Fire Loss of Profit Insurance (FLOP) policy provides coverage for the financial losses incurred by a business due to interruption or disruption of operations caused by a fire or related perils.
- Business Interruption Coverage: FLOP insurance compensates the insured business for the loss of net profit and continuing fixed expenses during the indemnity period resulting from the fire incident, helping to maintain financial stability during the recovery period.
- Indemnity Period: The policy's indemnity period typically begins from the date of the fire incident and extends until the business resumes normal operations or until the specified period expires, whichever is earlier.
- Gross Profit Protection: FLOP insurance covers the reduction in the business's gross profit due to the decrease in turnover or production output resulting from the fire, providing financial support to cover ongoing expenses and obligations.
- Additional Expenses Coverage: It may also include coverage for additional expenses necessarily incurred by the insured to minimize the loss of gross profit or to expedite the resumption of business operations, such as temporary relocation costs or increased advertising expenses.
- Documentation Requirements: To file a claim under the FLOP policy, the insured must provide documentation of the financial records, such as profit and loss statements, revenue projections, and expenses incurred, to support the calculation of the loss of profit and fixed expenses during the indemnity period.
- Loss Assessment: The insurer typically conducts a thorough assessment of the business's financial records and operations to determine the extent of the loss of profit and fixed expenses covered under the policy, ensuring fair and accurate compensation for the insured's financial losses.
- Premium Calculation: The premium for FLOP insurance is based on various factors, including the business's industry, size, location, risk exposure, indemnity period, and coverage limits, with higher-risk businesses or longer indemnity periods generally attracting higher premiums.
- Importance for Business Continuity: FLOP insurance is essential for businesses to mitigate the financial impact of fire-related disruptions and maintain continuity of operations, providing peace of mind and financial security in the event of unforeseen fire incidents.
What is a Fire Loss of Profit Insurance (FLOP) Policy?
Fire and Special Perils Insurance policies that cover physical damage to the assets exclude consequential losses to the insured business. Fire Loss of Profit (FLOP) policies are useful in these cases. This is a specialized form of business interruption insurance that protects businesses against financial loss in the event of a fire or similar peril that disrupts their operations. Loss of revenue, fixed expenses, payroll costs, and additional expenses required to resume operations can all be factored into this policy.
What are the Major Characteristics of Fire Loss Insurance?
- Protects you from wage loss.
- Standby charges are included.
- Fees for auditors are covered by the insurance policy.
- Net trading profit is protected from loss.
- Consider the increased cost of working.
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Who needs Fire Loss Insurance?
A fire loss of profit (FLOP) policy is relevant and beneficial for a wide range of businesses across various industries. FLOP insurance is recommended for businesses that could suffer significant financial losses should their operations be interrupted by fire. The following are some examples of businesses that would benefit from FLOP policies:
- Companies engaged in manufacturing
- Stores in the retail industry
- Service based companies
- Hotels and restaurants
- Businesses that depend on supply chains
- Centers of distribution and warehouses
- Performing arts centers
- IT companies
- Schools and colleges.
Why Should You Go for Fire Loss Insurance?
It is important that you have a FLOP policy if you own a business. A fire can cause a temporary or prolonged closure of your operations. During this time, your business will not generate any income. Business interruption losses are not covered by standard property insurance policies, except for physical damage caused by fires. A FLOP policy fills this gap by covering the profits and income a business would have made if it had not been interrupted by a fire. Even if the business is not operational, it helps cover ongoing expenses and obligations by protecting the company's income stream.
The FLOP insurance helps businesses meet their obligations during interruptions, such as rent, utilities, employee salaries, loan payments, and other operating costs. A FLOP insurance policy helps businesses maintain their financial stability and retain their customers, reducing the risk of customer attrition over the long term. FLOP provides greater financial stability during the interruption period, leading to a quicker and smoother recovery after operations resume.
What is Included in a Fire Loss Insurance?
With the FLOP policy, you are fully protected against fire damage, flood damage, and other covered perils. Under the policy, trading losses are covered that result from business interruption due to covered perils. These coverages are categorized as follows:
Profit protection from losses in trading
Insurance covers the insured for the net trading profit that the insured would have earned if the fire incident hadn't occurred. The coverage includes fixed costs, ongoing expenses, and anticipated profits. It is limited to a specified period of time, based on how long it will take to restore the business to its pre-fire operating state. The policy also covers additional expenses the insured incurs in order to minimize the loss of net trading profit, such as temporary relocation and expedited repairs.
- Standing charges
Businesses must pay standing charges regardless of their operational status, also known as fixed expenses or overhead costs. A fixed cost is one that includes expenses such as rent, salaries, utilities, loan payments, insurance premiums, and others. Fixed expenses persist despite a peril-related halt in operations under FLOP policies.
- Loss of wage protection
In the event of an interruption of business activities caused by a covered peril, a Fire Loss of Profit policy may cover employees' wages. Instead of dealing with employee-related issues, businesses can focus on recovering and resuming operations when employees' wages are secured through FLOP coverage.
- Fees of an auditor
By including auditor's fees in their coverage, FLOP policies ensure that financial loss assessment and verification costs are also covered in the wake of a fire. The insurer does not have to engage auditors to evaluate the economic impact of the interruption, which is a significant financial burden
- Working cost increase
There might be additional expenses incurred after a fire incident interrupts business operations and prevents essential functions from being maintained. These expenses are related to assisting the recovery process and resuming normal operations. A temporary relocation expense, expedited repairs, overtime wages, and all other measures to minimize disruption can be considered as part of the increased cost of working. It facilitates a smoother transition back to normal operations by covering such expenses.
The following extensions may also be covered
- Damage to customer's premises caused by covered perils
- A failure of the electricity, gas, or water supply
- Damage caused by a covered peril to the premises of the Supplier
What is Not Included in Fire Loss of Profit?
An Indian FLOP policy typically excludes the following:
- Peril not covered by the fire policy that results in a loss of gross profits
- The difference between the stock value prior to the fire and the new stock value after the fire
- Undamaged stock that degrades after a fire
- Expenses associated with Fire and Loss of Profits claims
- Goodwill loss
- Claims from third parties
Example -
Suppose "ABC Electronics," an Indian manufacturing company, suffers severe damage to its production facility due to fire. A fire forces the company's operations to halt entirely, affecting its ability to manufacture and deliver products, as well as causing significant financial damage.
The Solution: In addition to its Standard Fire and Special Perils policy, ABC Electronics also carries FLOP insurance, which covers the costs of repairing and reconstructing damaged equipment, machinery, and facilities. In addition, the policy covers the company's loss of net trading profit should the incident not have occurred, as it ensures ABC Electronics can quickly restore its physical assets. The company continues to incur fixed expenses such as employee salaries, rent, loan payments, and utilities even though operations have been suspended. FLOP insurance covers these standing charges, reducing the business' financial strain and preventing further economic setbacks.
What is Indemnity Period in Fire Loss of Profit Insurance?
In a Fire Loss of Profit Policy, the indemnity period begins from the date of damage and continues until the business is restored to its pre-damaged level or until the period specified in the policy, whichever comes first. This policy is designed to cover the earnings lost by the business during the indemnity period. To obtain this policy, it is mandatory to have an existing Standard Fire and Special Perils Policy covering the risk.
A Fire Loss of Profit Policy can cover the following:
- Net profit loss resulting from the cessation of business due to an insured peril.
- Standing charges that persist despite the business stoppage.
- Additional expenses incurred by the insured to sustain normal business operations during the period of business disruption.
Frequently Asked Question
- What is the formula for calculating the fire loss of profit in an insurance claim?
Gross profit loss can be calculated in two ways:
A. Addition Basis = Net Profit + Standing Charges
B. Difference Basis = Sales – Variable Expenses
2. How is gross profit calculated in business?
In business, gross profit is calculated as the difference between the total revenue from sales and the total cost of goods sold. It is a key financial metric that shows a company's profitability at a very basic level.
Gross profit can be calculated using the following formula:
Gross Profit = Total Revenue - Cost of Goods Sold (COGS)
- In the event of a fire loss of profit insurance, what is the interruption period?
Fire Loss of Profit (FLOP) policies provide coverage for financial losses associated with a business interruption caused by a fire incident during the interruption period, otherwise known as the indemnity period. This is the maximum period required to restore a business to normal operation after damage to insured property is caused by an insured peril. It is determined by the extent of the loss and the nature of the business concerned.
- What is a contingent business interruption in a fire loss of profit insurance?
As a result of fire or loss of profit (FLOP) insurance, contingent business interruption covers losses suffered by a business when its suppliers, customers, or other key partners are disrupted by specified perils. The insurance covers a business' losses caused by third-party interruptions of operations.
- In what ways do lost profits cause damage?
Loss of profits refers to the financial damages incurred by a business when specific events or circumstances prevent it from generating revenue and earnings. In addition to business interruptions, market changes, contractual disruptions, supply chain disruptions, lawsuits, and natural disasters, many other factors can cause lost profits.
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