000 = 11 / 12 x 36,000 = 33,000
The amount payable as ICW cannot exceed the GP
earned on the TO maintained by additional expenses
Turnover maintained = Rs. 2 lacs
Rate of GP x 2 lacs = 25% x Rs. 2 lacs = Rs. 50,000
Hence, GP earned due to ICW is Rs. 50,000 and ICW is
Rs. 33,000. Hence, ICW of 33,000 is payable
CLAIM PAYABLE = A + B = 1,50,000 + 33,000 = 1,83,000 less
savings in insureds standing charges (Rs. 7,000) =
Rs. 1,76,000

Annual Turnover = Rs. 50 lacs

GP on ATO = 25% of 50 lacs = 12.5 lacs
The insurable sum insured is Rs. 12.5 lacs whereas actual sum
insured Rs. 8 lacs
Hence, there is under insurance and condition of average is
applicable

Net Claims Payable = Rs. 8 lacs / Rs. 12.5 lacs x 1.76 lacs
=
Rs. 1,12,640
THANK YOU