Fire Loss of Profit Insurance Policy

What is Fire Loss of Profit Insurance Policy?

A fire loss of profit insurance is a type of business interruption insurance that covers the loss of gross profit due to fire and allied perils damaging insured property.

This policy can be combined with a standard fire and special perils policy to offer complete protection against losses from fire, flood, and other special perils. It covers elements such as lost revenue, fixed expenses, and additional costs necessary for resuming business operations.

Why do you need a Fire Loss of Profit (FLOP) Policy?

Owning a business necessitates a Fire Loss of Profit policy for several critical reasons. A fire can lead to temporary or long-term business closure, during which revenue generation may cease. Standard property insurance policies cover physical damage but fail to consider financial losses from business interruptions. FLOP insurance fills this gap by covering potential income and profits that a business could have earned without the fire-related interruption. It also assists in covering ongoing expenses and mitigating the risk of long-term customer attrition.

What will a Fire Loss of Profit (FLOP) Policy cover?

The FLOP policy, when combined with a standard fire and special perils policy, offers comprehensive protection against losses resulting from covered perils such as fire damage and floods. The coverage can be classified as follows:

Protection from Loss of Net Trading Profit

The policy compensates the insured for the net trading profit that would have been generated if the fire incident had not taken place. This encompasses fixed costs, ongoing expenses, and projected profits. Coverage is restricted to a specific time frame—namely, the duration needed to restore the business to its pre-fire operational status. Additionally, the policy covers extra expenses that the insured incurs to minimize the loss of net trading profit. These may include costs for temporary relocation, expedited repairs, and any other actions taken to expedite the resumption of business activities.

Increased Cost of Working

In the event of a fire incident that interrupts business activities, there may be additional expenditures to maintain critical functions, speed up recovery, and resume normal operations. Known collectively as the increased cost of working, these expenses can encompass temporary relocation costs, expedited repairs, overtime wages, and any other measures undertaken to reduce the disruption duration. A Fire Loss of Profit policy covers these costs, facilitating a smoother transition back to normal operations.

Auditor fees

FLOP policies frequently extend their coverage to include auditors' fees. This ensures that expenses related to assessing and verifying financial losses in the wake of a fire incident are also covered. It alleviates the financial burden on the insured business by covering the costs of engaging auditors to evaluate the economic consequences of the interruption.

Standing Charges

Standing charges, also known as fixed expenses or overhead costs, represent the regular financial commitments that a business has to fulfill, regardless of its operational status. These expenses include items like rent, salaries, utilities, loan repayments, insurance premiums, and other fixed costs. FLOP policies take these persistent fixed expenses into account when the business ceases operation due to a covered peril.

Here are some extensions covered in FLOP policies in India:

Damage to a customer's premises due to a peril covered under the fire policy
Accidental failure of public electricity, gas, or water supply
Damage to a supplier's premises due to a peril covered under the fire policy
Costs of documentation for claims related to fire and loss of profits

What's not covered?

Here are some typical exclusions commonly found in FLOP policies in India :

Loss of gross profit due to a peril not covered by the fire policy
The difference in stock value between the time of the fire incident and the time of subsequent replacement
Deterioration of undamaged stock following the fire
Loss of goodwill
Third-party claims
Other exclusions specified in the policy

Who needs a Fire Loss of Profit (FLOP) Policy?

A fire loss of profit (FLOP) policy is beneficial for various businesses across multiple sectors. If your business could face significant financial disruption due to fire-related interruptions, consider securing a FLOP policy. Businesses that may benefit include:

Manufacturing companies
Retail stores
Service industries
Hotels and hospitality
Supply chain-dependent businesses
Warehouses and distribution centers
Entertainment venues
Technology companies
Educational institutions

FAQs

How can the loss of profit due to a fire be calculated in an insurance claim?

Loss of gross profit can be determined using one of the following two methods :
1. Addition Basis: Net Profit + Standing Charges
2. Difference Basis: Sales - Variable Expenses

What does gross profit mean in business?

Gross profit in business signifies the difference between the total revenue generated from sales and the cost of goods sold (COGS). It serves as a crucial financial metric, offering insights into a company's profitability at a fundamental level, before accounting for other operating expenses.
The formula for calculating gross profit is:
Gross Profit = Total Revenue - Cost of Goods Sold (COGS)

What is the interruption period under a Fire Loss of Profit insurance policy?

The interruption period, also known as the indemnity period, in a Fire Loss of Profit (FLOP) insurance policy refers to the time frame during which the policy covers financial losses resulting from a business interruption due to a fire. It is the maximum duration needed to restore the business to regular operation following damage by an insured peril. The length of this period depends on the severity of the loss and the nature of the affected business.

What is meant by contingent business interruption in a Fire Loss of Profit insurance policy?

Contingent Business Interruption, as part of a Fire Loss of Profit (FLOP) insurance policy, provides coverage for financial losses incurred due to disruptions in the operations of a business's suppliers, customers, or other essential partners caused by specified perils. In simpler terms, it covers the business's losses stemming from operational interruptions in third parties upon which it relies.

What types of damages constitute lost profits?

Lost profits refer to the financial setbacks a business experiences when it is unable to generate anticipated revenue and earnings due to specific events or circumstances. Various scenarios can lead to lost profits, covering a range of damages including, but not limited to, business interruption, market shifts, contractual disruptions, supply chain breakdowns, legal disputes, natural disasters, and catastrophic events.