Fire Loss of Profit Insurance
Keep Earning While You Rebuild
A fire policy pays to rebuild the factory. It does not pay the salaries, loan instalments and lost margin during the months you cannot trade. Fire Loss of Profit insurance, also called fire consequential loss or business interruption cover, fills that gap. It pays the gross profit you lose from reduced turnover and the extra costs of keeping customers served, for an indemnity period you choose. Setting that period and the gross profit figure correctly is where most businesses go wrong.
What Fire Loss Of Profit Covers
Lost Gross Profit
Pays the gross profit lost because turnover falls after insured fire or allied peril damage at your premises.
Standing Charges And Wages
Keeps fixed costs such as salaries, rent, interest and insurance funded while production is interrupted.
Increased Cost Of Working
Pays reasonable extra costs, like temporary premises or outsourced production, spent to reduce the loss of turnover.
Chosen Indemnity Period
Cover runs for the period you select, commonly twelve months or more, starting from the date of damage.
Auditors' Fees
Reasonable fees charged by your auditors to produce the figures needed for the claim can be included.
Supplier And Customer Extensions
Can be extended to interruption caused by damage at named suppliers' or customers' premises, subject to underwriting.
What is Fire Loss of Profit insurance?
Fire Loss of Profit insurance pays the gross profit a business loses, and the extra costs it incurs, when trading is interrupted by damage from fire or another peril insured under its property policy. It protects earnings, while the fire policy protects the physical assets.
It is sometimes called fire consequential loss or business interruption insurance. It is bought alongside a Bharat Laghu, Bharat Sookshma or Standard Fire and Special Perils policy, and sits within our fire insurance range.
What the policy covers
Loss of gross profit
The policy compares your turnover during the interruption with what it would have been, and pays the rate of gross profit on the shortfall. Gross profit here is an insurance definition, not the figure in your profit and loss account. Broadly, it is turnover less the variable costs that stop when production stops, such as raw materials and power used in manufacture. What remains covers fixed costs and net profit.
Increased cost of working
If you rent a temporary unit, pay for overtime or get products made by a third party to keep customers, the reasonable extra cost is paid, as long as it saves at least that much in lost gross profit.
Other elements
- Wages, which can be insured on a different basis from other fixed costs
- Auditors' fees for producing claim figures
- Extensions for damage at key suppliers' or customers' premises
- Extensions for failure of public utilities such as power or water, where available
The material damage proviso
A loss of profit claim is payable only if the physical damage that caused it is covered under a fire policy, and that claim has been paid or liability admitted. If your fire policy is underinsured, excludes the peril, or has lapsed, the profit claim can fail too. This is why both policies must be arranged together, with matching locations and perils. Where a machine breakdown rather than a fire stops production, you need machinery loss of profit insurance instead.
How the sum insured is decided
Two choices drive the cover.
- Indemnity period: the maximum time after the damage during which losses are paid. Think about how long it would take to clear the site, obtain approvals, rebuild, source imported machinery, commission it and win back customers. For many manufacturers this is longer than twelve months.
- Sum insured: the annual gross profit, projected forward for growth, and scaled up if the indemnity period exceeds twelve months. An 18-month period needs one and a half times the annual figure.
A time excess, such as the first few days of interruption, usually applies. Premium depends largely on the underlying fire rate, the indemnity period and the time excess you accept.
What is not covered
- Interruption without physical damage from an insured peril
- Losses beyond the indemnity period, however long recovery actually takes
- Fines, penalties and loss of market share not reflected in turnover
- Damage excluded under the fire policy, such as war or wear and tear
How a claim works
- Report the damage under both the fire and loss of profit policies at once.
- Keep records of turnover, orders lost and every extra cost you incur.
- Agree with the surveyor early on steps that reduce the loss, such as temporary production.
- Your accountants prepare the claim using the standard turnover and gross profit formula.
- The insurer pays interim amounts on account where the loss is clear, and settles once the indemnity period ends or trading recovers.
How MILES helps
- We work from your audited accounts to calculate insurable gross profit, avoiding the common mistake of insuring net profit.
- We test your indemnity period against realistic rebuild and machinery lead times.
- We align the profit policy with your Standard Fire and Special Perils policy so the material damage proviso is met.
- We compare terms across 16+ insurers and help manage a claim that can run for many months.
Cover, exclusions and premiums depend on the insurer’s policy wording and underwriting. MILES Insurance Brokers Pvt. Ltd. is an IRDAI-licensed direct broker (Life & General, Reg. No. 954); the insurance is issued by the insurer. Insurance is the subject matter of solicitation.