Loss of profit is based on the premise that the business is interrupted due to a covered peril. Loss of profit claims cover the following types of losses:
- Loss of revenue
- Excess cost of operations due to the insured peril
Settlement of Loss of Revenue Claims
Loss of revenue to the business is determined by:
- Estimating the ‘annual revenue’ in the last 12 months immediately prior to the date of accident
- Adjusting this ‘annual revenue’ for the period variations and special conditions and arriving at a ‘Standard Revenue’ figure
- Estimating the gap between estimated ‘Standard Revenue’ and ‘actual revenue’ in the indemnity period
- Deduct the cost saved during this period by the business from the ‘revenue gap’ to determine the claim amount
- If the Sum Insured applicable to ‘Loss of Revenue’ claim is less than the ‘revenue gap’ the claim amount will be prorated
Settlement of Increased Cost of Working
Increased cost of working claims is determined as follows in the office insurance policy:
- An additional expense is incurred in continuing the operations during the indemnity period
- The expense is reasonable and necessary for avoiding the revenue loss
- Should not be more than the ‘avoided revenue ’
This amount will be prorated if the sum insured allocated to this peril is less than the additional cost incurred.
The claims, however, are limited by the exclusions, and any loss apart from the reasons related to normal business operations may not be considered by the insurer.
Rajesh Singh had a flourishing business of home appliances. He had four offices situated in different parts of India, out of which the head office was in Delhi.
Considering the risks that could arise to disrupt his business, he had bought an office insurance policy to get coverage under various risks, like fire, earthquake, theft, flood, etc.
Last year, a fire erupted at his Delhi’s office due to short-circuit. Though no one was hurt, his property worth Rs 50 lakh went into ashes. As he had an office insurance policy, he approached the insurance company for the settlement of the loss. The office insurance policy had a fire insurance clause which promised Rajesh to offer coverage in case of loss due to fire.
In this case, Rajesh approached the office insurance company who agreed to settle the claim after reviewing several documents like, claim form, compete for account of the loss or damage, invoice bills of the item, etc.
It was due to the impact of fire that Rajesh had to keep his office closed for ten days. A week before the accident, Rajesh had got a big contract of home appliances from one of the buyers situated in Sri Lanka. However, the fire caused loss and being the head office, Delhi’s fire affected the business activities of the other offices as well.
At the time of buying office insurance, Rajesh had got an extra cover in the form of loss of profit. He had paid extra for this cover. As his office was engulfed in fire, it affected his profit as well.
So, he approached the office insurance company for getting the coverage of the loss of profit. To compute the amount to be paid, the insurer estimated the annual revenue of the last one year of the home appliance business of Rajesh. The insurer adjusted this annual revenue with regard to the period variation, i.e., those months in which business was good and those in which business was down. The amount calculated was called ‘standard revenue’.
Then the insurer found out the gap between the estimated standard revenue and actual revenue in the indemnity period. The insurer deducted all the costs which were saved by Rajesh during this tenure of insurance from the ‘revenue gap’ in order to decide the claim amount.
As in this case, the sum insured applicable to ‘Loss of Revenue’ claim was less than the ‘revenue gap’, the insurer paid the claim amount on a pro-rata basis.
Without ‘loss of profit’ cover, it would have been difficult for Rajesh to bear the expenses.
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