Loss of Profits or Consequential Loss on Insurance Companies

Fire results not only in loss of property but also loss of profits to the business on account of its dislocation. Such a loss can be got covered by taking a loss of profits policy.

Amount of Policy

Considerable care should be exercised in determining the amount for which a loss policy should be taken. The policy should adequate to cover the likely amount of loss, which the insured may suffer on account of dislocation of the business. The policy specifics both the period as well as the amount it covers. While determining the amount of policy the insured should take into account not only the amount of net profit, he earns but also the amount of standing or fixed charges which have been charged against the revenue for determining the amount of net profit.

Computation of Claim:

Loss of profit occurs because of loss of sales on account of dislocation of the business.  Moreover, the insured may have to incur certain additional expenses to mitigate the amount of loss. There may also be certain savings in expenses of the business because of its being closed down for some period. All these have to be taken into account while calculating the amount of insurance claim. This has been explained below:

• Short sales: The term short sales refers to the loss of sales on account of fire resulting in dislocation of business. This is the difference between the "standard turnover" and the "actual turnover" during the period of fire. Computation of short sales requires the understanding of the following terms
  • Standard turnover: The term standard turnover refers to the turnover for the period corresponding with the indemnity period during the preceding accounting year adjusted in view of the trends noticed during the accounting year in which the fire occurred.
  • Indemnity Period: The term indemnity period refers to the period beginning with the occurrence of the damage and ending not later than 12 months there after during which the results of the business shall be affected in consequence of the damage.