Fire Loss Of Profit
Fire insurance is designed to provide protection in respect of loss to buildings, machineries, fixtures, goods etc. by fire and or other insured perils. In other words fire insurance affords cover for ‘material damage’. However, an indemnity for the material damage does not provide complete protection to the insured who will also suffer trading losses due to total or partial stoppage of his business. The object of loss of profit insurance (also known as Consequential Loss or Business Interruption insurance) is to make good for loss of gross profit.
FLOP policy covers the loss of gross profit if the loss is occurred due to perils covered under Fire Insurance.
What it covers?
FLOP insurance covers trading losses which result from stoppage of the business.
Trading loss may be considered under three headings,
- Net profit: income
- Standing Charges: expenses which are fix in nature irrespective of the volume of business transacted.
- Increase cost of working: expenditures incurred by insured to maintain the business at its normal level.
Sum Insured:Gross Profit.
Gross Profit can be arrived by following two methods.
- Addition Basis = Net Profit + Standing Charges
- Difference Basis = Sales – Variable Expenses
How to evaluate Sum insured and Indemnity period?
- The indemnity period is the maximum period required to put the business back into normal operation after damage to insured property by an insured peril. This would depend on extent of loss and the nature of particular business. The detailed analysis has to be made such as indemnification of the key or critical parts, their availability, type of supplier, relative importance in production and time required to re- commission the same. In other words Indemnity period should be the maximum period or the Lead Time required to restore the critical equipment or to put the business into normal operation status. This indemnity period is chosen by insured, it may vary from 3 months to 3 years.
- The Sum insured is to be computed from the insured’s account e.g. P&L accounts.