• 1. WAGES:
• Two methods in which wages can be included.
• a) PRO-RATABASIS:
• It is possible to cover under a separate policy to claim wages for a Standard Period
• for an amount to represent the wages for the selected period. E g
• ·Wages of all employees
• ·The wages of a specified category or categories of employees.
• ·The wages of all employees who are normally paid on weekly basis.
• b) DUALBASIS:
• 100% cover for a selected initial period and for the remainder of the indemnity
• period, a selected percentage only. On Dual basis it is necessary to have a
• minimum indemnity period of 12 months. The sum insured must represent the full
• annual payroll. If saving in payroll are made during 100% cover period, such
• saving can be carrieThe insured has the option of converting the combination to a straightforward
• 100% cover for a stipulated period longer than initial period.
• DUAL BASIS PROVIDES A FLEXIBLE COVER : There are two main
• advantages to the Dual Basis cover. They are
• ·Carry over of saving
• ·Option to Consolidate
• ·Insurance of lay off and/or retrenchment compensation
• ·Auditors feesd over to boost the partial cover period during the indemnity
• period.
• ASCERTAINMENTOFTHE LIABILITYOFINSURANCE
• What should be identified first before looking at the claim for business
• interruption?
• ·Whether there is a standard fire policy and claim for material damage has been
• admitted.
• ·What would be period of indemnity in case of reinstatement of property
• damaged.
• ·Turnover earned by the insured after the damage but preferably at the different
• premises of the insured.
• ·The insurance is limited to reduction in turnover.
• ·Limited to increase in cost of working.
• ·The amount payable as indemnity shall be additional cost of working with
• some standing charges of the business insured.
• ·How the premium is adjustable with the gross profit earned by the business
• differs from the sum insured during the year.
• EVIDENCE FOR ADMITTED MATERIALDAMAGE OR DESTRUCTION
• Basically, it is a precondition that there should be a claim towards material
• damages under the policy admissible as the terms and conditions of the standard
• fire policy. The insured peril must have operated and the damages resulted.
• Inotherwords, the resultant damages that has arisen out of the insured peril
• should have been admitted by the insured. A point should always remains the
• minds of the insurers that the policy is designed to cover the effect of a cause,
• which is falling under the scope of the policy and does not fall under any of the
• exception specified in policy.
• This brings two situations
• Insured peril The first one is the situation where the peril operates that is termed as
• insured peril as per the policy. Admit both claims material damages and loss of
• profit resulting the insured event.
• Other unknown peril The second situation is where a peril operates but is not found
• in the listed perils of the policy. Under the new circumstances, what do we do .
• Reference is made to ensure that it is not found in the exceptions mentioned in the
• policy and also verify whether this peril is an insured peril under any other product
• of the insurer .
• Where property suffers damage by a peril, which might not have been insured
• under the policy, the course of the damage may lead to a fire starting. If the
• proximate cause of the fire is not specifically excluded, the policy will respond to
• the fire damage. However, damage caused by the original peril will not be
• recoverable.
• It being so, a suitable adjustment need to be made necessarily in the business
• interruption period on the ' would have been basis' as if both unknown peril as well
• as insured peril had happened separately. Of course, the onus is on the insured to
• establish damages separately towards what is covered and what stands uncovered
• due to the operation of an other peril unknown to the policy. [ an international
• author of a book on practice of insurance says that the insured commits fatal to his
• policy if he fails to establish the distinction between the losses].
• It is our view the similar effect would happen in the Business interruption policy
• too as it operates only on the admission of a claim towards material loss. It will be
• explained more in the paragraphs to follow
• WHATIS TURNOVER?
• It may be defined as consideration measurable in terms of money received or
• receivable by the insured for goods sold and delivered and services rendered in the
• course of the business carried out within his premises.
• What does not fall under Turnover?
• o Any sum receivable for the sale of redundant plant and machinery.
• o Income from any source not insured under the policy. Example rental
• income from the tenants.
• o Any other business carried out within the insured's premises or goods
• sold or services rendered but not insured under the policy.
• STANDARD TURNOVER
• The Turnover during that period in the 12 months immediately before the date of
• incident, which correspond, with the indemnity period. Example -Indemnity
• period for the restoration of the business disturbed is 01.06.2001 to 30.10.2001
• and this period is the period of interruption. The standard turnover for this purpose
• means the turnover for a period from 1.6.2000 to 30.10.2000.
• RATE OF GROSS PROFIT
• The rate of gross profit earned on the turnover during the financial year
• immediately before the incident. This can be expressed by a formula
• Gross Profit/Turnover x 100
• Turnover
• However, the estimated gross profit for the period of insurance should be based on
• the previous years audited accounts but not less than that of the nearest financial
• year.
• N.B. Standard turnover, annual turnover and rate of gross profit are subject to
• adjustment to take care of trend of business and special circumstances affecting
• the business. For example a workers' strike, a big event (like IPL for sports goods
• manufacturers) providing extraordinary business opportunity.
• INCREASE IN COSTOF WORKING AND SAVING
• The insured may have to incur any additional expenditure for the sole purpose of
• averting or minimizing the reduction in Turnover which, but for that expenditure,
• would have taken place during the indemnity period in consequence of the
• incident. But such expenditure should not exceed the sum produced by applying
• the Rate of Gross Profit to the amount of the reduction thereby avoided.
• EXAMPLE:
• Incurring expenditure for overtime or hiring alternate machinery or occupying the
• alternate premises on rent.
• Basis of Indemnity for IC
• The insured should remember that his payment would not exceed the amount
• arrived as under.
• Rate of Gross Profit x Reduction in T/o avoided. But, if the insured agrees to pay
• more, then this can be expressed in the policy. The limitations which are usually
• imposed are largely common sense and are that the increase in cost of working
• shall be
• ·Absolutely necessary and reasonable
• ·That increased cost, which is incurred with a purpose to avoid or
• minimize a reduction in turnover and therefore a loss of gross profit.
• ·Such IC is only in consequence of the damage [or incident]
• ·Necessarily incurred during the indemnity period and
• ·Equitably limited in the amount payable by insurers
• The effect of this equitable limit is to restrict the maximum recovery as increase in
• cost in working to the amount that would otherwise have been payable as a loss of
• gross profit if such expenditure had not been incurred . This is often referred to as
• 'the economic limit’
• This limit is clearly equitable but there are occasions when expenditure is incurred
• with the agreement of insurers, which proves later to have been uneconomic.
• Insurers must then stand by their original agreement.
• SAVINGS
• Any sum saved during the indemnity period in respect of such of these charges
• payable out of gross profit insured based on the past records, may be used to set off
• against the standing charges that are constant in nature.
• ANNUALTURNOVER
• It is the Turnover during the twelve months immediately preceding the incident. It
• is not the Turnover taken from the Audited accounts, as the figures shown in the
• Audited Final accounts must have become outdated. The rate of Gross Profit is
• applied to the Annual T/o and the proportion of the loss to be borne by the insured
• is
• Sum Insured
• ————————————————— = Amount payable
• Rate of Gross Profit x Annual T/o
• Those cost which should continue wholly or in part or deducted from the Gross
• Profit amount.
• PROVISION FOR UNDERINSURANCE
• The sum insured by this item is less than the sum produced by applying the Rate of
• Gross Profit on Annual T/o, the amount payable shall be proportionally reduced.
• EXCESS CLAUSE
• Every claim under the Fire Loss of Profits policy is subject to compulsory
• deduction as under:
• Other than Petrochemical Risks: 7 days Gross Profit
• Petrochemical Risks : 14 days GrossProfit
• ACCUMULATED STOCKS CLAUSE.
• If stocks of finished goods which is accumulated is used to maintain the turnover
• when production is affected adversely, during indemnity period, account is to be
• taken of this use and turnover figures are adjusted accordingly.
• ACCUMULATED STOCKS CLAUSE.
• If stocks of finished goods which is accumulated is used to maintain the turnover
• when production is affected adversely, during indemnity period, account is to be
• taken of this use and turnover figures are adjusted accordingly.
• SUM TO BE INSURED
• The sum insured should be at least one year's gross profit, even if
• indemnity period is less that 12 months.
• ·If indemnity period is more than 12 months, the sum insured will be a
• multiple (i.e. proportionate) of the annual G.P.