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Consequential loss

or
Fire Loss of Profits Policy.
Introduction
Under the conventional fire policy,
only property damage is covered.
But in addition to the loss on
account of property damage, there
will be loss on account of stoppage
of work and loss of profit
To cover the stoppage of work and
loss of profits, another policy
namely Consequential loss or Fire
Loss of Profits Policy is offered by
the insurance companies
Profit due to any accident can be
affected because of any of the
following reasons:
No sales or Sales reduction
Sales but with higher expenditure -
Some extra or increases expenses may
have to be incurred in order to
maintain sales
Fixed expenses like wages, salary,
depreciation, interest on borrowed
capital will be incurred irrespective of
Terms of loss of profit
policy
Gross Profit
Gross profit = Net profit +
Insured standing charges

In case of net loss,

Gross Profit = Insured standing


charges – Net loss
Indemnity period
The period beginning with the
occurrence of damage and ending not
later than 12 months thereafter, during
which the results of the business shall
be affected in consequence of the
damage
Dislocation period
Period for which the business is actually
dislocated due to fire or accident.

For loss of profit policy, time calculated is indemnity


STANDARD TURNOVER 
The turnover during that period in the
12 months immediately before the
date of the damage which corresponds
with the indemnity period

ANNUAL TURNOVER
The turnover for 12 months
immediately preceding the date of fire
Short sales

Reduction/Loss in sales during the


indemnity period due to fire

Standing charges

The fixed expenses incurred


irrespective of sales
Procedure for
calculating loss of
profit claim
1. Calculate gross profit rate of last
year using the formula

Gross profit rate =


Net profit + Insured standing
charges * 100
Sales
Incase of loss,
2. Calculate short sales

Standard turnover xxx


(Turnover during the same period last year
corresponding to indemnity period)

Add/Less Trend adjustments xxx


(for increase or decrease in sales trend)
Less Sales during indemnity period xxx
Short sales xxx
3. Calculate loss of gross profit
using the formula

Short sales * Gross profit rate


4. Calculate the amount of
admissible additional
expenses
The least of the following shall be taken as
admissible additional expenses:
a. Actual expenses
b. Gross profit on additional sales
c. Additional expenses * GP on annual turnover
GP on annual turnover + Uninsured
standing charges

OR

Additional expenses * Net profit + Insured


5. Calculate Gross claim

Loss of gross profit xxx


Add Admissible additional expenses
xxx
Less Savings in standing charges if
any xxx
Gross claim xxx
6.Net claim

If average clause is applicable, it


may be applied to find out the net
claim

Net claim = Gross claim * Policy value


GP on annual turnover