Figuring Out Profitability From Gross Sales And Expenses Taxes Formula Machinery Loss of Profit Policy :- Can Help Business Concerns

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Machinery Loss of Profit Policy :- Can Help Business Concerns

A close up view of: –

Machinery loss of profit

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.

Introduction

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 MLOP

Business expert Ms.Meenakshi Gupta said this policy is must for every business organization as the market competitions is so tight that one minor loss can ruin the whole business.

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.

The basic features of MLOP insurance will be dealt with.

1 Subject matter insured

MLOP insurance provides cover for the actual loss of profits sustained as a result of a business interruption caused by material damage indemnifiable under machinery insurance. MLOP insurance provides indemnity also in cases where the material loss amount falls below the deductible to be borne by the insured under the machinery cover. Basically speaking, a loss due to an interruption or interference of business operations is made up of the following factors:

1. The reduction in operating profit, i.e. the profit from selling the goods produced and traded by the insured and from rendering services.

2. The standing charges, i.e. the costs incurred entirely or in part if operations are interrupted or impaired. These comprise wages and salaries, including social security contributions if they continue to become due during the interruption; interest, economic depreciations, basic rates for third-party energy, expenses for the current upkeep of buildings and machines, rent, taxes and other non-specified working expenses, expenses for the preservation of vested rights, insurance premiums and other business expenses, e.g. guaranteed commissions.

3. Not included in standing charges, however, are turnover taxes and expenses for raw or auxiliary materials, fuels and goods purchased unless they serve to continue operations; excise taxes, freight charges, specified license and inventor’s fees and similar expenses. Loss minimization costs are also covered if they lower the insurer’s obligation to indemnify. These include expenses that avoid, minimize or terminate an interruption loss soon after the occurrence of material damage.

Loss minimization is of great importance in MLOP insurance. The following are examples.

1. Purchase/sale of semi-finished goods

2. Provisional repairs

3. Early overhauls

4. Purchase of non-identical (but compatible) machinery

5. Express, airfreight

6. Overtime work, additional shifts, work on Sundays

7. To accelerate repairs on undamaged machines to reduce the interruption loss

8. Rent of machinery (e.g. transformers, boilers, compressors)

9. Shifting of operations to alternative plants

10. Making up for the production loss after reopening

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:

a) Reduction in turnover and

b) 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.

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: – which 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 which ever 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.

Graph showing relation of indemnity period with damage

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 then the actual figure but subject to that refund does not exceed 50% of premium collected.

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.

Exclusions

1. 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

2. Any restriction on reconstruction or operation imposed by any public authority

3. Shortage, destruction, deterioration and spoilage of or damage to raw materials, semi-finished 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

4. Alterations improvements or overhauls being made while repairs or replacements of damaged or destroyed property are being carried out

5. Extension of repair period beyond 4 weeks on account of

a. Inability to carry or delays in carrying out repairs

b. Prohibition to operate the machinery due to import and/or export customs & other restrictions or by statutory regulations

c. Inability to secure or delays in securing replacement parts, machines or technical services

d. Transport of parts to and from the insured premises

6. Willful acts or Gross Negligence on the part of Insured &/or his employees

7. War or warlike operations, Civil Commotion, Strike & Locked-out workers

8. Nuclear reaction, nuclear radiation or radioactive contamination

9. 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 exclusion

Explosive factory, petrochemical, power plant and fertilizers 14 days exclusion where as in other industry it is 7 days.

Underwriting consideration

– 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. Incase production is halted.

– Any alternative means of working available.

– Stand by machine.

– Breakdown experience.

The possibilities of loss minimization

The results of MLOP insurance depend to a great extent on the loss minimization measures taken. It is therefore quite obvious that this topic deserves special attention. Such measures for loss minimization are, for example, the hiring of substitute motors, generators, transformers, boilers, small turbines, etc. or the speeding up of repair work by carrying out complex welding operations even on high-alloy materials or using metalock and other special repair methods on the damaged components.

Terms used in policy:

The following terms used in this policy will be defined as follows:

a. Gross Profit is defined as the sum produced by adding to the Net Profit the amount of all insured fixed charges. If there is no Net Profit the amount of all insured fixed charges less that proportion of any loss from business operations as the amount of the insured fixed charges bears to all fixed charges.

b. Net Profit is defined as the net operating profit exclusive of all:

1) Capital receipts and accruals; and

2) Outlay properly chargeable to capital;

Resulting from the business of the Insured at the described location after due provision has been made for all fixed charges and any other expenses, including depreciation, but before deduction of any taxes on Profits.

c. Insured Fixed Charges are defined as all fixed charges unless specifically excluded in the declarations.

d. Sales are defined as the money paid or payable to the Insured for:

1) Goods sold and delivered; and

2) Services rendered;

e. Rate of Gross Profit is defined as the rate of Gross Profit earned on the sales during the twelve (12) full calendar months immediately before the date of physical loss or damage to the insured property.

f. Standard Sales are defined as the sales during that period in the twelve (12) months immediately before the date of the loss or damage to the insured property which corresponds with the period of indemnity.

Marketing aspect for betterment of MLOP policy in India

Capered to other products of engineering insurance, MLOP is very less in number. This product requires proper advertisement and making the small business owner aware of this policy. This policy is more suitable for small industrial sector of India which facing many difficulties. Agents are required to train about coverage and usages of policy, so that they will be in position to explain other. Special advertisement campaign is required.

Vishnu Ramdeo

MBA (Insurance)

National Law University

Jodhpur.

India

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