Consequential Loss (Machinery) Insurance A knowledge share initiative of Salasar Services (Insurance Brokers) Pvt. Ltd.

Transcription

1 Consequential Loss (Machinery) Insurance A knowledge share initiative of Salasar Services (Insurance Brokers) Pvt. Ltd.

2 INTRODUCTION MLOP insurance indemnifies the actual loss of gross profit sustained as a result of a business interruption caused by an accident covered under machinery insurance. Despite all the precautions taken by managers, companies may suddenly find itself in a situation that threaten its survival, e.g. as a result of natural disasters, accidents, fire, industrial espionage, sabotage, damage to their reputation, or the failure of a supplier, the power supply or a telecommunications network. It is well accepted fact that risks can never be entirely eliminated. However, while corporate managements cannot guarantee that losses will be precluded, they are at least expected to deal with loss events and the attendant aftermath in a satisfactory manner. In addition to the traditional tasks of risk management identifying, analyzing, reducing and transferring risks companies are thus increasingly being expected to prepare systematically to deal with loss events. A step for this purpose is machinery loss of profit. EVOLUTION Under both machinery and fire insurance, indemnity is provided, in respect of damaged or destroyed machinery, solely for the material loss sustained by the insured. These types of insurance do thus not protect the insured against all the losses which arise in connection with a fire or the breakdown of machinery, since in most cases a material loss also causes an interruption or interference of the insured's business operations. The result is a financial loss in the form of lost profit and unearned standing charges. In many cases the loss sustained as a result of an interruption or interference of business operations by far exceeds the mere material loss. An awareness of the need for insurance protection against the financial consequences of material damage arose at the beginning of this century, and the result was the introduction of the two variants, loss of profits following fire insurance and loss of profits following machinery breakdown insurance also called machinery loss of profits (MLOP) insurance. As the size of modern production facilities increases, MLOP insurance is becoming more and more important. The individual production stages in modern processes are often accomplished by just one machine, the failure of which leads to substantial interruption losses. Machinery loss of profit policy is just a replica of fire loss of profit policy. Like fire loss of profit is require standard fire policy same with MLOP. It requires machinery break down policy or boiler and pressure plant policy or eclectic equipment policy. In US it is known as Business interruption insurance. Sometimes it is also called as business income coverage or loss of profit insurance, is typically a rider or endorsement added to a business's property/casualty policy. As such, what's covered under the main property/casualty policy will determine what is and is not covered for business interruption. For example, P/C policies typically cover fire, but not floods or earthquakes, so if an earthquake damages the business, your business interruption coverage won't kick in unless insured have obtained additional coverage for earthquakes. NEED FOR THE COVER This policy is must for every business organization as the market competitions is so tight that one minor loss can ruin the whole business.

3 The incident of machinery breaks down not only cause loss of property to industry but result in stoppage of work, resulting in loss of production and loss of fixed charges which ultimately results in loss of profit. To cover loss of profit because of machinery breaks down it requires a specific policy given with machinery break down policy or boiler and pressure plant policy or eclectic equipment policy. COVERAGE Machinery loss of profit policy gives cover against consequential losses following loss or damage to the property insured under machinery breakdown and/or boiler and pressure plant insurance. This policy covers actual financial losses suffered by the insured due to business interruption arising from: Reduction in turnover and Increase in cost of working The standard policy thus insures the loss of gross profits in the business because of accident to the machinery, boiler and pressure plant, electric equipment covered under respective policy. EXCLUSIONS Loss or damage to machinery or other items which are not listed in the list of machinery insured even if the consequence of material damage to an item indicated in the list of machinery insured is involved Any restriction on reconstruction or operation imposed by any public authority Shortage, destruction, deterioration and spoilage of or damage to raw materials, semifinished or finished products or catalyst or operating media even if the consequence of material damage to an item indicated in the list of machinery insured is involved Alterations improvements or overhauls being made while repairs or replacements of damaged or destroyed property are being carried out Extension of repair period beyond 4 weeks on account of o Inability to carry or delays in carrying out repairs o Prohibition to operate the machinery due to import and/or export customs & other restrictions or by statutory regulations o Inability to secure or delays in securing replacement parts, machines or technical services o Transport of parts to and from the insured premises Wilful acts or Gross Negligence on the part of Insured &/or his employees War or warlike operations, Civil Commotion, Strike & Locked out workers Nuclear reaction, nuclear radiation or radioactive contamination Loss or damage caused by any faults or defects existing at the time of commencement of this insurance within the knowledge of the insured or his responsible representatives whether such faults or defects were known to Company or not. TIME EXCLUSIONS For Explosive factory, petrochemical, power plant and fertilizers 14 days exclusion where as in other industry it is 7 days. UNDERWRITING CONSIDERATIONS

4 Risk inspection report. Description of plant Date of make Work performed Alternative means of working Repair time Spare parts held Unattended plant Percentage of daily loss, in case production is halted. Any alternative means of working available. Stand by machine. Breakdown experience. WHAT CAN BE INSURED Continuing Overhead Expenses: which have to be met out of reduced earnings such as rent, taxes, interest on debentures, mortgages and loans. Increase in Cost of Working: necessarily incurred to overcome or to minimize the effects of damage upon the business such as renting of temporary premises, hiring of machinery or extra labour costs. Loss of Profit: This would be earned by industry if there was no damage to machinery. Wages: of employees not gainfully employed during the interruption period and payments to employees whose services are no longer required. INDEMNITY PERIOD In contrast to a material loss, the loss of profits following a business interruption depends on the time factor involved. In other words, the longer the period for which operation is interrupted or impaired, the greater the loss of profits, For this reason it is essential to set a certain limit for the period during which the insurer is obliged to provide indemnity for an interruption loss. This is done by the insured specifying an indemnity period limit which represents the maximum time for which an insurer is liable for loss of profits. The period of indemnity begins on the date on which material damage could first be said to have occurred, as judged according to the recognized principles of engineering, at the latest, however, on the date when the loss of profits commenced. Generally the indemnity period limit is three, six, nine or twelve months. The basic rule is that the indemnity period limit should relate to the amount of time required for removing the interruption loss, i.e. for repairing the machinery damaged or for the delivery of new machinery in cases of a total loss, assembly and trial run. Higher premiums are, of course, charged for long indemnity period limits. In other words the indemnity period commences with the date of damage and lasts till such a time as the business is restored to its pre damaged level or the period stipulated policy whichever comes first. The policy insures earnings of the business lost during the indemnity period. But in any case indemnity period will not exceed 12 months. SUM INSURED Sum insured is net profit plus standing charges. For calculating profit past years data are taken. It is difficult to calculate gross profit for future so it is allowed to increase gross profit by 50%. Refund of premium is allowed if estimated figure is more than the actual figure but subject to that refund does not exceed 50% of premium collected.

5 PREMIUM Premium rates depend on the critical nature of the machinery covered by the breakdown or explosion policies; their relative importance and contribution to final output; the repairs, maintenance and stand by facilities available and the indemnity period opted. LOSS MINIMIZATION Loss minimization is of great importance in MLOP insurance. The following are examples. Purchase/sale of semi finished goods Provisional repairs Early overhauls Purchase of non identical (but compatible) machinery Express, airfreight Overtime work, additional shifts, work on Sundays To accelerate repairs on undamaged machines to reduce the interruption loss Rent of machinery (e.g. transformers, boilers, compressors) Shifting of operations to alternative plants Making up for the production loss after reopening. EXCESS The Policy will have an Excess in terms of days for each and every loss. DEFINITIONS Gross Profit: Net Profit plus insured standing charges Net Profit: Net Trading Profit less all capital receipts / accretions / outlays chargeable to capital less all standing and other charges including depreciation, before tax from specified business and specified premises Trading Profits: Profits from selling goods dealt / manufactured and services rendered Standing Charges: All fixed costs incurred for proper business operations Turnover: Amount payable (less discounts) to the insured for sale of goods / services rendered in course of business at specified premises Indemnity period: Period that starts from the day of accident and ends not later than the number of months indicated in the policy during which the business is affected Lay off Wages: Payment to employees during indemnity period for which no work was/ is available in consequence of the accident.