Loss of profit is based on the premise that the business is interrupted due to a covered peril. The Loss of profit claims under Office Insurance covers 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 can determine by:
- Estimating the ‘annual revenue’ in the last 12 months immediately prior to the date of the 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 the ‘Loss of Revenue’ claim is less than the ‘revenue gap’ then would prorate the claim amount.
Settlement of Increased Cost of Working
The increased cost of working claims is determined as follows in the office insurance policy:
- Incurred an additional expense 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 ’
However, would prorate the amount of the sum insured allocated to this peril is less than the additional cost incurred.
The exclusions, however, limited the claims, and the insurer would not consider any loss apart from the reasons related to normal business operations.
Rajesh Singh had a flourishing business in home appliances. He had four offices situated in different parts of India, out of which the head office was in Delhi.
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Considering the risks that could arise to disrupt his business, he 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 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 that promised Rajesh to offer coverage in case of loss due to fire.
In this case, Rajesh approached the office insurance company and agreed to settle the claim after reviewing several documents like the claim form, competing for the account of the loss or damage, invoice bills of the item, etc.
It was due to the impact of the fire that Rajesh had to keep his office closed for ten days. A week before the accident, Rajesh got a big contract for home appliances. From one of the buyers situated in Sri Lanka. However, the fire caused the 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. The fire in his office affected his profit as well.
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So, he approached the office insurance company for getting coverage for the loss of profit. To compute the paid amount the insurer estimated the annual revenue of the last 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, Rajesh saved 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 the ‘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.