Business Interruption Policy

Introduction

The standard fire policy covers loss or damage to material property occurred due to: fire, lightning as well as explosion of boilers & gas (used for domestic purposes only). If properly arranged this policy ensures the money which can be used to repair or replace damaged assets following the loss. But repairing or replacing the damaged assets will take considerable time. During that time the business is at risk from:
a) losing orders/customers;
b) losing income/profits;
c) ongoing costs & expenses such as rent, rates, insurance premiums etc.
d) salaries & wages which should be paid to key employees.

These financial/pecuniary risks which occurred as a result of material damage will not covered by fire policy.

The proper insurance policy which covers these risks is business interruption policy. Therefore, business interruption policy replaces the lost income/profit which would have been achieved by the business if the interruption to the business had never happened. Nevertheless, it should be noted that any claim under business interruption policy will be accepted only if there is material damage policy issued prior to the loss & liability for a claim of damage to property is admitted.

Subject Matter Insured

The loss of profits policy is an extension of the basic fire policy & machinery breakdown under which the subject matter insured is physical property (buildings, machineries content, etc) in the business premises of the insured. Indeed, it is a provision of the consequential loss policy that there should be insurance inforce covering the property of the insured and that payment of material damage shall have been made or liability admitted thereof before the consequential loss policy is called upon to cover loss of profits.

What the loss of profits undertakes to do in the event of business interruption brought about by loss/damage of the physical property is to pay the insured the sum of:
? the gross profit that would have been earned during the period of business interruption and
? increase in cost of working, which is additional expenditure incurred with the consent of the insurer to minimize the loss of gross profit which would otherwise result from the fire. This might take the form of renting temporary premises, the hiring of machinery or the purchase of manufactured goods to complete contracts.

The Scope of Cover

The corporation agrees (subject to the conditions contained in the policy) that if any building or other property or any part thereof used by the Insured at the Premises for the purpose of the Business be destroyed or damaged by:

3.1 Fire,
3.2 Lightning,
3.3 Explosion, in a building in which gas is not generated and which does not form part of any gasworks, of gas used therein for illuminating of domestic purposes

(less of or destruction of or damage to so caused being hereinafter termed DAMAGE) at any time after payment of the premium and before the time specified in the Schedule on the last day of the period of insurance or of any subsequent period in respect of which the premium required for the renewal of this Policy shall have been paid to and accepted by the Corporation and the business carried on by the Insured at the premises be in consequence thereof interrupted or interfered with.
3.4 Special perils: The covers provided under special perils for Fire & Lighting Insurance policy can also be extended to cover business interruption due to the special perils specified.

Exclusions

This Insurance doesn’t cover:- 
Loss occasioned by or happening through or in consequence of:-
a) The burning of property by order of any public authority.
b) Subterranean Fire.
c) Explosion except as stated on the scope of cover.
d) The burning, whether accidental or otherwise, of forests, bush, prairie, pampas or jungle and the clearing of lands by fire.
e) Damage to property occasioned by its own fermentation, natural heating or spontaneous combustion or by its undergoing any heating or drying process.
f) Loss or damage directly or indirectly caused by or arising from or in consequence of or contributed to by nuclear weapons material.
g) Loss or damage directly or indirectly caused by or arising from or in consequence of or contributed to by ionizing radiations or contamination by radioactivity from any nuclear fuel or from any nuclear waste from the combustion of nuclear fuel. For the purpose of this condition only combustion shall include any self-sustaining process of nuclear fission.
h) Earthquake, volcanic eruption or other convulsion of nature.
i) Typhoon, hurricane, tornado, cyclone or other atmospheric disturbance.
j) War, invasion, act of foreign enemy, hostilities or warlike operations (whether war be declared or not), civil war.
k) Mutiny, riots, strikes civil commotions, military or popular rising, insurrection, rebellion, revolution, military or usurped power, martial law or state of siege or any of the events or causes which determine the proclamation or maintenance of martial law or state of siege, or any act or any person acting on behalf of or in connection with any organization with activities directed towards the overthrow by force of the Government de jure or de facto or the influencing of it by terrorism or violence.

Conditions

5.1 If there be any material misdescription of the business or premises to which this insurance refers or any misrepresentation as to any fact material to be known for estimating the risk, or any omission to state such fact, the Corporation shall not be liable upon this Policy.
5.2 No payment in respect of any premium shall be deemed to be payment to the Corporation unless a printed form of receipt of the same signed by an official or duly appointed Agent of the corporation shall have been given to the Insured.
5.3 The insured shall give notice to the Corporation of any insurance or insurances already effected, or which may subsequently be effected covering any of the loss hereby insured against and unless such notice be given and the particulars of such insurance or insurances be stated in or endorsed on this policy by or on behalf of the Corporation before the occurrence of any Damage all benefit under this policy shall be forfeited.
5.4 Immediately upon any fall or displacement of
a. any building Damage to which might give rise to a claim under this Policy;
b. any part of such building;
c. the whole or any part of any range of buildings or of any structure of which such building forms part,
the insurance under this Policy shall cease in respect of loss resulting from Damage to such building or property therein;
Provided that:-
1. such fall or displacement is of the whole or a substantial or important part of such building or impairs the usefulness of such building or any part thereof or leaves such building or any part thereof or any property contained therein subject to increased risk of Damage or is otherwise material;
2. such fall or displacement is not caused by Damage, loss resulting from which is covered by this policy or would be covered if such building, range of buildings or structure were included in the premises to which this policy refers.
If any claim be made upon this policy in consequence of Damage whether occurring before, during or after such fall or displacement the Insured shall produce such proof as may reasonably be required that the loss was not, either in origin or in extent, directly or indirectly, proximately or remotely, occasioned by or contributed to by and such fall or displacement and did not either in origin or extend, directly, or indirectly proximately arise out of or inconnection with any such fall or displacement.

If any action, suit or other proceeding, the burden of proving that any fall or displacement is caused by Damage shall be upon the Insured.

Every notice and other communication to the Corporation required by these conditions must be written or printed.

In any action, suit or other proceeding where the Corporation alleges that by reasons of the provisions of this condition any loss is not covered by this insurance, the burden of proving that such loss is covered shall be upon the Insured.

The insurance by this Policy shall cease if:-
a) the business be wound up or carried on by a liquidator or receiver or permanently discontinued or
b) the Insured’s interest cease otherwise than by death or
c) any alteration be made either in the business or in the premises or property therein whereby the risk of damage is increased at any time after the commencement of this insurance, unless its continuance be admitted by memorandum signed by or on behalf of the Corporation.
Notice shall be given to the Corporation and, if required, an additional premium paid, if the rate of premium payable in respect of the insurance covering the interest of the Insured in the property at the premises against Damage shall be increased;

This insurance may be terminated at any time at the request of the insured, in which case the Corporation will retain the customary short period rate for the time the policy has been in force, this insurance may also at any time to be terminated at the option of the Corporation, on notice to that effect being given to the insured, in which case the Corporation shall be liable to repay on demand a rateable proporation of the premium for the unexpired term from the date of the cancelment.

On the happening of any damage in consequence of which a claim is or may be made under this policy, the Insured shall forthwith given notice thereof to the Corporation and shall with due diligence do and concur in doing and permit to be done all things which may be reasonably practicable to minimize or check any interruption of or interference with the business or to avoid or diminish the loss, and in the event of a claim being made under this policy shall, not later than thirty days after the expiry of the indemnity period or within such further time as the Corporation may in writing allow, at his own expense deliver to the Corporation such books of account and other business books, vouchers, invoices, balance sheets and other documents, proofs, information, explanation and other evidence as may reasonably be required by or on behalf of the Corporation for the purpose of investigating or verifying the claim together with a declaration on oath or in other legal form of the truth of the claim and of any matters connected therewith. No claim under this policy shall be payable unless the terms of this condition have been complied with and in the event of non-compliance therewith in any respect any payment on account of the claim already made shall be repaid to the Corporation forthwith.

All benefits under this policy shall be forfeited, if the claim be in any respect fraudulent, or if any fraudulent means or devices are used by the insured or any one acting on his behalf to obtain any benefit under this policy.

If at the time of any loss under this policy there be any other subsisting insurance or insurances, the Corporation shall not be liable to pay or contribution hereunder more than its rateable proporation of such loss.

The insured shall, at the expense of the Corporation, do and concur in doing, and permit to be done, all such acts and things as may be necessary or reasonably required by the Corporation for the purpose of enforcing any rights and remedies, or subrogated, whether such acts and things shall be or become necessary or required before or after his indemnification by the Corporation.

5.5 Indemnity period

The indemnity period is the maximum period during which the results of the business shall be affected in consequence of the damage; i.e. the period of business interruption (until the turnover returns to normal) and for which the policy provides compensation.

The maximum indemnity period is chosen by the insured and represents a policy limit. The factors affecting his choice include his ability to obtain other premises, the speed with which existing facilities, buildings, machinery equipment, stock can be repaired or replaced, and customers and trading restored.

5.6 Sum insured

The sum insured for any period of indemnity of twelve months or less is the annual gross profit figure as assessed by the insured himself. If the indemnity period exceeds twelve months, the sum insured is increased proportionately.

5.7 Measure of Indemnity

In the event of business interruption covered by the policy, the basic indemnity payable to the insured is generally arrived at as follows:

1. the rate of gross profit (gross profit divided annual – turnover) for the last complete financial year before the damage is determined;
2. the rate of gross profit as determined above, is applied to the shortage in turnover resulting from the damage, this shortage being found by comparing the turnover in the months immediately following the damage with that in the corresponding period of the previous year.(known as standard turnover)
3. The above calculation will produce the figure for fall in gross profit, to which will be added any increase in cost of working. (of covered and subject to a limit)
4. The above assumes a constant gross profit figure of one year. But in practice this might not very well be so due to unforeseen or special circumstances, or the trend of business. Adjustments may, therefore, be made to the calculated figure by taking such realities into account.
5. Finally deduct amount in respect of any savings or adjust amount payable on average basis if there is under insurance.

Arbitration

1. If any difference arises as to the amount of any loss such difference shall independently of all other questions be referred to the decision of an Arbitrator to be appointed in writing by the parties in difference, or, if they cannot agree upon a single Arbitrator, to the decision of two disinterested persons as Arbitrators, of whom one shall be appointed in writing by each of the parties within two calendar months after having been required so to do in writing by the other party. In case either party shall refuse or fail to appoint an Arbitrator within two calendar month after receipt of notice in writing requiring an appointment, the other party shall be at liberty to appoint a sole Arbitrator; and in case of disagreement between the Arbitrators, the difference shall be referred to the decision of an Umpire who shall have been appointed by them in writing before entering on the reference and who shall sit with the Arbitrators and preside at their Meetings. The death of any party shall not revoke or affect the authority or powers of the Arbitrator, Arbitrators or umpire respectively; and in the event of the death of an Arbitrator or Umpire, another shall in each case be appointed in his stead by the party or Arbitrators (as the case may be) by whom the Arbitrator or Umpire so dying was appointed. The costs of the reference and of the award shall be in the discretion of the Arbitrator, Arbitrators or umpire making the award. And it is hereby expressly stipulated and declared that it shall be a condition precedent to any right of action or suit upon this policy that the award by such Arbitrator, Arbitrators or Umpire of the amount of the loss if disputed shall be first obtained.

2. In no case whatever shall the Corporation be liable in respect of any claim under this policy after the expiration of
a. One year from the end of the indemnity period or, if later,
b. Three months from the date on which payment shall have been made or liability admitted by the insurers covering the damage giving rise to the said claim,
unless the claim is the subject of pending action or arbitration.

Note:

This article is prepared to elaborate about Loss of Profits Insurance. Due to fire and Allied Perils. Therefore, legally it shall not come in to force.