topic related to insurance : consequential loss policy with excel sheet appropriate example

1. CONSEQUENTIAL
LOSS
POLICY
SUBMITTED BY :
ANMOL GULATI
ROLL NO: 2013360
MCOM 3A

2. INTRODUCTION
• Generally insurance policies cover only physical
damage to property by insured perils. An incident
of fire has the potential to not only damage the
goods and machinery, but also impact the
projects in pipeline and in hand. This can cause
business interruption and financial loss.
• This, at best , covers the expenses incurred for
repairing or replacing the damaged property . But
what about the financial loss suffered due to
interruption of business operations whilst the
damaged property is being repaired or replaced?

4. What will happen in case of fire ?
If there is loss by insured peril say Fire , Earthquake:
• They may be reduction in turnover
• Thereby loss of the anticipated gross profit
• fixed costs which are to be incurred irrespective
of the reduction in the level of activity.
• Sometimes, material damage may be minor but
production / turnover may be interrupted for a
long period.

5. MEANING
…. This is where Consequential Loss Insurance
Policy comes in picture.
What is Consequential Loss Insurance?
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.

6. DEFINITION
The consequential loss is defined as the loss of
indirect nature caused due to direct damage
to the equipment or a property or a tangible
unit. This type of loss arises when the
individual or business loses earnings or rent
on account of damages to property or tangible
unit even if the tangible unit had insurance in
place as protection.

7. HIGHLIGHTS
This policy offers a solution by covering profit
lost due to reduction in turnover arising from
interruption of business following damage to
the property insured.
This policy is also known as Business
Interruption Policy or Loss of Profit Policy.

8. KEY TAKEAWAYS
• Consequential losses are the indirect results of
property damage.
• These must be insured separately from the policy
that covers physical damage to facilities or
equipment.
• Such policies cover losses due to business
interruptions.
Fire insurance + consequential loss policy
=complete protection + profitability

9. SCOPE (WHAT IS COVERED?)
The consequential loss policy covers:-
i. Loss of Gross profit due to in turnover , which
includes
-STANDING CHARGES
- NET PROFIT
i. in cost of working due to reduction in
turnover/output.
ii. Wages
iii. Lay-off and retrenchment compensation
iv. Auditors Fees

10. GROSS PROFIT , NET PROFIT &
STANDING CHARGES

11. TERMS USED IN LOSS OF PROFIT
INSURANCE
The following are the important terms used in
Loss of Profit insurance and a knowledge of
the terms will be advantageous:
1. Indemnity period
2. Standard turnover
3. Standing charges
4. Increased Cost of working
5. Short sales

12. 1. INDEMNITY PERIOD
Indemnity period means the period which
commences on the date of damage by fire and
ends on the date when normality is restored.
It is the maximum period required to put the
business back into normal operation after
damage to insured property. The indemnity
period could vary from 6 months to 3 years.

13. For example..
If insured opts for a Insurance Policy of 6
months and the loss takes place on 01.6.2018,
the maximum period of interruption insurer
can pay is upto 01.12.2018.

14. 2. STANDARD TURNOVER
It is the turnover during the period in the twelve
months immediately preceding the date of the
hazard which corresponds with the indemnity
period.

15. 3. STANDING CHARGES
• Standing charges refer to those fixed expenses
which are incurred irrespective of the
reduction in turnover. Only those standing
charges, which are insured, can be claimed.
For example, Duties, licenses and patent fees ,
Director’s fees and remuneration

16. SOME OTHER EXAMPLE
i. Salary, all social security contributions,
Pension
ii. Interest on loans, bank overdraft & Deb.
iii. Rent, rates and taxes
iv. Power / Electricity charges (Minimum
charges), Water, Heating, Lighting
v. Research and Development

17. 4. INCREASED COST OF WORKING
The insured may have to incur some additional
or special expenses in order to keep the
business, during the post-fire period and to
avoid reduction in sales. Expenses in excess of
what is essentially required may be
unreasonable expenditure.

18. 5. SHORT SALES
The term “Short Sales” refers to the loss of sales
due to the dislocation of business. That is,
short sale is the difference between standard
turnover and actual turnover during the
period of fire.
SHORT SALES
= STANDARD TURNOVER – ACTUAL TURNOVER

19. EXCLUSIONS
Certain situations are not covered by consequential loss
insurance. Some of the general exclusions under
consequential loss insurance are:-
• Any loss of gross profits due to fire or special perils which
are not covered in the policy and that result in the damage
to the business property.
• Loss of market
• Difference in value of stocks at the time of fire and on
subsequent replacement
• Bad Debts
• Loss of goodwill and any third-party claims generating out
of the unfortunate events.
• Claim due to war, invasion, act of foreign enemy.

20. How to select the sum insured?
The sum insured under CL Policy (Consequential
Loss) should represent the gross profit of the
indemnity period selected.

21. HOW TO CALCULATE CLAIM ?

23. How Consequential Loss Insurance
Functions?
a) Insurance company will consider Annual gross profit,
indemnity period while calculating the premium for
consequential loss insurance
b) In case of misfortune due to fire or special perils, resulting in
loss in income or revenue or increased fixed cost covered
under the policy, a policyholder must immediately call the
toll-free number of the insurance company and register the
case
c) Licensed surveyor is appointed to survey the case and the
documents and for proper evaluation of loss to the
organisation
d) At the end, insurance company analyses the Final Survey
Report submitted by the Surveyor, and compensates the
organization for the consequential loss subject to the T&C.

24. ADVANTAGES
1. Covers financial turnover losses due to fire in the
company premises which is not covered by other
standard insurance policies
2. Additional expenditure incurred to maintain normal
business activity during the period in which the
business is affected is also covered
3. Compensation to the employees due to layoffs or
retrenchment
4. This policy covers the risks which may arise due to the
inability to use the business premises for product or
service delivery resulting in a loss in profits

25. DISADVANTAGES
1. Even if the business is secured against consequential
loss, the insurance policy may put in some exclusions
in the policy itself, which causes the business to suffer
the losses even when insured against it.
2. The exclusions may consist of material
damages, goodwill , and name loss, loss of market ,
bad debts.
3. Typically insurance companies do not issue policies
for consequential losses.
4. In simpler words, it is easier to procure insurance
products for direct losses but not for indirect.

26. CONCLUSION
Consequential Loss is classified as a variant of
indirect loss. Such losses are not covered
under conventional insurance policy products.
Instead, these are covered under business
interruption insurance plans. As per
conventional insurance guidelines, such
damages happen as losses due to certain
events rather than uncertain events.

28. SOME OF THE COMPANIES OFFERING
THIS POLICY
Insurance companies providing consequential loss
insurance in India are:
• HDFC ERGO
• Bharti AXA
• SBI General
• Royal Sundaram
• Reliance General
• ICICI Lombard
• TATA AIG
• IIFCO-TOKIO

30. CASE STUDY

32. A SHORT DURATION VIDEO
https://www.youtube.com/watch?v=hz-
NA5Mo7Sg&feature=youtu.be

33. REFERENCES
• https://www.paisabazaar.com/commercial-
insurance/consequential-loss-insurance/
• https://www.investopedia.com/terms/c/consequential-
loss.asp
• https://www.newindiabahrain.com/services/consequential-
policy
• https://www.wallstreetmojo.com/consequential-loss/
• https://www.reliancegeneral.co.in/Insurance/Corporate/Fir
e-Insurance/ConsequentialLoss.aspx
• https://www.slideshare.net/goyalvimal/flop-fire-loss-of-
profit-insurance?from_action=save
• file:///C:/Users/Admin/Downloads/flopfirelossofprofit-
180815095353.pdf