A fire incident can wreak havoc not only on goods and machinery but also on ongoing and future projects. Such disruptions can lead to business interruptions and financial setbacks. While a Standard Fire and Special Perils Policy covers damages from fire and related risks, it doesn't address the financial losses stemming from business interruptions. Enter Consequential Loss Insurance, designed specifically to mitigate these financial impacts.

What is the meaning of Consequential Loss Insurance?

Consequential loss refers to any disruption in business operations caused by fire or other special perils, leading to various forms of financial loss. A consequential loss insurance policy for fire or other perils provides financial compensation to the owner for lost business income resulting from fire-related incidents.

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What are all Consequential Loss Insurance Covers?

The insurance policy offers coverage for a range of business losses. Here are some examples:

  • Loss of gross profit resulting from decreased turnover.
  • Compensation for layoffs and retrenchment.
  • Consequential loss due to spoilage.
  • Coverage for auditor's fees.

Consequential Loss Insurance operates as follows:

  • Premium Calculation: The insurance company assesses the premium based on factors such as annual gross profit, selected indemnity period, and chosen extensions.
  • Claim Registration: In the event of a fire or special peril causing income or revenue loss, or increased fixed costs covered by the policy, the policyholder must promptly contact the direct broker or insurer
  • Survey Appointment: A licensed surveyor is appointed to investigate the case, examine relevant documents, and assess the loss to the organization accurately.
  • Evaluation and Compensation: Following the survey, the insurance company reviews the Final Survey Report (FSR) submitted by the surveyor. Compensation for the consequential loss is provided to the organization based on the terms and conditions outlined in the policy.

Who can Take Consequential Loss Insurance?

Consequential Loss insurance policy is designed for:

  • Small and medium-sized enterprises (SMEs)
  • Corporations seeking protection for their businesses against unforeseen circumstances that could cause significant damage to property and operations.

The claim process for Consequential Loss Insurance involves the following steps:

Compensation is then provided to the organization for the consequential loss in accordance with policy terms and internal guidelines.

The insurance company reviews the FSR, validates policy terms, and calculates the financial loss and claim amount.

After thorough investigation and receipt of necessary proofs, the surveyor submits a Final Survey Report (FSR) to the insurance company.

The surveyor may request documentation such as proof of reduced turnover, revenue, or production output.

Upon completion of verification, the insurance company dispatches an IRDA licensed surveyor to assess the scene and finalize the loss.

Initiate loss minimization measures while awaiting further instructions.

Provide policy details such as policy number, organization name, and nature of the claim to validate policyholder authenticity.

Contact the direct broker or insurer. BimaKavach helps in the claim settlement process. 

Documents needed for the claim process include:

  • Completed and signed claim form.
  • Standing charges document.
  • Supplier invoices.
  • Report detailing additional expenditures required to sustain business operations.

Please note that this list is not exhaustive and may require additional documentation depending on the specific circumstances of the claim.

Exclusions under Consequential Loss Insurance:

Consequential loss insurance may not cover certain situations. Here are some general exclusions:

  • Loss of gross profits resulting from fire or special perils not covered by the policy that cause damage to business property.
  • Losses due to material damage to the organization's property.
  • Loss of goodwill and any third-party claims arising from the events.
  • Claims resulting from war, invasion, or acts of a foreign enemy.

Key Considerations:

To ensure adequate coverage, organizations should project profits one year beyond the indemnity period in case of damages occurring towards the end of the insurance term.

It's prudent for organizations to thoroughly review policy details and exclusions before selecting a consequential loss insurance policy.

Advantages of Consequential Loss Insurance:

Certain insurers offer rider options to cover power failures or utility unavailability after a fire, potentially halting business operations.

Protects against risks arising from the inability to utilize business premises for product or service delivery, resulting in profit loss.

Compensation for employee layoffs or retrenchment may be included.

Additional expenses incurred to maintain normal business activities during affected periods are covered.

Some policies extend coverage to gross profits and fixed costs if business targets are not met due to fire or other perils.

Covers financial losses in turnover due to fire incidents on company premises, which may not be covered by standard insurance policies.

FAQs

Q1. Do employees salaries are covered under consequential loss policy?

Yes, some consequential loss insurance policies include coverage for employee salaries. In the event of business interruption due to covered perils, these policies may compensate the organization for the financial loss incurred by paying salaries to employees.

Q2. How is the calculation done for Sum Insured of Consequential Loss Insurance ?

The sum insured for consequential loss insurance is typically calculated based on several factors:

Gross Profit: The sum insured is often determined by the organization's projected gross profit over a specified period, usually corresponding to the policy's indemnity period.

Indemnity Period: This refers to the duration for which the policy provides coverage for business interruption. The sum insured may be based on the projected gross profit for this period.

Fixed Costs: Some policies also consider the organization's fixed costs, such as rent, utilities, and salaries, when calculating the sum insured.

Extensions: Additional coverage extensions, such as coverage for increased costs of working or additional expenditure incurred to minimize loss, may also impact the sum insured.

Q3. Are there any deductions to the sum insured when making a claim under this policy?

Typically, insurance companies do not apply an excess amount or deduction to the sum insured under a Consequential Loss Insurance Policy.

Q 4. What factors are considered when calculating premiums for Consequential Loss Insurance?

It is calculated based on various factors such as the organization's projected gross profit, chosen indemnity period, selected extensions, and the insurer's assessment of risk.

Q 5. What additional coverage options are available with Consequential Loss Insurance?

For an extra premium, insurers provide the following add-on covers:

  • Supplier's Extension
  • Customer Extension
  • Failure of Public Power Supply/Gas Works/Water Works
  • Spoilage Risk Extension

Q 6. How much does it take to claim consequential loss insurance?

Each insurer providing consequential loss insurance aims to expedite claim settlement promptly upon receiving all necessary documents. Claims may be rejected or delayed if any fraudulent activity is detected.

Q 7. What do we mean by gross profit?

Gross profit refers to the financial metric that represents the difference between a company's revenue from sales and the cost of goods sold (COGS). In other words, it is the profit a company makes after deducting the direct costs associated with producing or purchasing the goods sold. Gross profit does not account for operating expenses such as salaries, rent, utilities, or taxes. It is a crucial indicator of a company's profitability and operational efficiency.