Presentation on Consequential Loss (Fire) in India

1. CONSEQUENTIAL LOSS /
BUSINESS INTERRUPTION/
FIRE LOP
Vimal Goyal
FIII, ACII (London),
Chartered Insurance Broker.
vimal@bpopioneers.com
goyalvimal@yahoo.co.uk
vkgnia@hotmail.com
Cell 098996 99304

2. Understand
client’s needs &
objectives
Underwriting Rating
Considerations Factors
Working of
Sum Insured
& Premium
What
Type of Is not
Policies Covered
and Clauses
Working of
Claim Amount

3. The Top 10 hotspots
 Material damage • Increased costs of
proviso working
 Sum insured • Locations at risk
 Definition of gross • Policy extensions
profit
• Perils
 Indemnity period
• Insurable interests
 Policy type

4. 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

5. WHAT IS INSURED ?
• GROSS PROFIT
 STANDING CHARGES
 NET PROFIT
INCREASE IN COST OF
WORKING

6. PERILS COVERED
ALL PERILS COVERED
UNDER THE MATERIAL
DAMAGE POLICY :
ADDITIONAL PRERILS IF
COVERED UNDER FIRE
POLICY MAY BE
INCLUDED (OPTIONAL).

7. UNDERWRITING CONSIDERATIONS
(other than Petrochemical risks)
 OCCUPATION
 PHYSICAL HAZARDS
 IMPORTED / MADE TO ORDER
MACHINES
 INDEMNITY PERIOD
 SUM INSURED
 PAST HISTORY OF CLAIMS / EVENTS
 ADD ON COVERS
 MORAL HAZARD / GENERAL
REPUTATION OF INSURED
 OTHER INSURANCES / POTENTIAL

8. 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 INSURED’S
ESTIMATION OF THE MAXIMUM PERIOD REQUIRED
FOR NORMAL BUSINESS OPERATION TO BE
RESTORED FOLLOWING A LOSS
TO BE DECIDED AT THE TIME OF INCEPTION

9. 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 INSURER’S LIABILITY IS RESTRICTED TO
THE LOWER OF THE TWO.

10. 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

11. 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

12. RATING SLABS
(Based on Process & Indemnity Period)
INDEMNITY CONTINUOUS NON-CONTINUOUS
PERIOD % %
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

13. HOW TO FIX THE
SUM INSURED
 PREFERABLY THE GROSS PROFIT SHOULD BE ARRIVED AT
FROM THE LAST YEARS ACCOUNT
 IN CASE THE LAST YEARS ACCOUNTS HAVE BEEN AFFECTED
BY CERTAIN ABNORMAL CIRCUMSTANCES--- ACCOUNTS OF
THE PRECEDING YEAR(S) MAY BE CONSIDERED
 OFTEN THE RESULTS OF 2- 3 YEARS ARE TAKEN IN TO
ACCOUNT TO UNDERSTAND THE TREND AND MAKE DUE
ADJUSTMENTS FOR THE FUTURE
 IF THE CHOSEN I.P. IS MORE THAN 12 MONTHS THE GROSS
PROFIT NEEDS TO BE INCREASED PROPORTIONATELY

14. Definition of Gross Profit
Last accounts for ABC Manufacturing Limited:
Last A/cs
Turnover 1,000,000 100%
Opening Stock 20,000 2%
Materials 350,000 35% Director asked for gross
Direct Labour 250,000 25% profit of his business
Closing Stock -20,000 -2% and quotes 400,000
COGS 600,000 60%
Gross Profit 400,000 40%
Overheads 300,000 30%
Net Profit 100,000 10%

15. Definition of Gross Profit
Turnover 1,000,000
The amount by which: Closing Stock 20,000
i) the sum of the amount of the Total 1,020,000
Turnover and the amount of
the closing stock shall exceed
Opening Stock 20,000
ii) the sum of the amounts of
the opening stock and the Purchases 350,000
amount of the uninsured Total 370,000
worked expenses
(i.e purchases & discounts Gross Profit 650,000
received) Rate of Gross Profit 65%

16. What can we learn from this?
Uninsured working expenses
Only include those costs that truly vary with turnover
e.g. 100% reduction in turnover will result in 100%
reduction in purchases, but may not lead to 100%
reduction in direct labour / wages.

17. When definitions don’t match
 Accounts definition
 400,000 @ 40% Rate of Gross Profit
 Policy definition
 650,000 @ 65% Rate of Gross Profit
 Substantially underinsured as a result
 Only 61.5% covered
 Consider carefully what is and isn’t
included in uninsured working expenses

18. What can we learn from this?
Definition of Gross Profit
Make sure that you and your clients
are talking the same language.

19. Gross Profit v Gross Revenue
 Gross Revenue policies may be more
appropriate for service type businesses
 Hotels
 Clubs
 PR / Ad agencies / TV Channels
 Private hospital / nursing home
 Art galleries / Museums
 Private schools etc.

20. 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

21. STANDING CHARGES
 Advertisement and Publicity
 Duties, licenses and patent fees
 Director’s 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

22. COSTS , TURNOVER AND GROSS PROFIT
Break Even
Net Profit
Costs
Turnover
GP Variable Cost Total Cost
Standing Charges
UNITS

23. 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)

24. Example of premium working
Turnover 1,000,000,000
Production Cost 6,000,000,000
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 90% X 125% =
2.8125
Premium Amount Rs. 11,25,000

25. 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
 Auditor’s fee clause
 Trend Adjustment : Trend, Variations, Sp. Circumst.
 New Business Clause
 Insured’s Property stored at other locations
 Supplier and customers premises extension
 Loss due to accidental failure of public
electricity/gas/water supply due to M.D.

26. Material damage proviso
Typical BI policy definition
“…provided that at the time of the loss, destruction
or damage there shall be in force an insurance covering
the interest of the Insured in the property at the Premises
against such loss, destruction or damage and that payment
shall have been made or liability admitted therefore”
except due to Policy excess.

27. TYPES OF BI COVERS
• ON TURNOVER BASIS
• ON OUTPUT BASIS
• DIFFERENCE BASIS (Turnover)
• REVENUE BASIS

28. 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 )

29. 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

30. BASIS OF INSURANCE
DIFFERENCE BASIS:
 GROSS PROFIT IS ARRIVED AT ON THE DIFFERENCE BASIS.
 INSTEAD OF STNADING 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 )

31. 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.

32. 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

33. TERMS TO UNDERSTAND
 SPECIFIED AND UNSPECIFIED STANDING
CHARGES
 GROSS PROFIT
 RATE OF GROSS PROFIT : Financial Year
 ANNUAL TURNOVER : year before DOA
 STANDARD TURNOVER
 INDEMNITY AND INTERRUPTION PERIOD
 REDUCTION IN TURNOVER
 TREND ADJUSTMENT
 INCREASE IN COST OF WORKING
 ECONOMIC LIMIT

34. CLAIM WORKING : STEPS
1. Ascertain Annual G.P. (Specified Standing charge + N.P.)
2. Trend Adjustment to Gross Profit
3. Work out rate of Gross Profit (G.P. / Turnover for F.Y.)
4. Interruption period and actual turnover therein
5. Work out standard turnover (turnover during months /
days in preceding year corresponding to interruption
period) + Trend Adjustment
6. Ascertain Reduction in Turnover (Standard Turnover less
Actual Turnover during interruption period)
7. Apply rate of G.P. to reduction in turnover due to Accident
8. Reduce it by Saving in Standing charges
9. Calculate increase in cost of working : Apply rate of gross
profit to ‘reduction in turnover avoided’ and allow lower.
10. Adequacy of Sum Insured : Apply rate of gross profit to

35. BI claims methodology
 Standard turnover less actual turnover = Loss of
turnover
 @ Rate of gross profit (turnover less specified working
expenses) = Loss of Gross Profit
 Less Savings (adjustment for business overheads not
incurred)
 Plus Increased Cost of Working (additional costs
incurred to mitigate loss)
 All subject to adequacy of cover

36. ABC Manufacturing Limited
Projected Post-incident Claim
Pre Post Claim
Incident Incident
Turnover 1,000,000 100% 400,000 100% 600,000
Materials 350,000 35% 140,000 35%
Gross Profit 650,000 65% 260,000 65% 390,000
Direct Labour 250,000 25% 200,000 50% (50,000)
Overheads 300,000 30% 240,000 60% (60,000)
Net Profit 100,000 10% (180,000) (45%) 280,000

37. Savings
Typical policy definition
“…less any sum saved during the Indemnity
Period in respect of such of the charges
and expenses of the Business payable
out of Gross Profit as may cease or be
reduced in consequence of the Incident.”

38. Under insurance
20042005 2005 2006 20052006 Lost Lost
Actual
Actual Anticipated
Projected Actual
Actual Turnover
Turnover
Turnover 1,100,000 2,200,000 750,000 1,450,000
Gross Profit 715,000 1,430,000
Rate of GP 65% 65% 65%
Lost GP 942,500
• Sum Insured = 715,000
• Limit of cover = 715,000 / 1,430,000 = 50%
• Settlement = 476,250

39. Any questions?

40. THANK YOU