Machinery Loss of Profit Insurance

What is Machinery Loss of Profit Insurance?

Machinery Loss of Profit (MLOP) insurance goes beyond merely repairing damaged machines; it covers the financial losses incurred when those machines break down. This policy compensates for the revenue lost during periods when your machinery is out of operation and addresses the additional costs required to get your business back to normal.

These extra expenses may encompass renting alternative equipment, paying for employee overtime, and expediting repairs. In essence, the policy aims to minimize your business's financial setback due to machinery malfunctions by accounting for both the drop in turnover (attributable to decreased production) and the spike in operational costs (resulting from expedited repairs and temporary arrangements).

Why do you need a Machinery Loss of Profit (MLOP) Policy?
When your business is highly dependent on machinery and equipment, a machine breakdown doesn't just create a glitch; it can precipitate significant disruptions. Such a failure can impede your operations, incur financial costs, and jeopardize your business. That’s where MLOP insurance steps in as a financial safety net. This insurance doesn't solely cover the costs of repairing or replacing malfunctioning machinery; it also accounts for additional expenses like emergency repairs and equipment rentals. Therefore, even in adverse conditions, your business can maintain operational continuity.

However, the benefits extend beyond machinery repairs. A machine breakdown can set off a domino effect, impacting everyone from suppliers to customers. MLOP insurance mitigates these secondary repercussions. Moreover, having such coverage sends a signal that your business is serious about risk mitigation, potentially enhancing your reputation and fostering greater trust among clients, suppliers, and partners. In essence, MLOP acts as a stabilizing force for your business, particularly during unexpected breakdowns.

What will a Machinery Loss of Profit Policy cover?

The coverages offered by an MLOP policy can be broadly classified as follows :

Loss of Gross Profit Due to Reduction in Turnover/Output

MLOP insurance compensates for the financial losses a business may experience due to reduced turnover or output resulting from accidental machinery breakdown. Insurance compensation is based on "gross profit," calculated by deducting operating expenses like wages, rent, and other fixed costs from the anticipated revenue. The insurer will remunerate the business for the discrepancy between the actual gross profit made during the indemnity period and the projected gross profit that would have been realized had operations been normal.

Increased Cost of Working

Following a machinery breakdown, immediate actions often incur additional costs to restore normalcy and limit financial losses. Businesses may need to expedite repairs, employ specialized technicians, or even rent substitute machinery. In some cases, operations may temporarily relocate, incurring extra labor costs. These additional costs, known as the 'increased cost of working,' are covered up to the policy limits.

Consequential Loss Cover

Unplanned machinery breakdowns can lead to production delays, supply chain disruptions, and consequent financial losses. The policy provides indemnification for these losses and covers income lost during downtime. Despite non-operational machinery, ongoing fixed costs like rent and salaries still accumulate, and the policy alleviates this financial strain.

What's not covered?

Common exclusions typically found in MLOP policies in India include :

Loss or damage resulting from willful acts or gross negligence.
Loss or damage arising from pre-existing faults or defects known to the insured or their representatives at policy inception.
Loss or deterioration of raw materials, finished products, or operating media (such as fuel and lubricants) due to machinery damage.
Restrictions imposed by law enforcement authorities.
Intangible losses, e.g., loss of goodwill or customer base.
Loss or damage resulting from war activities, riots, or strikes.
Damage caused by nuclear perils or radioactive contamination.
Extended repair periods beyond four weeks due to various logistical challenges like customs restrictions, delays in finding replacements or carrying out repairs, and transportation of damaged or replacement parts to and from the insured premises.

Who needs a Machinery Loss of Profit Policy?

A machinery loss of profit (MLOP) insurance policy is pertinent and advantageous for an extensive array of businesses across multiple sectors. Below are some examples of businesses that could substantially benefit from this type of insurance :

Construction companies
Manufacturing firms
Energy and power utility plants
Automotive manufacturers
Textile industries
Mining operations
Companies specializing in electronic goods and technology components
All those manufacturing units where any machinery breakdown can lead to a break in the production line and eventually lead to loss of profit.

FAQs

What is Machinery Loss of Profit?

Machinery Loss of Profit (MLOP) insurance covers the indirect or consequential financial losses that a business may sustain due to operational interruptions caused by the malfunction of designated machinery or equipment. These losses can range from diminished production and missed deadlines to loss of revenue and increased operational costs.

How is Lost Profit Calculated?

Lost profit can be determined through two primary methods:
1. Addition Basis: Net Profit + Standing Charges
2. Difference Basis: Sales - Variable Expenses

How Does MLOP Insurance Work?

Here's a general outline of how MLOP operates:

Businesses often already possess a machinery breakdown insurance policy before considering MLOP. This foundational policy covers direct physical damage to machinery and equipment resulting from covered risks like mechanical failure, electrical breakdown, or operator error.
Should a covered machinery breakdown transpire, operations may halt, leading to various financial setbacks such as diminished production, missed deadlines, loss of revenue, and increased costs.
MLOP augments this coverage by compensating the business for the financial losses incurred during the period of interruption stemming from the machinery breakdown. Covered losses may include reduced sales, increased operational costs, lost profits, and ongoing fixed expenses.

What's the Difference Between ALOP and MLOP?

The key distinctions between ALOP (Advance Loss of Profit) and MLOP are:

ALOP covers the financial losses a business might experience due to delays in the project's completion resulting from unexpected events. MLOP specifically addresses losses resulting from the interruption of operations due to machinery breakdown. Thus ALOP covers anticipated profit, which is the projected profit if everything goes as planned. Whereas, MLOP covers the loss incurred due to machinery breakdown.
ALOP insurance focuses on the delay in the start of operations due to project-related causes, such as construction delays, and supply chain disruptions. On the other hand, MLOP insurance focuses on the loss of revenue and additional expenses incurred during downtime caused by machinery breakdown.
The indemnity period for ALOP insurance typically starts from the originally planned project completion date and extends until the business can start generating income.
The indemnity period for MLOP insurance starts from the time of machinery breakdown and extends until the machinery is repaired or replaced and normal operations can resume.

Is it Possible to Claim Damages for Loss of Profit?

Yes, you can claim damages for loss of profit. When a machinery breakdown covered under the policy leads to an operational interruption, the policyholder can file a claim with their insurance provider. The insurer will evaluate the severity of the machinery breakdown, the resultant damages, and the impact of the interruption on the business's profitability. They will calculate the gross profit the business would have earned had the machinery been operational during the period. If the claim is validated, the insurance company will issue an indemnity payment to the policyholder, compensating for the assessed loss of profit.

Why should you buy machinery loss of profit insurance at Covermax?

If you are looking to purchase machinery loss of profit insurance for your business, there are several compelling reasons to buy it through Covermax:

Comprehensive marketplace: BimaKavach is one of the most comprehensive marketplaces for commercial insurance products in India. With exclusive tie-ups with almost all reputed insurance companies, most insurance products are available for side-by-side comparison and purchase on the BimaKavach website.
Customization: Our insurance experts will help you get your policy with extras (customization) that also fits your budget.
Round-the-clock customer support: BimaKavach offers round-the-clock customer service through their toll-free contact number and WhatsApp option on their website. You can simply connect with either and get your queries resolved, at any time!
Personalized dashboard and expert advice: Personalized dashboard is facilitated for your ease. Moreover, you can get a dedicated and seasoned expert to hand-hold you at every stage of your buying journey, claims processing, etc.