PARA 13.2|IC 57, Fire Insurance|ONE LINER|CHAPTER 9

PARA 13.2|IC 57, Fire Insurance|ONE LINER|CHAPTER 9: Consequential Loss Insurance – I

Insurance exams offered by the Insurance Institute of India (III Exam), consist of various papers either in Life or Non Life or Combined. Here we are providing ONE LINER IC 57, Fire Insurance Chapter 9 “Consequential Loss Insurance – I” for para 13.2 and III exam .These questions will be very helpful for upcoming promotional exam in 2020.

IC 57 / Fire Insurance is a very important topic in insurance promotional exam. This IC 57 / Fire Insurance paper comes in all GIPSA exams which makes it very important.

♦CHAPTER 9: CONSEQUENTIAL LOSS INSURANCE – I

1. Losses from stoppage of business- Fire insurance is designed to provide protection in respect of loss of or damage to buildings, machinery, fixtures, goods etc. by fire and or other allied perils. In other words, fire insurance affords cover for ‘material damage’.

2. 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 business.
3. Trading losses-The trading losses resulting from stoppage of business may be considered in three areas:

• Net profit: This may be broadly described as margin of income over all the expenses.
• Standing charges: These are overhead expenses such as salaries, taxes, interest, rent etc. which continue to be incurred in spite of the stoppage of the business.
• Increased cost of working: This is the abnormal expenditure incurred by the insured to maintain the business, as far as possible, at its normal level, so that the loss under net profit and standing charges is avoided or at least minimised.

4. Turnover is defined in the Loss of Profit 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.
5. Rate of Gross Profit: The proportion the gross profit bears to the turnover during a given period (usually the last financial year before the fire) is called the rate of gross profit.
6. The measure of indemnity is the sum produced by applying the rate of gross profit to the reduction in turnover during an agreed period following damage. When the rate of gross profit is applied to the shortage in turnover the amount of trading loss is ascertained.
7. Indemnity Period- The Loss of Profit policy provides indemnity in respect of loss of gross profit during the indemnity period which is selected by the insured. The indemnity period chosen by the insured may vary from 3 months to 3 years. The choice of the indemnity period would be mainly influenced by the time that would be taken for reinstatement of the building, replacement of machinery etc.
8. Where the indemnity period is 12 months or less, the sum insured should be the annual amount of the gross profit i.e. the annual amount of net profit and the insured standing charges.
9. Where the indemnity period is 24 months, the sum insured should represent twice the annual gross profit.
10. The ‘indemnity period’ is to be distinguished from the ‘period of insurance’ which is usually a year; the fire must have occurred during the period of insurance and the indemnity period which commences then may well extend beyond the expiry date of insurance
11. Components of the policy

• Operative Clause
• Material Damage Proviso
• Schedule
• Specification
• Definitions
• Adjustment Clause
• Variations and Special Circumstances
• Departmental Clause
• Policy Conditions
• Losses not payable

12. Provisions of operative clause

The provisions of this clause may be summarised as follows:

• Fire or other peril must occur at the Insured’s premises
• Property used for the business of the Insured at the Insured premises must be destroyed or damaged;
• The business must be interrupted or interfered with as a consequence;
• The resulting loss is paid in accordance with the provisions of the specification incorporated in the policy.
• Reference is also made to the ‘Premises’ and the ‘Business’ of Insured

13. Material Damage Proviso-The operative clause is followed by a proviso, which states that the Insured must maintain a material damage Fire Policy and claim under C. L. Policy will be paid only if the material damage claim is paid or payable.
14. Specification is an important part of the Policy, and provides for:

• Items insured under the policy and the relative sums insured, e.g. Gross Profit, Wages, and Auditor’s Fees.
• Definitions, and
• A formula for ascertaining the liability for any loss

15. The Schedule provides for incorporation of the particulars of the individual contract under the following items:

• The Insured;
• The Business;
• The Premises;
• The Sum Insured;
• Period of Indemnity;
• Period of Insurance

16. Turnover consists of the following three elements
17. Variable charges: These are expenses incurred in producing the goods (e.g., purchase of raw materials) which vary in amount in direct proportion to the volume of business transacted.
18. Standing Charges: These expenses are fixed in amount irrespective of the volume of business transacted or which cannot be reduced in direct proportion to any reduction of business (e.g., Taxes, Bank interest, Salaries to permanent staff, etc.)
19. Net Profit: This is turnover minus variable and standing charges.
20. Standing charges and net profit together constitute the gross profits of business
21. After a fire, if the turnover is reduced, the Variable Expenses may also bereduced in the same , in which case the insured suffers no loss on this account.
22.  The sum insured is to be computed from the insured’s accounts e.g., Trading and Profit and Loss accounts
23. Property tax can be insured as a standing charge.
24. Income Tax and Profits may not be insured as a standing charge.
25. The net trading profit resulting from the Business of the Insured at the ‘premises’ after due provision has been made for all standing and other charges including depreciation, but before the deduction of any tax chargeable on profits.

26. Insured Standing Charges : The Standing Charges covered by the insurance are those specified in the proposal form and named in the policy, and no other Charges.
27. Gross Profit: This is the net profit, as defined, added to the amount of the insured standing charges

28. If the business is in the position that not only is no net profit being earned, but standing charges also cannot be fully met, out of the earnings, there is a net trading loss
29. If there be no Net Profit the amount of the Insured Standing Charges less such proportion of the net trading loss as the amount of the Insured Standing Charges bears to all the Standing Charges of the business
30. If all standing charges are named in the policy as insured, then this means that gross profit is the total amount of those insured standing charges, less the net trading loss.
31. 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.
32. Annual turnover is the turnover during the twelve months immediately before the date of the damage.
33. Standard Turnover: The Turnover during that period in the twelve months immediately before the date of the damage which corresponds with the actual Indemnity Period.
34.  The “Adjustment Clause“, is bracketed against the rate of gross profit, annual turnover and standard turnover, all of which are the essential factors in calculating the loss.
35. The trend of the business

• Upward trend
• Downward trend

36. Upward trend: Figures extracted from the insured’s books may show that the turnover for the twelve months before the fire, the annual turnover, was greater than the turnover during the last financial year on which the rate of gross profit is calculated. The difference shows that there was an upward trend of turnover, up to the time of the fire.

37. Downward trend: The trend may be downward in a declining business, and this calls for corresponding adjustments. If it were found that the machine troubles were serious, resulting in waste of material and go slow labour tactics resulted in decreased turnover, the rate of gross profit would be less than in the previous financial year.
38. A trend, either upward or downward, must therefore, be taken into account when arriving at the rate of gross profit.
39. If during the Indemnity Period goods shall be sold or services shall be rendered elsewhere than at the premises for the benefit of the business either by the insured or by others on his behalf the money paid or payable in respect of such sales or services shall be brought into account in arriving at the Turnover during the Indemnity Period
40. If any Standing Charges of the business be not insured by this policy then in computing the amount recoverable hereunder as increase in cost of Working that proportion only of the additional expenditure shall be brought into account which the sum of the Net Profit and the Insured Standing Charges bears to the sum of the Net Profit and all the Standing Charges.

41.  If the Insured declares at the latest 12 months after the expiry of any period of insurance that the gross profit earned (or a proportionately increased multiple thereof where the indemnity period exceeds 12 months) during the accounting period of 12 months most nearly concurrent with any period of insurance as certified by the Insured’s Auditors, was less than the Sum Insured thereon, a pro-rata return of premium not exceeding 50% of the premium paid on such Insured for such period of insurance shall be made in respect of the difference.

42.  If declaration not received no refund shall be admissible.
43. The rate of gross profit based on turnover and gross profit figures of the last audited financial accounts
44. Actual turnover during the Indemnity Period is deducted from the Standard Turnover to arrive at the reduction in turnover.
45. The policy ceases if;

• the business be wound up or carried on by a liquidator or receiver or permanently discontinued or;
• the insured’s interest ceases otherwise than by death or,
• any alteration is made in the business or premises whereby the risk of damage is increased unless the insurance is continued by endorsement by insurers (Condition 1)

46. On the happening of any event which may give rise to a claim the insured shall take measures to avoid or minimise loss (This is known as ‘due diligence’ and is relevant to increased cost of working which is payable under the policy)
47. On the happening of any event which may give rise to a claim the insured shall furnish at his expense documentary evidence such as business books, vouchers, invoices, balance sheets etc. to enable to investigate or verify the claim
48. No claim is payable or any ‘on-account’ payment shall be paid, if the terms of this condition are not complied with
49. The company shall not be liable for any claim after the expiry of

• One year from the end of the period of indemnity, or if later,
• Three months from the date on which payments shall have been made or liability admitted under the material damage policy, unless the claim is the subject of pending action or arbitration

50. the policy and the schedule shall be read together as one contract and Condition 6 excludes war and kindred perils
51. Condition 7 provides for automatic reinstatement of the sum insured, after a loss by deducting from the claim amount, pro-rata premium from the date of loss to the date of expiry of the policy
52. It is important to note the type of consequential losses which are not covered under the policy. These are:

• Under-insurance against property damage under fire policies.
• The difference between value of stock at the time of the fire and value at the time of subsequent replacement.
• Depreciation of undamaged stock after a fire.
• Cost of preparation of fire and consequential loss claims. (Accountant’s fees for extracting and certifying particulars of profits claims may be insured as a special item, in a consequential loss policy at additional premium – Auditors Fees Clause).
• Litigation costs connected with fire or Consequential loss claims generally.
• Third Party claims.
• Failure to recover book debts owing to destruction of records.
• Loss of goodwill.
• Fines and Penalties payable due to delayed fulfillment or cancellation of sale/service contract.
• Loss of Market

53. Business Interruption (FLOP):The following minimum deductibles are applicable Other than Petrochemical Risks 7 days of Gross Profit Petrochemical risks 14 days of Gross Profit

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