NATIONAL CENTRE FOR INSURANCE LEARNING NARENDRAPUR

NATIONAL CENTRE FOR INSURANCE LEARNINGNARENDRAPURSome thoughtsFew preliminary observations:The inspiration for the project came in the chamber of Shri K P Brahma, GM(P) when it was suggeste that we print a book & make it available to the aspirants in the Class I Promotion exercise.2. Our fundamental tenet is the Democracy of knowledge. We believe that in the Age of Informationavailabilityof information should be just a click away for everyone. The competitive edge of a usergroup should come from the depth of understanding & utilisation of the available information.(Incidentally , we at NCIL practice what we preach. We are trying to share with all NICians on theCompany Intranet- all material - as basic reference or as PPT. Our endeavour is to further enrich &expand this information base.)3. This is a Team Work. It is a compilation of the work earlier done at Ahmedabad & somewhat updated& re-organised by the team at HO/ NCIL in Kolkata.4. For us at NCIL- this was our maiden foray in the field of editing. We tried to learn on the run. Inretrospect we feel that we were somewhat overambitious to begin with- both in terms of tight timeschedule & the content. Our initial target was to create a reference source which will have its utilitybeyond the current Promotion exercise & to ensure an uniform layout throughout the content.5. We have partly succeeded in this but at the cost of time overrun.6. The material is in your hands now. We await your feedback to improve on this in the next edition.7. With our one edition experience, we have started working on the next one right now. Please mailyour inputs to- s.singh@nic.co.in, s.k.pradhan@nic.co.in, a.k.das@nic.co.in,u.bhattacharya@nic.co.inWe acknowledge with thanks the role of all who have inspired &/or contributed to this project nowor in the earlier versions. At the same time, with humility, we regret our editorial shortcomingswhichwe hope to overcome with more experience.Contents

1. FIRE INSURANCE 1 - 242. BUSINESS INTERUPTION (LOP) 26 - 403. INDUSTRIAL ALL RISK 42 - 464. ENGINEERING INSURANCE 48 - 76TESTS 76 - 1185. MISCELLANEOUS INSURANCE 120- 138TESTS 138-- 1736. MOTOR INSURANCE 173- 206TESTS 206- 2187. MARINE INSURANCE 240- 2548. AVIATION INSURANCE 256- 299TESTS 299-3249. RE-INSURANCE 326- 337TESTS 338-35210. FINANCE TESTS 354- 40811. HUMAN RESOURCE * 420 469TESTS 496-502( * Page numbering error)This book is for private circulation amongst NICians only.

FIRE INSURANCEBASIC PRINCIPLES OF FIRE INSURANCE CONTRACT:Insurable Interest :Essential Feature The legal right to insure.By ownership,Bailer/ Baillie,Leaser/ Lessee;By Agreed Bank Clause;Goods held in trust; etc.Actual time when the interest should exist both at the time during issuance ofpolicy and also at the time of claim. Assignment of Insurable interest in varioussituationsUtmost Good FaithThe contract put the proposer in a superior position- facts material to the risk withexample - duty of utmost good faith evolves-reciprocal duty- breach of duty maymake the contract void or voidable depending upon the nature of the breachbreachof condition - duration of observance of the duty-before accepting the risk,throughout the policy- following a loss.IndemnityFire Policy is a strict indemnity policyTHIS INSURANCE IS MEANTFOR:Plant and machineryFurniture, fixtures and fittingsOther contentsElectrical installationsStocks of raw materials and finished goodsStocks in processWHO CAN TAKE THE POLICY?Those who are having insurable interest in the propertyOwnersLessor/lesseeMortgagors/mortgageesBaileesBuildingsTrusteesFinancial institutions that have advanced loans against the property.PERILS COVERED UNDER STANDARD FIRE & SPECIAL PERILSPOLICY:Fire- Excl. inherent vice, undergoing heating & drying, burning ofproperty by public authority.Lightning.Explosion/ Implosion excl. to pressure vessels by own explosion/implosion.Aircraft Damage.Riot, Strike& Malicious DamageStorm including hailstorm, cyclone, typhoon, tempest, hurricane,tornado, flood & inundation.Impact damage- rail/road vehicles or animals not belonging to theinsured/ occupier.Subsidence & landslide/ rockslide.Bursting, overflowing of water tanks, apparatus & pipes.Missile testing operations.Leakage from automatic sprinklers.Bush fire- excl. forest fire.The loss/ damage under above perils may be of fire or non-fire in nature. Bothtypes of losses are covered under the policy. In other words the policy is MaterialDamage policy which covers physical losses to the insured property arising out ofall above perils.STFI Storm, tempest, flood and inundation (Flood group of perils) and RSMD Riot, Strike, Malicious Damage can be opted out with reduction in premium rate.ALOSS ORDAMAGE MAY BE SAID TO BE BY FIRE WHEN:There must be ignition (accompanied with heat &/or flame i.e. some kindChemical reaction - oxidation/addition of oxygen from air). A loss ordamage may be said to be by fire when there has been ignition of insuredproperty which was not intended to be ignited. When insured propertyhas been damaged otherwise than by ignition as a direct consequence ofthe ignition of other property not intended to be ignited.Damage by smoke, sparks, water etc. consequent on ignition of otherproperty.Fire must be accidental and fortuitousEXCLUSIONS UNDER THE FIRE POLICY:Excess- Applicable to all risks except dwellings with individual ownersFor policies having S.I.upto Rs. 10 crs, per location:5% of claim amount subject to a minimum of Rs 10,000For policies having S.I.more than Rs. 10 crs but upto Rs. 100 crs. perlocation:5% of claim amount subject to a minimum of Rs 25,000For policies having S.I.more than Rs. 100 crs but upto Rs. 1500 crs. perlocation:5% of claim amount subject to a minimum of Rs 5,00,000For policies having S.I.more than Rs. 1500 crs but upto Rs. 2500 crs. perlocation:5% of claim amount subject to a minimum of Rs 25,00,000For policies having S.I.more than Rs. 2500 crs per location:5% of claim amount subject to a minimum of Rs 50,00,000N.B. Excess is applicable per event per Insured

War perils.Nuclear losses.Pollution, contamination unless caused by insured perils.Curios, documents etc. >10,000Rs., Goods held in trust or on commissionunless specifically coveredChange of temp. (Stocks in cold storage)Pure electrical fires.Architects etc. fees (beyond 3% of claim amount) & Removal of debris(beyond 1% of claim amount).Consequential losses.Spoilage due to cessation of process.Theft- during/ after loss.Earthquake.Terrorism damage. Shifting of property to other place But Mechanical items & equipments arecovered for 60 days if shiftOut of the above exclusions certain are covered as ADD-On Covers. e.g.Terrorism, Earthquake, architects fees(beyond 3% of claim amount) & removalof debris(beyond 1% of claim amount), spoilage (due to cessation of process),curios /documents etc. > Rs.10,000/- can be covered for actual value under Misc.Department (subject to declaration).ed for repairs/ renovation etc.Out of the above exclusions certain are covered as ADD-On Covers. e.g.Terrorism, Earthquake, architects fees(beyond 3% of claim amount) & removalof debris(beyond 1% of claim amount), spoilage (due to cessation of process),curios /documents etc. > Rs.10,000/- can be covered for actual value under Misc.Department (subject to declaration).EXTENSIONS OR ADD ON COVERS OFFIRE POLICY:Architects, surveyors and consulting engineers' fees in excess of 3% ofclaim amount.Removal of Debris in excess of 1% of claim amount.DOS in cold storage due to power failure/ change of temperature due toinsured Peril.Forest fire.Impact Damage- Own vehicles.Spontaneous combustion.Omission to insure additions, alterations & extensions.Earthquake (fire & shock). Spoilage (material damage) covers.Leakage & Contamination cover.Temporary removal of stocks.Loss of rent.Additional rent for alternative premises.Start up expenses.Escalation (upto 25%)NEW ADD ON COVERS FILED WITH IRDA1. Housebreaking2. Electrical apparatus clause3. Spontaneous combustion (wording modified)4. Insurance of jetties, docks and other properties erected in water &damage by water borne bodies clause5. Boiler explosion damage clause6. Start up/shut down expenses clause7. Accidental damage clauseGENERALCONDITIONS OFFIRE AND SPECIALPERILS POLICY:1. Misrepresentation, non-discloser of material facts by the insured makesthe policy voidable2. Cessation of cover on fall or displacement (other than by an insured peril)of insured property on expiry of 7 days3. Cessation of cover on material alteration, if unoccupied for more than 30days or passage of insurable interest4. Loss covered under any marine policy is not payable5. Cancellation6. Duties of the Insured in the event of an occurrence giving rise to a claim7. Rights of the Insurer in the event of a claim8. Fraudulent means by Insured forfeits all benefits under the policy9. Insurer's rights to reinstate or replace the property in case of a claim10. Average clause11. Contribution12. Subrogation13. Arbitration14. All communications by insured to be in writing15. Reinstatement of Sum Insured after a claimCLAUSESOMISSION TO INSURE, ALTERATIONS, EXTENSIONS CLAUSEBuildings, plant & machinery, furniture, fixtures and fittings can becovered up to 5% of the sum insured without specific insurance.5% additional premium to be paid at inception.Within 30 days of expiry of policy all such additions, etc. to be declaredand premium on this account to be adjusted.TEMPORATYREMOVALOFSTOCKS- CLAUSEUp to 10% of stocks in process can be covered whilst lying at un specifiedlocations undergoing process.10% extra premium to be paid in advance.No adjustment of premium.Stocks in excess of 10% of sum insured to be covered specifically.REINSTATEMENTVALUE CLAUSEFor building, plant & machinery, electric installations, F/F/F only.Sum Insured to represent Reinstatement value of the property insured.In the event of loss payment for Reinstatement Value of property of samekind or type, improvements, if any, to be borne by the insured.Depreciation not to be deducted.Average clause is still applicableReinstatement of property is compulsory.Within 6 months intimation to reinstate to be given to insurer & actual reinstatementto be completed within 12 months- extension possible withprior approval of insurer. Otherwise it will follow normal indemnitywithout RIVbasis.Reinstatement possible at other site provided liability of the insurers isnot increased.LOCALAUTHORITIES CLAUSEExtension for Reinstatement Value policies endorsed by Local AuthorityClause. Wherever RIV Clause is attached Local Authority Clause is amust to attach.No additional premium for this extension.Covers additional cost to comply with local regulations in reinstating theproperty.Liability if reduced under policy- under clause also reducedproportionately.Applies only to the damaged property, prior to extension losses notcovered, additional tax, duty etc. not payable.AGREED BANK CLAUSETo be applied when financial institution is interested.Any money payable to be paid to Bank.Notice by Co. to 'Bank' sufficient.Adjustment, settlement, arbitration- if made by 'Bank' binding on theinsured.Alteration etc. in risk not to prejudice 'Bank' interest.Co. will be subrogated of 'Bank's rights of recovery from insured onpayment.DESIGNATION OFPROPERTYCLAUSEAvailable without additional premiumWhatever designation is given to a particular item of property in Insured'sbooks of accounts is accepted as such by the Insurers.DECLARATION POLICYApplicable for policy covering stocks only. To take care of frequentfluctuations in stocks/stock values, Declaration Policy can be granted subject to the following conditions (Standard Declaration Clause J to beinserted).To take care of frequent fluctuations in the SI of stock (i.e. current asset)this policy is issued.The minimum sum insured shall be Rs 1 crore in one or more locationsand the sum insured shall not be less than Rs. 25 lakhs in atleast one ofthese locations. It is necessary that the declared values shouldapproximate to this figure at sometime during the policy year.Reduction in SI not allowed during the currency of policy.Maximum refund on downward adjustment 50% and no upwardadjustment is allowed.Basis of valuation- The basis of value for declaration shall be the MarketValue only anterior to the loss.If after occurrence of any loss it is found that the amount of lastdeclaration previous to the loss is less than the amount that ought to havebeen declared, then the amount which would have been recoverable bythe insured shall be reduced in such proportion as the amount of said lastdeclaration bears to the amount that ought to have been declared.Basis- Monthly declarations based on eithera) The average of the values at risk on each day of the month orb) The highest value at risk during the month shall be submitted by the Insuredlatest by the last day of the succeeding month.If declarations are not received within the specified period, the full sum insuredunder the policy shall be deemed to have been declared. It is not permissible toissue declaration policy in respect of:Insurance required for a short period.Stocks undergoing process.Stocks at Railway sidingsFLOATER POLICYFloater Policy can be issued for stocks at various locations under oneSum Insured (The Standard Floater Clause I, Annexure A shall beattached to such policies).Unspecified locations are not allowed.Applicable Fire Rate= Highest rate applicable to any of such locations+10%Presence of "Kutcha" construction under any location may be ignored forrating.If stocks are in godown/ process blocks in same compound, no floaterextra premium.In case Stocks in a process block are covered under the Floater Policy andthe rate for the process block is higher than the storage rate, the processrate plus 10% loading shall apply.FLOATER DECLARATION POLICIESFloater Declaration policy (ies) can be issued subject to a minimum suminsured of Rs 2 Crores and compliance with the Rules for Floater andDeclaration Policies respectively.The minimum retention shall be 80% of the annual provisional premium.Standard Floater Clause I and Declaration Clause J both shall beattached to Floater Declaration policy.

VALUED POLICYWhen market value cannot be ascertained, agreed value policy can be issued forwork of art, curious, etc.LONG TERM POLICYIt can be issued only for dwellings issued for minimum period of three years andmaximum can be for any number of years but discount is maximum for 10 years Policies for a period exceeding 12 months shall not be issued except for"Dwellings".Mid-term Cover may be granted for the deleted perils of STFI &/or RSMD.Generally, it is not permissible to grant mid-term cover for STFI and/or RSMTDperils. The following provisions shall apply, where such covers are granted midterm:Insurers must receive specific advice from the insured accompanied by paymentof the required additional premium in cash or by draft. This additional premiumshall not be adjusted against existing Cash deposits or debited to Bank guarantee.Mid-term cover shall be granted for the entire property at one complex/compound/location covering the entire interest of the Insured under one or morepolicy(ies). Insured shall not have any option for selection.Cover shall commence 15 days after the receipt of the premium.The premium rates as under shall be charged on short period scale (as per Rule 8)on full sum insured at one complex/compound/location covering the entireinterest of the insured for the balance period i.e. up to the expiry of the policy.Payment of Premium: Premium shall be paid in full and shall not be accepted ininstallments or by deferred payments in any form.N.B:- It is not permissible to split sum insured of the same property under variouspolicies for different periods of insurance to derive advantage of deferredinstallments for payment of premium. Notwithstanding the above, differentpolicies may be issued for stocks where circumstances necessitate issuance ofsuch policies.Minimum Premium: Minimum premium shall be Rs.100/- per policy except forrisks ratable under Section III and 'Tiny Sector Industries' under Section IV wherethe minimum premium shall be Rs. 50/ per policy.PARTIAL INSURANCE : It is not permissible-to issue a policy covering only certain portions of a building.Notwithstanding this, the plinth and foundations or only the foundationof a building may be excluded.to issue a policy covering only specified machinery (except Boilers),parts of machine or accessories thereof housed in the same block/building.N.B. Where portions of a building and/or machinery therein are underdifferent ownership, it is permissible for each owner to insure separatelybut to the full extent of his interest on the building and/or machinerytherein. In such cases, the Insured's interest shall be clearly defined in thepolicy.Rates for Short Period Insurance: Policies for a period of less than 12months shall be issued at the rates set out hereunder:For a period not exceeding 15 days 10% of the Annual ratedo 1 month 15% of the Annual ratedo 2 months 30% of the Annual ratedo 3 months 40% of the Annual ratedo 4 months 50% of the Annual ratedo 5 months 60% of the Annual ratedo 6 months 70% of the Annual ratedo 7 months 75% of the Annual ratedo 8 months 80% of the Annual ratedo 9 months 85% of the Annual rateFor a period exceeding 9 months The full Annual rateN.B.: Extension of short period policy (ies) shall not be permitted..CANCELLATION OFPOLICY:At insured's option Short period scale.At Insurer's option Pro-rata.Replacement of policy by new annual policy with same or higher S.I.-Pro-rataSUM INSUREDFIRE INSURANCE POLICY- SI SHOULD BE ADEQUATE OTHERWISE FOR UNDERINSURANCE WE NEED TO APPLY PRORATACONDITION OF AVERAGE CLAUSE.S.I. represents the limit of liability under the policy.S.I. is the amount on which the premium is charged.Consequences of insuring for < or > than actual value of property isunderinsurance or over insurance.SUM INSURED FOR BUILDINGS:Original cost- Inadequate for insurance purpose except when new.Book value- Not considered in Insurance (Adequate only for the firstyear and not for succeeding years- considering the depreciation aspect).Market value- Present cost less depreciation for age and/ or usage.Reinstatement value- Present cost of replacement ( No depreciationapplied)Formulae: Market Value = Reinstatement Value less (-) Depreciation.Land value not to be included.No fixed rate of depreciation- it depends upon the age and futureexpected life.Items like electrical installations and fittings to be included in thebuilding value.SUM INSURED FOR PLANT& MACHINERY:SI = Landed cost at site + installation charges.Reasonable depreciation depending upon the age and future life to bededucted.RIVpolicy has no depreciation.Items like accessories, electrical fittings and other things which arenecessary for running of the machinery to be included in the machineryvalue. SUM INSURED FOR STOCKS Raw materials- Cost price including all the expenses like octroi, freightetc. to bring up to the place.Stocks in Process: Cost of raw materials + process cost including labour,etc.Finished goods Manufacturer - Cost of manufacturing.Wholesaler - Purchase price from manufacturer.Retailer- purchase price from wholesalerProfit not to be included - exception Declaration Policy

TARIFF PROVISIONSGeneral Rules & RegulationsStandard Fire and Special Perils PolicyDwellings, Offices, Hotels, Shops Located outside the compounds ofIndustrial/Manufacturing RisksIndustrial Manufacturing RisksUtilities located outside the compound of Industrial/Mfg. RisksStorage Risks (Godown &/or in Open) outside the compound ofindustrial/mfg. Risks.Tank Farms/Gas Holders outside the compound of Industrial/MFG.RisksAdd-on CoversAnnexure A: Standard ClausesAnnexure B : Proposal FormRATING OFSTADARD FIRE & SPECIALPERILPOLICYRATING UNDER THE POLICY DEPENDS UPON THE FOLLOWINGFACTORS:-OccupancyConstructionFire Extinguishing Appliances.Option to delete RSMD &/or STFI Add on covers.Voluntary Higher Deductible (Excess) opted by Insureds.Claims experiencePrinciple of 'One Risk One Rate' whichever will be higher of Process(Mfg.) risks, or ii) Storage risk,Entire property in one complex/ compound will attract the same rateirrespective of kind of occupancy (Mfg./ storage/ utilities etc.).Dwelling exempted from the above rule.Two or more factories in the same compound /independent products perse rating if detached, otherwise the highest rate.FORSTORAGE RISKS RATING DEPENDS UPON OCCUPANCY- TYPE OF STORAGENon- hazardousCategory I goodsCategory II goodsCategory III goodsOpen storageTank farms, etc.For simple risk like dwellings, offices, hotels, shops etc. rating Per Se i.e. on itsown without considering other occupancies in the building.FOR MULTIPLE OCCUPANCIES:-For Entire Building Tariff Rate Rs. 1.80%o less De-Tariff Discount.For Contents of individual owner - Per Se (Partially on-merit).DISCOUNTS APPLICABLEFor fire fighting appliances.For deletion of certain perils like STFI & RSMDIf sum insured is more than 50 Crores for claim experience.For opting voluntary deductibles.Discount for paid up capital.De-Tariff Discounts for good features/ technical features/ ISOCertification or other Accreditations.RATING OFRISKS IN MULTIPLE OCCUPANCIESOne of the principles of rating in fire insurance is that if risks with different degreesof fire hazards are close to one another then the higher hazard risk may causespread of fire to other risks close by. Hence this factor should be considered whilerating a risk. For simplification the tariff has allowed per se rating for contents ofeach insured as per their occupancy.SILENTRISK:Factories where no manufacturing / storage activities are carried outcontinuously for 30 days or more.Premium rate is lower than working rate.The silent rates are not applicable if a risk goes silent following a lossunder the policy.CLAIMSDUTIES & RESPONSIBILITIES BEFORE LOSS:To intimate insurer-In case of any fall / displacement of building or any part withoutoperation of any insured peril within 7 days.Alterations of trade, manufacturing, occupational change immediately.If un-occupancy for more than 30 days.Change of interest by sale etc.DUTIES & RESPONSIBILITIESAFTER LOSS (CLAIM PROCEDURE):Intimation to fire brigade, police, etc.Loss minimization exercise to be taken by the insured.Notice to insurer within 14 days.Co operation with surveyor when appointed.Lodge claim within 15 days with supporting documents.Furnish particulars of other insurances available with the affectedproperties.Enforce rights against third parties.COSTREDUCTION MEASURES

Opt for clause like Designation of Property clause- No Extra premium.Insure non-stock items on Reinstatement Value basis.For non-stocks items opt for 'Omission to insure . Clause' and see thatat the end of policy within 30 days the insured send the declaration.Go for stocks declaration policy for finished goods and raw materials,send declarations in time to take the maximum advantage.Floater cum declaration policy decision depends upon the fluctuations inthe stock levels.When many locations are covered and when it is not possible to keep atrack of sum insured at every location, better to go for a floater policy.Opt for suitable voluntary excess.Keep fire fighting system in good working condition, obtain periodicalcertificates.Intimate to the insurer when in any unit production stops for more than 30days.Advice decrease in sum insured immediately.As far as possible go for annual cover- avoid short period covers they areCostly.Though it is cost saving it is not advisable to go for deletion of flood, etc.unless the unit is situated in area where chances of flood are NILHoweverthis should be a thoughtful decision.Riot etc. perils not to be deleted.Premium can be saved by deleting from the cover the value of plinths andfoundations of the buildings.ISSUES RELATED TO FIRE CLAIMS:The processing and settlement of claims constitute one of the mostimportant functions in an insurance organization. Indeed, the paymentof claims may be regarded as the primary service of insurance to theclient. The prompt and fair settlement of claims is the hall mark of goodservice to the insuring public.The proper settlement of claim requires a sound knowledge of the law,principles and practices governing insurance contracts and in particular,a thorough knowledge of the terms and conditions of the standardpolicies and various extensions and modifications there under.Finally we can conclude that prudent underwriting of the policy ensuresprompt settlement of claims which is main stream to satisfy the insured.INTIMATION OFCLAIM:Claim intimation is to be given in time along with estimated amount ofloss. In case, claim intimation is delayed, proper clarification is requiredto be obtained. Further, amount of loss is not ascertainable instantly, thensum insured of the affected property may be the point of consideration forthe purpose of appointment of surveyor.On receipt of claim intimation, the first step is to examine the policy fromthe underwriting point of view to confirm the acceptance of liabilityunder the policy.Claim is registered and claim no. is allotted and surveyor is appointedbased on the estimated amount of loss declared.As per present practice, the financial authority for appointment ofsurveyor is same as the financial authority for settlement of claim.As per IRDAguide line, the surveyors are categorized as'A', 'B' and 'C' tosurvey and assess the loss under Fire and Engineering Deptt. with thelimit of under noted estimated amount of loss.Category 'A' : Above Rs. 20.00 lacs (LOP-above 50.00 lacs)Category 'B' : Above Rs. 5.00 lacs ( do -upto 50.00 lacs)Category 'C' : Upto Rs. 5.00 lacs (no provision)In case, Interruption Loss is reported, estimate amount of loss is to be added withestimate amt. of loss under M.D. Policy and then surveyor would be appointed.FINANCIALAUTHORITYFOR SETTLEMENTOFFIRE CLAIMS.Administrative Officer : Rs. 1,00,000/-Assistant Manager : Rs. 2,50,000/-Deputy Manager : Rs. 10,00,000/-Manager : Rs. 15,00,000/-D.C.C. : Rs. 30,00,000/-Regional Manager : Rs. 40,00,000/-R.C.C. : Rs. 80,00,000/-Deputy General Manager : Rs. 100,00,000/-General Manager : Rs. 200,00,000/-Chairman-cum-Managing Director : Rs. 400,00,000/-H.C.C. : --- Actuals.---Under Fire Insurance variety of buildings, machinery, equipments and stocks areinvolved. In addition to a competent surveyor it is recommended that theCompany officials should visit the site of loss as far as possible.If the estimated loss is within Rs.20,000/- and loss of profits claim is not involved,the underwriting office shall have the discretion to waive an independent surveyand settle the claim on the basis of the claim form and other supporting documentsafter being satisfied that it is admissible under the policy and that the amountclaimed is reasonable and consistent with the extent of damage. Where necessary,an official in the underwriting office may inspect the damage.PROCESSING OFCLAIMS:The documents generally required for processing fire claims:Copy of the policy complete with term, conditions andwarrantiesSection 64VB compliance confirmation(iii) Claim form duly completed by the insured(iv) Survey report which should include:Occurrence of lossIndication of the cause of lossEstablishment of liabilityAssessment of lossConfirmation of compliance of policy terms, conditionswarrantiesAdmissibility of the claimPhotographsPolice Report* (i) Fire Brigade Report **these two reports may be waived if the survey report is clear and does not causeand doubt on the occurrence as well as extent of loss.CLAIMS ARISING OUTOFACTOFGOD PERILS:Documents like newspaper cuttings, photographs and meteorological reports arehelpful in substantiating such losses. Where the incident is localized, not reportedin the media, the surveyor should enquire about the incident from localgovernment/statutory authorities and is required to be supported by photographsof the damage.LOSSES REPORTED UNDER THE RSDMD & TERRORISM.In case of isolated losses under the above endorsements, copy of the FIRlodged with the police is required to be furnished.Disposal of claims where all records are destroyed in fire &/or alliedperils like flood.Settlement in these circumstances would generally be a negotiated onebecause of non-availability of accounting records and other evidences.Therefore, the surveyor should be advised to assess such losses on arealistic and reasonable basis after discussions with theinsured/Bank/Financial Institution (if involved), and if required withsuppliers/customers/statutory bodies like tax authorities, exciseauthorities etc.At present post-loss inspection by LPAis not required. Instead CompanyEngineer/Officers may carry out such inspection.CLAIMS ASSESSMENT:A. Market Value Basis:Gross LossLess: DepreciationLess: SalvageGross Assessed LossLess: Under InsuranceLess: Excess.Net Loss Payable.B. Reinstatement Value Basis:Gross LossLess: SalvageGross Assessed LossLess: Under insuranceLess: ExcessNet Loss PayableC. Market Value Basis (Stock) Gross LossLess: SalvageGross Assessed LossLess: Under insuranceLess: ExcessNet Loss Payable.Under single loss, if Buildings, Machinery and Stocks are affected, only ONEexcess will be applicable. In other words, excess is applicable per event perInsured.DISPOSALOFSALVAGE:Salvage is deteriorated faster. Therefore, disposal of salvage should beundertaken on priority basis for and on behalf of the concerned partieswithout waiting for the liability to be established with the help & undersupervision of the surveyor. This disposal of salvage guidelines shouldalways be followed.Insured officials also need to visit the site of loss and hasten disposal ofsalvage. It will also give moral support to the clients at the time of need.When the surveyor is required to undertake reconditioning and sale ofsalvage on behalf of the Account/interest concerned, he may be paid feesand actual expenses maximum up to 5% of value realized.SETTLEMENT OF CLAIM WHERE ALL RECORDS REQUIRED FORTHE ASSESSMENTOFTHE CLAIMS ARE DESTROYED IN FIRE &/ORALLIED PERILS RISK:In all such cases like what happened in Mumbai during July 2005 flood settlement was generally be a negotiated one because of non-availabilityof accounting records and other evidences.The surveyors should be advised to assess such losses on a realistic andreasonable basis after the discussions with the insured (even with theBank/ other Financial Institutions whenever involved).If required with suppliers/ customers/ statutory bodies like TaxAuthorities etc. and definitely with the Insurers.LOSS OF PROFIT /CONSEQUENTIAL LOSS/ BUSINESSINTERRUPTION LOSSES:Claims need to be monitored regularly by the insurer to ensure that theinsured is doing the needful to minimize the period of indemnity as muchas possible. If the insured has opted for more indemnity period more isthe likely chances of higher liability for the insurers.In case the surveyor for MD loss is different from the LOP policy, coordinationbetween both the surveyors is definitely needed and effectivecontrol is to be maintained by the insurer.SURVEYOR APPOINTMENT:Points to be notedThe surveyor must be holding a valid licenseSelection of surveyor should be restricted depending on the type of lossand the nature of the subject matter involvedWhen for assessment of some losses specific technical expertise isrequired - consultants having such technical expertise normally areassociated with the usual surveyors. The consultants' remuneration needsto be negotiated in advance bearing the expertise in mind and the samewill be in addition to the survey fee payable to the surveyor.Category of Surveyors (i.e. A,B,C) will be checked and appointment ofsurveyor must commensurate with this category & quantum of lossAppointment of joint surveyor may be done on the merits of the claim.No second surveyor may be deputed.Wherever the Loss of Profit losses are involved, the surveyors for thematerial damage and the business interruption losses, if several, shouldbe competent to complement one another. One surveyor can be utilizedfor both the material damageGuidelines on the financial authority for appointment of surveyor ( i.e. H.O. /R.O./ D.O./ B.O.) will be as per scale followed by each insurer.DOCUMENTS REQUIRED FOR PROCESSING OFCLAIMS:Policy copy complete with terms, conditions and warranties.Claim form duly completed by the insuredSurvey report indicating-Cause of loss;Establishment of liabilityAssessment of lossConfirmation of compliance of policy terms& conditions, warranties andendorsements.Admissibility of the claimPhotographs/ Bills & vouchers/ Police report/ Fire brigade report may besubmitted along with the survey reportSince under Fire Insurance variety of buildings, machineries, equipments andstocks are involved, in addition to a competent surveyor it is recommended that theinsurer should visit site of losses reported as far as possible.FOR CLAIMS ARISING OUTOFAOG PERILS:In addition to the documents specified earlier, other documents likenewspaper cuttings, photographs of the devastating damage andmeteorological reports are normally required in substantiating suchlosses. When the incident is localized, not reported in the media or notrecorded by any Meteorological Department, the surveyor shouldenquire about the incident from local Government / statutory authoritiesand support the description of the occurrence and the loss by taking thephotographs of the damage.The surveyor should cover in his report the vivid details of the loss,confirm the incident clearly & unambiguously - then only the documentsof Meteorological Report may be waived. Attention must be paid forconcurrent policies & Agreed Bank (Financial Institute) ClauseLOSSES REPORTED UNDER THE RSMTD PERILS:In case of isolated losses under the RSMD Perils, copy of the firstinformation lodged with the police and their Final Investigation Reportof police must be furnished.The surveyor needs to give detailed report on the occurrence and confirmthat the loss/damage is admissible under the policy.Loss / damage, if any, arising out of omission or commission notinvolving physical damage must be segregated.FOR ON ACCOUNT PAYMENTTO BE MADE:Pending final assessment of a claim an On Account payment may be consideredsubject to confirmation of the following:Loss due to occurrence of a peril covered by the policy .The establishment of liability leaves no doubt.The minimum liability based on assessment on market value basis (incase of Building, P&M and accessories) that arises under the policy hasbeen specifically examined & stated by the surveyor.PROCEDURES FOR FINALPAYMENT:When the Final Survey Report is submitted by the surveyor the ClaimProcessing Official / Authority will process and recommend the exactclaim amount for approval by the Competent Authority (as per theFinancial Settlement Authority of various claims laid down by eachinsurer).The insured / claimant should be advised of the final amount of claimapproved, with details thereof.The full & final discharge by the insured (The bank/ financial institution'sdischarge where required) must be obtained before release of theamount of claim.If the loss or any part thereof is recoverable from a Third Party, a letter ofsubrogation and/or assignment and Special Power of Attorney, to suitspecial cases, is to be sent to the insured for completion on requisitestamp paper and return before settlement.In case of Close Proximity Cases detailed investigation should beimmediately instituted when a loss occurs in close proximity, i.e. within 5days for all classes of insurance under Fire & Engg. Dept. of the date ofinception of risk. The close proximity mentioned here is in reference tonew insurance or where there has been a break in insurance. Closeproximity investigation should also be carried out in cases where it isfound that insurance has been taken out significantly later than it ought tohave been taken, i.e. the risk has remained un-insured or inadequatelyinsured prior to the insurance cover under reference.PROCESS OFCLAIM SETTLEMENTIN CASE OFCO-INSURANCE:The leader will process the claim on behalf of all the co-insurers. Adecision by the leader regarding claim settlement, taken at theappropriate level according to the existing tenets of delegation offinancial authority, shall be final and binding on all the co-insurers.Claims decided at the appropriate level by the leader will not beprocessed again by co-insurers, regardless of the amount. The leader willintimate to the co-insurer details of a claim settled by him with copies ofall relevant reports and documents. The coinsurer will settle his share ofthe claim within 15 days from the date of receipt of such intimation from the leader without any delay.In case of a claim requiring Board decision the decision taken by theBoard of the leader shall be binding on the other co-insurers. There shallbe no separate need for the co-insurers to approach their respectiveBoards for decision in respect of such claims. A suitable note may,however, be placed by the co-insurers before their respective Boards forinformation in such cases.APPOINTMENTOFINVESTIGATOR:Depending on the circumstances it may be necessary to appoint aninvestigator to verify the claimed version of a loss. A separate surveyorappointment may be considered if any actual physical survey/assessment are possible and called for. While referring such matter toR.O. from DO/BO, specific terms of references must be mentionedclearly to justify its necessity.The letter appointing the investigator should mention the terms ofreference and make it clear that the report should contain no references ordoubts unless these are well documented and substantiated and can standthe scrutiny of a court, if so required.In the absence of any laid down schedule of fees for investigators, it isadvisable to negotiate and decide the fees to be paid in addition toexpenses actually incurred before formally appointing the investigatorand that decided fee to be recorded in the letter of appointment.Investigator's fees are required to be negotiated and are to be paid inaddition to the expenses actually incurred. The negotiated fees to berecorded in the letter of appointment to avoid any dispute in future.CLOSE PROXIMITYCLAIM:Detailed investigation should be initiated immediately when a loss closeproximity i.e. within 5 days of the date of occurs in inception of the risk. Referenceis to be made to R.O. along with underwriting details to verify the close proximityaspect. The Close Proximity aspect is applicable for new business or where therehas been a break in insurance.RECTIFICATION OFPOLICYAFTER ALOSS:When collection of additional premium is required, the same is to becharged on the affected policy period only in which the claim has arisen.Rectification can be done by the authority competent for settlement of theclaim.Rectification of a policy after a loss is reported for reasons other thanbreach of condition/ warranty should be carried out as under:Where rectification involves collection of additional premium, theadditional premium may be charged only on the affected policy period inwhich the claim has arisen.Rectification can be done by the Authority Competent for settlement ofthe claim.REPUDIATION OFCLAIM:If a claim warrants repudiation, the competent authority would be the authoritycompetent to settle the claim. Letter of repudiation must state the reasons and/orthe policy condition under which it is repudiated.RE-OPENING OFCLAIM FILES:Re-opening of the claim file can be done by the authority one step higher thanthe appropriate claim settlement authority.LOSS OF PROFIT INSURANCELOSS OFPROFITPOLICYWhereas, the insured may have to incur the loss of profit, constant expensesirrespective of business interruption brought by the accidental fire and alliedperils. The standard fire policy does not offer such benefits. Therefore, there isa need for a separate policy to take care of the consequential loss. This benefitis offered by a separate policy which can be an extension of fire policy , orengineering policy and or project insurance.The extension of LOPto Fire Insurance is known as FLOP (Fire Loss ofProfit).The extension of LOP to Engineering Policy is known as MLOP(Machinery Loss of Profit).The extension of LOP to Project Insurance is knows as ALOP ( AdvanceLoss of Profit).Loss of Profit Policy can also be termed as Consequential Loss Policy orBusiness Interruption Policy.NEED FORBUSINESS INTERRUPTION COVERBusiness Interruption [also known as consequential loss or loss of profits andhereinafter known as BI) is of recent origin. It was only with the improvement inthe standard of accountancy practice that the possibility of covering financial lossfollowing fire could be met with a practical solution.Fire destroys everything that men possess. Fire destroys buildings, Hotels, cinematheatres, factories, and contents therein such as machinery and stock, shops andwarehouse leaving only crippled remains of man's labour. The only solution to thisever-present threat is Fire InsuranceWhen a property is destroyed or damaged [whether by fire or any other insuredperil] the owner of the property is indemnified by the payment of a sum of money,which will enable them to repair or replace it. This is not, however, the full extentof their loss. If, for instance, they are a manufacturer then, as the owner of thebusiness, they will try to sell their products for more money than the sum spent onbuying materials and converting them to completed products. This is their reasonfor being in business in the first place. If the facility to manufacture is diminishedbecause of the destruction of their property, their earnings will fall off or evencease.The insurers offer standard fire and special perils policy, which can only take careof the victim of fire. As a result, only the damaged buildings can be reconstructed,destroyed plant and machinery can be reinstated and lost stock can be restoredwith the compensation paid by the insurer towards such material damages.WHAT HAPPENS TO BUSINESS DURING THE PERIOD OFRECONSTRUCTION?The destruction caused by fire does not end with the smoldering shell of buildingsor the mangled skeleton of expensive machinery or worthless stocks. Destructiongoes on, business comes to a standstill. The factory cannot produce goods, in otherwords, money stops coming on.The earnings of the business dwindle, if not cease totally while business expenseshave still to be met. Wages and salaries have to be paid. So also overheads, rent,rates and insurance. The net result - "LOSS". In extreme cases the business mayhave to be wound up. This is a very real risk.However, just as the Material/Property damage policy comes to the rescue of theinsured when he incurs material damage, the profit policy works to protect againstthe consequent disruption to the business itself.If damages occur to the property owned by the insured causing his business tosuffer, the policy would pay the amount of loss resulting from that interruption.SCOPE OF POLICY:Loss of earning (Net Profit)Standing ChargesIncreased cost of workingStanding Charges include all fixed expenses such as rent, salary, electricity exp.,audit expenses etc. which have to be incurred by the insured irrespective ofwhether the business activities interrupted due to material damage or loss ordestruction brought by the operation of insured perils.The indemnification under this policy is admissible only when the insurer admitsthe claim for material loss or damage or destruction.NO CONSEQUENTIAL INSURANCE COVERS FOR VARIABLEEXPENSES.An illustration to demonstrate the impact of fire accident on the business activityBEFORE FIREI Income From Sales Rs.1, 00,00,000II Production costs Rs. 60,00,000Raw materials, Unskilled Labor andOther variable charges Rs. 20,00,000III Over headsRent, rates printing and stationery,Wages and salaries etc. Rs. 20,00,000AFTER FIRE50% cut in productionIncome from sales Rs. 50,00,000Less: Production costs Rs. 30,00,000Overhead expenses Rs. 20,00,000Net Result Rs. 50,00,000Additional expenses NilPurchase of goods elsewherePremises on hire Rs. 20,00,000OvertimeNETRESULT - LOSS Rs. 20,00,000THEREFORE, THERE IS A NEED FOR INSURANCE PROTECTIONFORTHE RESULTING CONSEQUENCE.If the premises are destroyed the ` cost of maintenance also is affected. So theindemnity under the Policy has the following components:1) Loss of Income When the factory is unable to function2) Loss of Income after the repairs and repurchase until theentire activity commences.3) Additional expense to engage rented building until the damagedbuilding is reinstated4) The machines are installed.5) Indemnity period must be long enough to cover the above [i]and [ii]6) Saving due to the damage are deducted from thesettlement.THE CONSEQUENTIALLOSS POLICYCOVERS :NET PROFIT : This policy is designed to take care of loss of net profit, which isdifferently meant by this policy unlike the net profit derived from trading and P&Laccount. Such loss of profit should result from the cause of insured peril coveredunder Standard Fire policy and that cause should have brought the interruption ofbusiness.STANDING CHARGES/ FIXED CHARGES : In spite of the stoppage of thebusiness, the fixed remuneration and other standardized fixed expenses have to beincurred by the insured. Such expenses have to be incurred irrespective whetherthe business is carried on or not due to the occurrence of the insured peril.INCREASED ALTERNATE COST OF WORKING : To pay the additionalexpenditure incurred by the Insured to maintain the normal business activityduring the period in which the business is affeTURNOVER : Modern BI policies are based on the turnover of the business.Profit comes out of turnover and is supported by it. Turnover can be conceived ofas representing the activity of the business, but is defined as the money paid orpayable to the insured for goods sold and delivered and for services rendered in thecourse of the business at the premises. Turnover actually consists of Variablecharges, standing charges and net profit as we have already seen. If the ratio ofvariable charges of a business to it is turnover is a constant [and this must be so,because the definition of variable charges is simply those charges, which varydirectly to the turnover.] Then the remainder [the turnover less such variablecharges]. Is also constant to the turnover of the business. Thus, on the basis thatturnover does represent the activity of a business. we can measure this fall inactivity of a business. we can measure this fall in activity [which we do bycalculating the fall in turnover] and then, by applying the remainder constant to theamount of this reduction, we can get at the true indemnity.

67It is against the background of the definition of 'rate of gross profit ' annualturnover' and standard turnover 'that financial loss will be calculated.GROSS PROFIT : It may be defined that it is the amount by which the sum of theturnover and the values of the closing stock shall exceed the value of the openingstock and specified working expenses. DIFFERENCE BETWEENACCOUNTANT'S AND INSURERS'GROSS PROFIT. The basic difference isthat accountants will take Turnover and deduct Purchases of raw materials toproduce gross profit.Insurers are, however, concerned with identifying that part ofgross profit which Relates to the business insured and Can be the subject of an indemnity from insuranceThe insured pays only for insurance on those elements of gross profit whichcontinue to be payable after an interruption in the business [and on net profit] byusing the insurers definition and the premium relates only to the business insured.Additionally, the insured's accountant will need to know on what basis to preparethe declaration of gross profit for the insurance company.

THERE ARE TWO METHODS IN WHICH THE GROSS PROFIT CANBE ARRIVED AT:ADDITIONAL METHOD : In this method, insured adds standing charges to thenet profit before taxation and excluding capital receipt as per the Profit and LossAccount of the Company.DIFFERENCE BASIS : Under this method, gross profit is arrived at as the"Difference between turnover and variable charges " as detailed below.Turnover 10,00,000Less: Whatever trade discounts allowed 20% 2,00,000 8,00,000Add: Closing Stock as on 31.03.2001 50,000 8,50,000Less: Opening Stock as on 01.04.2001Specified working expensesLess: Purchases net of discounts 1,00,000Bad debts 50,000 1,50,000GROSS PROFIT 7 ,00,000The original definition of gross profit was net profit plus insured standing charges.The insured's accounts were the starting point. All 'non business' items weretaken out [such as rent and upkeep of let-out portions, stock market gains andlosses etc].Net trading profit was the surplus left after taking from the turnover of the businessinsured All the costs of making it, from purchases of raw material to the cost ofdelivery by the insured's vehicles or by post etc .The 'Difference 'method starts with the accounts but uses them the other wayround. Basically, it lists 'specified working expenses' such as purchases these arethe previously mentioned variable charges which vary directly in proportion to theturnover. Obviously, if your turnover is down you do not need to buy so much.Once you have deleted the variable charges you are left with the standing chargesand net profit or [to put it another way ]the gross profit.STEPS INVOLVED1) Take out all income and expenditure extraneous to the business insured.E.G rent of tenanted portions and costs of upkeep of that portion profit orloss on share transactions [in other firms].2) Identify the specified working expenses and take them off the total of theturnover and the closing stock. The result is gross profit.The term 'difference basis' describes the current definition of gross profit whichcan be phrased as The difference between turnover plus closing stock and openingstock plus specified working expenses.STANDING CHARGES - ILLUSTRATIVE LISTSalaries to permanent staffContribution to PF, FPF, Superannuation, Perquisites, ESI, etc.Rent, Rates, Taxes, Duties and License fees'Director's fees, remunerationTotal audit fees and professional chargesConveyance, Travelling expenses and other office expensesInterest on loan, debentures, bank charges, guarantee, commissionDividend on preference sharesDepreciation on various assetsMiscellaneous standing chargesNot exceeding 5% of the total listed insured standing charges.INCREASED COSTOFWORKINGRent for temporary premisesPayment of overtimeHire of machinery etcPERIOD OFINSURANCE:Period of insurance of LOP policy is usually in consonance with material damagepolicy. It runs and expires almost simultaneously.PERIOD OFINDEMNITY

THE SELECTION OFINDEMNITYPERIODThe indemnity period commences with the date of damage and lasts till such timeas the business is restored to its pre-damaged level or the period stipulated in thepolicy, whichever comes first. A consequential loss insurance policy insuresearnings of the business lost during the indemnity period.HOWTO ARRIVE ATTHE SUM INSUREDThe Sum Insured is based on the gross profit of the business. The sum insured isextracted from the previous year's account. If the indemnity period is 18 months,the amount is increased by 50%. This is the basic sum insured. Assuming thebusiness would be interrupted for not more than 12 months, there are adjustmentsto be made and this is where a little forecasting comes in.Normally business does not standstill, year after year, it generally expands. Thenthere is another factor to be taken into consideration i.e. Inflation.Even if the business does not expand in terms of goods produced the expense andincome levels do expand in terms of money, roughly in conjunction with thegeneral inflation rate. Therefore, a sum to be insured needs to be drawn from theprevious years accounts and an upward adjustment is done in such a way that takescare of any future influence of inflationary factors.It is not sufficient if the sum insured is influenced by such factors pertaining to aparticular period of insurance as the indemnity period commences only insuccession to the date of occurrence of insured peril causing material damages.Supposing, a loss takes place on the last date of a policy i.e. expiry date of thepolicy, the indemnity period may be twelve months from that date or may betwenty four months from that date or the period agreed between the parties to thecontract. This makes it clear that factors pertaining to the period of indemnitychosen is very relevant while deciding the level of sum insured.ADDITIONAL ITEMS THAT WHICH CAN BE INCORPORATED ASPARTOFSUM INSURED

1. WAGES:Two methods in which wages can be included.a) PRO-RATABASIS:It is possible to cover under a separate policy to claim wages for a Standard Periodfor an amount to represent the wages for the selected period. E gWages of all employeesThe wages of a specified category or categories of employees.The wages of all employees who are normally paid on weekly basis.b) DUALBASIS:100% cover for a selected initial period and for the remainder of the indemnityperiod, a selected percentage only. On Dual basis it is necessary to have aminimum indemnity period of 12 months. The sum insured must represent the fullannual payroll. If saving in payroll are made during 100% cover period, suchsaving can be carrieThe insured has the option of converting the combination to a straightforward100% cover for a stipulated period longer than initial period.DUAL BASIS PROVIDES A FLEXIBLE COVER : There are two mainadvantages to the Dual Basis cover. They areCarry over of savingOption to ConsolidateInsurance of lay off and/or retrenchment compensationAuditors feesd over to boost the partial cover period during the indemnityperiod.

ASCERTAINMENTOFTHE LIABILITYOFINSURANCE

What should be identified first before looking at the claim for businessinterruption?Whether there is a standard fire policy and claim for material damage has beenadmitted.What would be period of indemnity in case of reinstatement of propertydamaged.Turnover earned by the insured after the damage but preferably at the differentpremises of the insured.The insurance is limited to reduction in turnover.Limited to increase in cost of working.The amount payable as indemnity shall be additional cost of working withsome standing charges of the business insured.How the premium is adjustable with the gross profit earned by the businessdiffers from the sum insured during the year.EVIDENCE FOR ADMITTED MATERIALDAMAGE OR DESTRUCTIONBasically, it is a precondition that there should be a claim towards materialdamages under the policy admissible as the terms and conditions of the standardfire policy. The insured peril must have operated and the damages resulted.Inotherwords, the resultant damages that has arisen out of the insured perilshould have been admitted by the insured. A point should always remains theminds of the insurers that the policy is designed to cover the effect of a cause,which is falling under the scope of the policy and does not fall under any of theexception specified in policy.This brings two situationsInsured peril The first one is the situation where the peril operates that is termed asinsured peril as per the policy. Admit both claims material damages and loss ofprofit resulting the insured event.Other unknown peril The second situation is where a peril operates but is not foundin the listed perils of the policy. Under the new circumstances, what do we do .Reference is made to ensure that it is not found in the exceptions mentioned in thepolicy and also verify whether this peril is an insured peril under any other productof the insurer .Where property suffers damage by a peril, which might not have been insuredunder the policy, the course of the damage may lead to a fire starting. If theproximate cause of the fire is not specifically excluded, the policy will respond tothe fire damage. However, damage caused by the original peril will not berecoverable.It being so, a suitable adjustment need to be made necessarily in the businessinterruption period on the ' would have been basis' as if both unknown peril as wellas insured peril had happened separately. Of course, the onus is on the insured toestablish damages separately towards what is covered and what stands uncovereddue to the operation of an other peril unknown to the policy. [ an internationalauthor of a book on practice of insurance says that the insured commits fatal to hispolicy if he fails to establish the distinction between the losses].It is our view the similar effect would happen in the Business interruption policytoo as it operates only on the admission of a claim towards material loss. It will beexplained more in the paragraphs to followWHATIS TURNOVER?It may be defined as consideration measurable in terms of money received orreceivable by the insured for goods sold and delivered and services rendered in thecourse of the business carried out within his premises.What does not fall under Turnover?o Any sum receivable for the sale of redundant plant and machinery.o Income from any source not insured under the policy. Example rentalincome from the tenants.o Any other business carried out within the insured's premises or goodssold or services rendered but not insured under the policy.STANDARD TURNOVERThe Turnover during that period in the 12 months immediately before the date ofincident, which correspond, with the indemnity period. Example -Indemnityperiod for the restoration of the business disturbed is 01.06.2001 to 30.10.2001and this period is the period of interruption. The standard turnover for this purposemeans the turnover for a period from 1.6.2000 to 30.10.2000.RATE OF GROSS PROFITThe rate of gross profit earned on the turnover during the financial yearimmediately before the incident. This can be expressed by a formulaGross Profit/Turnover x 100TurnoverHowever, the estimated gross profit for the period of insurance should be based onthe previous years audited accounts but not less than that of the nearest financialyear.N.B. Standard turnover, annual turnover and rate of gross profit are subject toadjustment to take care of trend of business and special circumstances affectingthe business. For example a workers' strike, a big event (like IPL for sports goodsmanufacturers) providing extraordinary business opportunity.INCREASE IN COSTOF WORKING AND SAVINGThe insured may have to incur any additional expenditure for the sole purpose ofaverting or minimizing the reduction in Turnover which, but for that expenditure,would have taken place during the indemnity period in consequence of theincident. But such expenditure should not exceed the sum produced by applyingthe Rate of Gross Profit to the amount of the reduction thereby avoided.EXAMPLE:Incurring expenditure for overtime or hiring alternate machinery or occupying thealternate premises on rent.Basis of Indemnity for ICThe insured should remember that his payment would not exceed the amountarrived as under.Rate of Gross Profit x Reduction in T/o avoided. But, if the insured agrees to paymore, then this can be expressed in the policy. The limitations which are usuallyimposed are largely common sense and are that the increase in cost of workingshall beAbsolutely necessary and reasonableThat increased cost, which is incurred with a purpose to avoid orminimize a reduction in turnover and therefore a loss of gross profit.Such IC is only in consequence of the damage [or incident]Necessarily incurred during the indemnity period andEquitably limited in the amount payable by insurersThe effect of this equitable limit is to restrict the maximum recovery as increase incost in working to the amount that would otherwise have been payable as a loss ofgross profit if such expenditure had not been incurred . This is often referred to as'the economic limitThis limit is clearly equitable but there are occasions when expenditure is incurredwith the agreement of insurers, which proves later to have been uneconomic.Insurers must then stand by their original agreement.SAVINGSAny sum saved during the indemnity period in respect of such of these chargespayable out of gross profit insured based on the past records, may be used to set offagainst the standing charges that are constant in nature.ANNUALTURNOVERIt is the Turnover during the twelve months immediately preceding the incident. Itis not the Turnover taken from the Audited accounts, as the figures shown in theAudited Final accounts must have become outdated. The rate of Gross Profit isapplied to the Annual T/o and the proportion of the loss to be borne by the insuredisSum Insured = Amount payableRate of Gross Profit x Annual T/oThose cost which should continue wholly or in part or deducted from the GrossProfit amount.PROVISION FOR UNDERINSURANCEThe sum insured by this item is less than the sum produced by applying the Rate ofGross Profit on Annual T/o, the amount payable shall be proportionally reduced.EXCESS CLAUSEEvery claim under the Fire Loss of Profits policy is subject to compulsorydeduction as under:Other than Petrochemical Risks: 7 days Gross ProfitPetrochemical Risks : 14 days GrossProfitACCUMULATED STOCKS CLAUSE.If stocks of finished goods which is accumulated is used to maintain the turnoverwhen production is affected adversely, during indemnity period, account is to betaken of this use and turnover figures are adjusted accordingly.ACCUMULATED STOCKS CLAUSE.If stocks of finished goods which is accumulated is used to maintain the turnoverwhen production is affected adversely, during indemnity period, account is to betaken of this use and turnover figures are adjusted accordingly.SUM TO BE INSUREDThe sum insured should be at least one year's gross profit, even ifindemnity period is less that 12 months.If indemnity period is more than 12 months, the sum insured will be amultiple (i.e. proportionate) of the annual G.P.