| A close up view of: -Machinery loss of profitDespite all | | | | longer required.Indemnity PeriodIn contrast to a material |
| the precautions taken by managers, companies may | | | | loss, the loss of profits following a business interruption |
| suddenly find itself in a situation that threaten its | | | | depends on the time factor involved. In other words, |
| survival, e.g. as a result of natural disasters, accidents, | | | | the longer the period for which operation is interrupted |
| fire, industrial espionage, sabotage, damage to their | | | | or impaired, the greater the loss of profits. For this |
| reputation, or the failure of a supplier, the power supply | | | | reason it is essential to set a certain limit for the period |
| or a telecommunications network.It is well accepted | | | | during which the insurer is obliged to provide indemnity |
| fact that risks can never be entirely eliminated. | | | | for an interruption loss. This is done by the insured |
| However, while corporate managements cannot | | | | specifying an indemnity period limit which represents |
| guarantee that losses will be precluded, they are at | | | | the maximum time for which an insurer is liable for loss |
| least expected to deal with loss events and the | | | | of profits. The period of indemnity begins on the date |
| attendant aftermath in a satisfactory manner.In addition | | | | on which material damage could first be said to have |
| to the traditional tasks of risk management - identifying, | | | | occurred, as judged according to the recognized |
| analyzing, reducing and transferring risks companies | | | | principles of engineering, at the latest, however, on the |
| are thus increasingly being expected to prepare | | | | date when the loss of profits commenced. Generally |
| systematically to deal with loss events. A step for this | | | | the indemnity period limit is three, six, nine or twelve |
| purpose is machinery loss of profit.IntroductionUnder | | | | months. The basic rule is that the indemnity period limit |
| both machinery and fire insurance, indemnity is | | | | should relate to the amount of time required for |
| provided, in respect of damaged or destroyed | | | | removing the interruption loss, i.e. for repairing the |
| machinery, solely for the material loss sustained by the | | | | machinery damaged or for the delivery of new |
| insured. These types of insurance do thus not protect | | | | machinery in cases of a total loss, assembly and trial |
| the insured against all the losses which arise in | | | | run. Higher premiums are, of course, charged for long |
| connection with a fire or the breakdown of machinery, | | | | indemnity period limits.In other words the indemnity |
| since in most cases a material loss also causes an | | | | period commences with the date of damage and lasts |
| interruption or interference of the insured's business | | | | till such a time as the business is restored to its pre |
| operations. The result is a financial loss in the form of | | | | damaged level or the period stipulated policy which |
| lost profit and unearned standing charges. In many | | | | ever comes first. The policy insures earnings of the |
| cases the loss sustained as a result of an interruption | | | | business lost during the indemnity period. But in any |
| or interference of business operations by far exceeds | | | | case indemnity period will not exceed 12 months.Graph |
| the mere material loss. | | | | showing relation of indemnity period with damageSum |
| An awareness of the need for insurance protection | | | | InsuredSum insured is net profit plus standing charges. |
| against the financial consequences of material damage | | | | For calculating profit past years data are taken. It is |
| arose at the beginning of this century, and the result | | | | difficult to calculate gross profit for future so it is |
| was the introduction of the two variants, loss of profits | | | | allowed to increase gross profit by 50%.Refund of |
| following fire insurance and loss of profits following | | | | premium is allowed if estimated figure is more then the |
| machinery breakdown insurance - also called | | | | actual figure but subject to that refund does not |
| machinery loss of profits (MLOP) insurance. As the | | | | exceed 50% of premium collected.PremiumPremium |
| size of modern production facilities increases, MLOP | | | | rates depend on the critical nature of the machinery |
| insurance is becoming more and more important. The | | | | covered by the breakdown or explosion policies; their |
| individual production stages in modern processes are | | | | relative importance and contribution to final output; the |
| often accomplished by just one machine, the failure of | | | | repairs, maintenance and stand by facilities available |
| which leads to substantial interruption losses.Machinery | | | | and the indemnity period opted.Exclusions1. Loss or |
| loss of profit policy is just a replica of fire loss of profit | | | | damage to machinery or other items which are not |
| policy. Like fire loss of profit is require standard fire | | | | listed in the list of machinery insured even if the |
| policy same with MLOP. It requires machinery break | | | | consequence of material damage to an item indicated |
| down policy or boiler and pressure plant policy or | | | | in the list of machinery insured is involved2. Any |
| eclectic equipment policy. In US it is known as Business | | | | restriction on reconstruction or operation imposed by |
| interruption insurance. Sometimes it is also called as | | | | any public authority3. Shortage, destruction, |
| business income coverage or loss of profit insurance, | | | | deterioration and spoilage of or damage to raw |
| is typically a rider or endorsement added to a | | | | materials, semi-finished or finished products or catalyst |
| business's property/casualty policy. As such, what's | | | | or operating media even if the consequence of |
| covered under the main property/casualty policy will | | | | material damage to an item indicated in the list of |
| determine what is and is not covered for business | | | | machinery insured is involved4. Alterations |
| interruption. For example, P/C policies typically cover | | | | improvements or overhauls being made while repairs |
| fire, but not floods or earthquakes, so if an earthquake | | | | or replacements of damaged or destroyed property |
| damages the business, your business interruption | | | | are being carried out5. Extension of repair period |
| coverage won't kick in unless insured have obtained | | | | beyond 4 weeks on account ofa. Inability to carry or |
| additional coverage for earthquakes.Need for | | | | delays in carrying out repairsb. Prohibition to operate |
| MLOPBusiness expert Ms.Meenakshi Gupta said this | | | | the machinery due to import and/or export customs & |
| policy is must for every business organization as the | | | | other restrictions or by statutory regulationsc. Inability to |
| market competitions is so tight that one minor loss can | | | | secure or delays in securing replacement parts, |
| ruin the whole business.The incident of machinery | | | | machines or technical servicesd. Transport of parts to |
| breaks down not only cause loss of property to | | | | and from the insured premises6. Willful acts or Gross |
| industry but result in stoppage of work, resulting in loss | | | | Negligence on the part of Insured &/or his employees7. |
| of production and loss of fixed charges which | | | | War or warlike operations, Civil Commotion, Strike & |
| ultimately results in loss of profit. To cover loss of | | | | Locked-out workers8. Nuclear reaction, nuclear |
| profit because of machinery breaks down it requires a | | | | radiation or radioactive contamination9. Loss or |
| specific policy given with machinery break down policy | | | | damage caused by any faults or defects existing at |
| or boiler and pressure plant policy or eclectic | | | | the time of commencement of this insurance within the |
| equipment policy.The basic features of MLOP | | | | knowledge of the insured or his responsible |
| insurance will be dealt with.1 Subject matter | | | | representatives whether such faults or defects were |
| insuredMLOP insurance provides cover for the actual | | | | known to Company or notTime exclusionExplosive |
| loss of profits sustained as a result of a business | | | | factory, petrochemical, power plant and fertilizers 14 |
| interruption caused by material damage indemnifiable | | | | days exclusion where as in other industry it is 7 |
| under machinery insurance. MLOP insurance provides | | | | days.Underwriting consideration- Risk inspection report.- |
| indemnity also in cases where the material loss | | | | Description of plant- Date of make- Work performed- |
| amount falls below the deductible to be borne by the | | | | Alternative means of working- Repair time- Spare |
| insured under the machinery cover. Basically speaking, | | | | parts held- Unattended plant- Percentage of daily loss. |
| a loss due to an interruption or interference of business | | | | Incase production is halted.- Any alternative means of |
| operations is made up of the following factors:1. The | | | | working available.- Stand by machine.- Breakdown |
| reduction in operating profit, i.e. the profit from selling | | | | experience.The possibilities of loss minimizationThe |
| the goods produced and traded by the insured and | | | | results of MLOP insurance depend to a great extent |
| from rendering services.2. The standing charges, i.e. the | | | | on the loss minimization measures taken. It is therefore |
| costs incurred entirely or in part if operations are | | | | quite obvious that this topic deserves special attention. |
| interrupted or impaired. These comprise wages and | | | | Such measures for loss minimization are, for example, |
| salaries, including social security contributions if they | | | | the hiring of substitute motors, generators, |
| continue to become due during the interruption; interest, | | | | transformers, boilers, small turbines, etc. or the speeding |
| economic depreciations, basic rates for third-party | | | | up of repair work by carrying out complex welding |
| energy, expenses for the current upkeep of buildings | | | | operations even on high-alloy materials or using |
| and machines, rent, taxes and other non-specified | | | | metalock and other special repair methods on the |
| working expenses, expenses for the preservation of | | | | damaged components.Terms used in policy:The |
| vested rights, insurance premiums and other business | | | | following terms used in this policy will be defined as |
| expenses, e.g. guaranteed commissions.3. Not included | | | | follows:a. Gross Profit is defined as the sum produced |
| in standing charges, however, are turnover taxes and | | | | by adding to the Net Profit the amount of all insured |
| expenses for raw or auxiliary materials, fuels and | | | | fixed charges. If there is no Net Profit the amount of all |
| goods purchased unless they serve to continue | | | | insured fixed charges less that proportion of any loss |
| operations; excise taxes, freight charges, specified | | | | from business operations as the amount of the insured |
| license and inventor's fees and similar expenses. Loss | | | | fixed charges bears to all fixed charges.b. Net Profit is |
| minimization costs are also covered if they lower the | | | | defined as the net operating profit exclusive of all:1) |
| insurer's obligation to indemnify. These include | | | | Capital receipts and accruals; and2) Outlay properly |
| expenses that avoid, minimize or terminate an | | | | chargeable to capital;Resulting from the business of |
| interruption loss soon after the occurrence of material | | | | the Insured at the described location after due |
| damage.Loss minimization is of great importance in | | | | provision has been made for all fixed charges and any |
| MLOP insurance. The following are examples.1. | | | | other expenses, including depreciation, but before |
| Purchase/sale of semi-finished goods2. Provisional | | | | deduction of any taxes on Profits.c. Insured Fixed |
| repairs3. Early overhauls4. Purchase of non-identical | | | | Charges are defined as all fixed charges unless |
| (but compatible) machinery5. Express, airfreight6. | | | | specifically excluded in the declarations.d. Sales are |
| Overtime work, additional shifts, work on Sundays7. To | | | | defined as the money paid or payable to the Insured |
| accelerate repairs on undamaged machines to reduce | | | | for:1) Goods sold and delivered; and2) Services |
| the interruption loss8. Rent of machinery (e.g. | | | | rendered;e. Rate of Gross Profit is defined as the rate |
| transformers, boilers, compressors)9. Shifting of | | | | of Gross Profit earned on the sales during the twelve |
| operations to alternative plants10. Making up for the | | | | (12) full calendar months immediately before the date |
| production loss after reopeningCoverageMachinery | | | | of physical loss or damage to the insured property.f. |
| loss of profit policy gives cover against consequential | | | | Standard Sales are defined as the sales during that |
| losses following loss or damage to the property | | | | period in the twelve (12) months immediately before |
| insured under machinery breakdown and/or boiler and | | | | the date of the loss or damage to the insured property |
| pressure plant insurance. This policy covers actual | | | | which corresponds with the period of |
| financial losses suffered by the insured due to | | | | indemnity.Marketing aspect for betterment of MLOP |
| business interruption arising from:a) Reduction in | | | | policy in IndiaCapered to other products of engineering |
| turnover andb) Increase in cost of workingThe | | | | insurance, MLOP is very less in number. This product |
| standard policy thus insures the loss of gross profits in | | | | requires proper advertisement and making the small |
| the business because of accident to the machinery, | | | | business owner aware of this policy. This policy is |
| boiler and pressure plant, electric equipment covered | | | | more suitable for small industrial sector of India which |
| under respective policy.What Can Be | | | | facing many difficulties. Agents are required to train |
| Insured?Continuing Overhead Expenses: - which have | | | | about coverage and usages of policy, so that they will |
| to be met out of reduced earnings such as rent, taxes, | | | | be in position to explain other. Special advertisement |
| interest on debentures, mortgages and loans. | | | | campaign is required.Vishnu Ramdeo |
| Increase in Cost of Working: - necessarily incurred to | | | | MBA (Insurance) |
| overcome or to minimize the effects of damage upon | | | | National Law University |
| the business such as renting of temporary premises, | | | | Jodhpur. |
| hiring of machinery or extra labour costs.Loss of Profit: | | | | Indiamr.Vishnu Ramdeo has done his garduation in |
| - which would be earned by industry if there was no | | | | honours in accounting and finance. He has done his |
| damage to machinery.Wages: - of employees not | | | | MBA in Insurance from National Law University, |
| gainfully employed during the interruption period and | | | | Jodhpur India. his intreset areas are insurance, |
| payments to employees whose services are no | | | | taxation,investment,equity research and law. |