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CHAPTER 6: FIRE CONSEQUENTIAL LOSS INSURANCE - Coggle Diagram
CHAPTER 6: FIRE CONSEQUENTIAL LOSS INSURANCE
BUSINESS INTERRUPTION/FIRE CONSEQUENTIAL LOSS INSURANCE
Intangible future loss is the subject matter of a consequential loss insurance contrast.
Insurance n property only covers the direct material loss following its damaged by an insured peril. Those insurance doesn't cover any indirect loss.
The primary objective of this policy is to provide indemnity arising from financial losses as a result of
reduction in turnover and increased cost of working
in the event of loss or damage to property by fire and other perils and which renders the business inoperable.
SECTION 8 (CLAUSES & ENDORSEMENT)
Contract Price Clause
Insurance on property provide indemnity for a loss which occurs and can be assessed at the time of the happening of the insured peril whereas consequential loss insurance is concerned with a loss which can only occur and be assessed subsequent to the happening of the insured peril.
2. MATERIAL DAMAGE PROVISO IN CL
A CL policy will only operate to cover loss of gross profit and increased of working if the policyholder's interest in subject matter of the loss is also covered. The reason for this is that, unless funds are made available by valid material damage insurance.
3. TURNOVER
The objective of all business activity is to produce an income which is greater than the costs incurred in its production. The difference between income and expenditure is a net profit which is reward for the effort he has made in conducting the business the effect of a fire at his premises is to stop or reduce the normal business activities so that the anticipated incomes will either cease because the capacity has been impaired. The earning will certainly be less than was anticipated and may even cease entirely.
Variable Charges
These are charges which vary in direct proportion to the activity of the business such as the cost of buying raw material will naturally be reduced proportionately to any reduction in production.
Standard Charges
These are charges that remain in full despite a reduction in production or trading .It must be paid irrespective of the extent of the business activity even though the turnover may be insufficient to meet them. E.g. rent.
4. GROSS PROFIT
Turnover is the combination of three element (net profit, standing charges and variable charges)
net profit= turnover. > Total of the standing charges + variable charges.
net loss = turnover < total of the standing charges + variable charges
Variable charges will not result in any loss to be insured, so:
The maximum loss an insured can incur consequent ulon the interruption of the business = the total of net profit + the fixed standing charges
This maximum loss of total figure is known as the gross profit and cl policy is designed to protect the gross profit.
5. INDEMNITY PERIOD
In policies that cover material damage, the period of insured's is the period during which the insured is indemnified. But in a loss of profit policy, the period of insurance and indemnity period may not be identical.
Indemnity period (tariff) - the period beginning with the occurrence of the damage and ending not later than the Maximum Indemnity Period MIP thereafter during which the results of the business shall be affected in consequence of the damage.
6. THE SUM INSURED
The gross profit in the last financial year but asjusted to provide for:
a. Trends of the business
b. Variations in the business
c. Special circumstances affecting the business where the indemnity period is less than 12 months, the sum to be insured is the annual Gross Profit.
d. Where the indemnity period exceeds 12 months, the sum insured would be increased proportionately.
7. AVERAGE in CL (GROSS PROFIT)
In the order to ensure that the insurers receive a premium commensurate with the risk they are under taking, the policy is so worded that under-insurance carries the same penalty as that resulting from the application of the prorata condition of average in a material damage policy. It follows from a provision that the amount payable must be proportionately reduced if the sum insured on gross profit is less the amount produced by applying the rate of gross profit is less than the amount produced by applying the rate gross profit to the annual turnover.
Basic of indemnity ( Insurance on gross profit)
1.1 The addition basis
Gross profit = net profit + all standing charges
Net profit can be computed from the profit and loss account.
1.2 Difference basis
Gross profit = turnover + closing stock - ( opening stock + uninsured working expenses)
Insurance on salaries/ wages
Salaries - payable to employees who are permanent staff and whose work functions are related to the central organization, whereby they needed at all times to ensure the business quick recovery to normal.
Wages - payables to other employees who are usually concerned with the production whereby reduction of the no. of employees is possible in the event of interruption.
Insurance on auditor's fees
A separate item in respect of Auditor's Fees can be included to cover the reasonable charges payable to the insured's auditors or professional accountant for their services in the insured's books of account as required by the insurer in investigating a claim.
CONSEQUENTIAL LOSS INSURANCE EXTENTION OF COVERAGE
A standard CL policy covers only such losses as a consequent upon insured damaged at the insuredcs own premises which are specified in the schedule.
The following extention are permitted under the tariff:
a. Specified Supplier Extention
Premises of named suppliers from which components, goods or materials are obtained or where they are manufactured .
b) Unspecified supplier extention
This covers for loss arising from damage to unspecified supplier lremises, provided that:
il the supplier are limited to those located in Malaysia, Singapore and Brunei only.
c) Specified customer extention
This covers loss arising from damage to specified cust premises located in M'sia, S'pore and Brunei only.
The extention shall be rated the same way as the specified supplier extention.
d) Prevention of access extention
This covers for loss resulting from damage elsewhere than at the insured premises which shall prevent or hinder the use of the insured premises notwithstanding that the insured's premises or property therein be not damaged.
THE BASIS OF PREMIUM RATING IN CONSEQUENTIAL LOSS INSURANCE
Average Base Rate under Fire Tariff
The rate for CL insurance shall not be less than the basic fire and/ or perils/clause rates for material damage insurance for the same perils on the property concerned before any form of discount other than discounts for fire extinguishing appliances actually allowed
CLAUSES IN CONSEQUENTIAL LOSS INSURANCE
Accountant clause
Accounting charges of another kind become payables as a result of the incident which are not as standing charge and cannot be measured by the reduction in turnover. Insured's accountant work involved in the preparation of a claim in a CL policy.
Payment of account Clause
Payments in account of a claim will be made to the insured monthly if desired
Department Clause
If business has different sections, each earniya different rate of gross profit, this clause can be incorporated so that is must be established quite in advance thatvthe account od the business are arranged insuch way that independent trading result of each department are ascertainable.
Accumulation of Stock Clause
Should an accident occur and the turnover of business not be affected until some weeks later, due to there being accumulation of stocks available from which the shortage in production can be temporarily made up, the indemnity period would commence with the date of the incident.
UNDERWRITING IN CL INSURANCE
The u/w of CL involves special features. There are two main factor which have a bearing on u/w profits risks: 'inceotion risk' and ' interruption risk'
The inception risk
It is evident that CL insurance is essentially a forn of fire insurance as the perils covered and other perils. Therefore, consideration of the physical fire hazard is important.
The interruption risk
The vulnerability of the business to interruption following damage is termed the 'interruption' risk . This hazard variesas trading activities in eavh business may have distinctive feature.
a) the time necessary to make good material damage. The time required for reinstatement if the buulding, replacement of stock and re-erection of machinery is a relevant factor to be assessed. If the machinery used is of a special nature , the period of interruption will be prolonged.
b) possibility of maintenance of business during interruption period: in certain types of business, production can be carried out at temporary premises