Loss of Profit Insurance, also known as Business Interruption Insurance, protects companies against consequential losses caused by certain perils. This policy covers loss of profits, increased cost of working, increased wages, rent, and all other expenses attributable to interrupted business operations.
Commercial Property Insurance safeguards your business against risks of material loss or damage to your insured asset due to unforeseen events such as fire, natural disasters, theft, or riots, to name a few.
But property damage doesn’t happen in isolation. When adverse events lead to extensive property damage, your regular business activities might also get negatively impacted. Your business might even have to shut down entirely. That in turn can cause a number of further losses like loss of wages, standing charges, auditor fees, increased cost of working, and loss of net trading profits.
The problem is, these additional losses are not specifically covered by property insurance policies even if the event that caused the losses is covered under them. This means that even if you get your desired pay-out, the interrupted business operations can still place you at a hefty loss.
This is why a Loss of Profit Insurance policy should always be taken in tandem with Property Insurance. This policy covers the consequential loss of income and additional expenses that are directly related to the covered event.
Loss of Profit Insurance policies come in many types depending on the underlying event they cover. Here are some of the most common ones :
Also known as Consequential Loss (Fire) Insurance, this policy protects businesses against the immediate consequences of fire and allied perils like floods, earthquakes, riots, strikes, malicious damage, terrorist attacks, etc. While damage to property due to these perils is covered by Fire and Allied Perils Insurance, loss of profits, reductions in turnover, and expenses associated with hindered production are all covered by a Fire Loss of Profit Insurance Policy.
This insurance is often taken as an add-on policy to Fire and Allied Perils Insurance, and only covers losses that happen because of the occurrence of events included in the parent Fire Insurance policy.
This insurance policy will cover the following losses caused due to Fire and Allied Perils :
- Loss of profits due to interrupted business operations
- Standing charges - fixed expenses like gas, electricity, etc. that persist even after business activities cease
- Loss of wages
- Auditor fees
- Increased cost of working and any other additional expenditure incurred to maintain normal operations
You can also opt for the following add-ons :
- Damage caused due to accidental failure of public electricity / gas / water supply
- Damage to customer's premises due to perils covered under Fire Policy (only offered by some insurers)
- Damage to Supplier's premises due to perils covered under Fire Policy (only offered by some insurers)
Moreover, you can avail add-ons for certain perils like earthquake (fire and shock), deterioration of stocks in cold storage, spontaneous combustion, impact damage due to insured’s own vehicles, forest fire, terrorism which are either excluded or offered as add-on in a Standard Fire and Special Perils Insurance policy.
Please Note - If the claim under the Fire policy is rendered inadmissible due to any reason by the insurer, then the claim cannot be made under a Loss of Profits policy either.
This policy excludes the following perils from its coverage:
- Loss of profits due to any peril not covered by Fire Insurance such as war and related events, nuclear perils, etc.
- The difference between the value of stock at the time of fire and at the time of subsequent replacement
- Deterioration of undamaged stock after fire
- Cost of documentation for Fire and Loss of Profits claim
- Loss of goodwill
- Third party claims
- Other exclusions stated in the policy
Fire Loss of Profit Insurance when paired with Fire and Allied Perils Insurance can provide your business with complete protection from fire and related perils.
This policy is associated with a Machinery Breakdown Insurance Policy. It will cover loss of profits on account of loss or damage that is caused by all the perils covered under a Machinery Breakdown Policy such as electrical/mechanical breakdown, voltage surge, impact damage, bursting turbines, damage to hydraulic cylinders, or compressors due to internal pressure, among other covered items.
- Consequential loss due to accidental breakdown of any machinery
- Increased cost of working due to business interruption
- Reduction in turnover due to business interruption
This policy will not cover financial loss arising out of perils not covered in a Machinery Breakdown Insurance Policy. Some of these perils are listed below :
- Fire and allied perils
- Theft and Burglary
- Nuclear perils, radioactive/ionization perils
- Political risks
- Overloading experiments
- Loss or damage caused by any existing faults
- Spoilage of raw materials, semi finished or finished goods or operating media
- Willful acts or gross negligence
- Deterioration on account of normal wear and tear
- Any restrictions imposed by lawful authorities
Please note : A Machinery Loss of Profit Insurance Policy is only issued in conjunction with a Machinery Breakdown Policy.
Businesses have to sanction multiple projects, whether they are strategic, operational or growth related. For the purpose of financing these undertakings, many businesses end up taking corporate loans intending to pay them off with the completed project’s earnings.
However, sometimes these projects can get unexpectedly delayed or interrupted, leading to significant losses for the business. Traditional material damage insurance policies do not include the loss of anticipated revenue. This risk is only covered by an Advanced Loss of Profit Insurance Policy.
Advanced Loss of Profit (ALOP) Insurance, also known as Delay in Startup Insurance, is considered an extension to Contractor’s All Risk (CAR) or Erection All Risk Insurance (EAR) policies.
This insurance policy will only cover the interests of the insured party (the business or the financiers of a project work), as opposed to the contractors, with respect to the following :
- Actual loss of gross profits sustained due to reduction in turnover on account of interrupted business activity
- Standing charges that continue to be accrued despite discontinued activity
- Increased cost of working and any additional expenditure incurred to maintain normal operations
The above risks will only be covered if they are a direct result of material damage caused due to perils insured by Contractor’s All Risk or Erection All Risk Insurance policies.
This policy does not cover loss of profits due to any peril that is excluded by the underlying CAR and EAR insurance policies. Broadly speaking, it will not cover loss of profits or anticipated revenue due to the following -
- Damage to surrounding property, construction machinery or plant and equipment
- Material damage covered by way of endorsement to a CAR or EAR policy, unless specified
- Damage to operating media or any materials necessary for the insured business
- Any restrictions imposed by a lawful authority
- Breach of contract, non-completion of orders, or any penalties
- War and nuclear perils
- Suspension or cancellation of a lease or license after the commencement of business
This policy offers extensions to cover loss of profits from a project due to perils like Earthquake, Volcanic Eruption and Tsunami.
This policy also states that the insured Principal will have to take all practical measures to complete the work as scheduled and provide the insurer with regular reports detailing the updated progress. The insurer will then determine the impact of any project delays on profits and ascertain the admissible claim amount.
Loss of Profit Insurance can provide your business with complete protection against a host of risks when paired with the accompanying material damage policy. These policies do not carry a hefty premium and it is always advisable to add them to your Fire, Machinery, or Construction Insurance bundles.
Learn more: Property Insurance policies for businesses