Consequential Loss Insurance: Coverage, Claim & Exclusions

Updated: 01-10-2019 11:44:46 AM

An incident of fire has the potential to not only damage the goods and machinery, but also impact the projects in pipeline and in hand. This can cause business interruption and financial loss. An insurance plan like Standard Fire and Special Perils Policy covers fire and allied perils but not financial loss due to business interruption. This is where Consequential Loss Insurance comes in picture.

What is Consequential Loss Insurance?

Any interruption in business operations caused by fire or other special perils, resulting in a financial loss of various kinds is called consequential loss. A consequential loss insurance policy for fire or other special perils financially compensates the owner for the lost business income due to fire.

What all Consequential Loss Insurance Covers?

The insurance policy provides coverage against various kinds of business loss.  Let us look at some of them:

• Loss of gross profit due to a decrease in turnover
• Layoffs and retrenchment compensation
• Spoilage consequential loss
• Auditor’s fees

How Consequential Loss Insurance Functions?

• Insurance company will consider Annual gross profit, indemnity period selected and extensions selected while calculating the premium for consequential loss insurance
• In case of misfortune due to fire or special perils, resulting in loss in income or revenue or increased fixed cost covered under the policy, a policyholder must immediately call the toll-free number of the insurance company and register the case
• Licensed surveyor is appointed to survey the case and the documents and for proper evaluation of loss to the organisation
• At the end, insurance company analyses the Final Survey Report (FSR) submitted by the Surveyor, and compensates the organization for the consequential loss subject to the terms and conditions

Eligibility Criteria

Consequential Loss insurance policy is meant for:

• SMEs
• Corporate Who need protection for  their business against uncontrollable situations that can devastate property and businesses

Claim Process for Consequential Loss Insurance 

Below is the claim process which an organization needs to follow for settling claim under Consequential Loss Insurance:

• Call the toll-free number of the insurance company and register the case
• To validate the authenticity of the policyholder, a policyholder gives details like policy number, name of the organization, nature of the claim etc. to the insurance company
• Meanwhile, Insured should initiate loss minimisation measures
• Once the verification process is complete, they will send an IRDA licensed surveyor to attend the scene for proper evaluation and finalisation of loss
• Insurance company or the Surveyor may request for documentation and records like proof of reduction in turnover, revenue, or production output of the organisation
• After a thorough investigation by the Surveyor and receipt of all relevant proofs and records, the Surveyor submits a Final Survey Report (FSR) to the insurance company
• The insurance company analysis the FSR by the Surveyor, check records and proofs, and validates the terms of the policy document before calculating the financial loss and the claim amount to be given
• The insurance company then compensates the organization for the consequential loss as per the terms and conditions of the policy document and internal guidelines

Documents Required For Claim Process

• Duly signed in claim form
• Standing Charges document
• Supplier invoices
• Additional expenditure report necessarily incurred to maintain business operation

Note: This is not an exhaustive list.

Exclusions under Consequential Loss Insurance

Certain situations are not covered by consequential loss insurance. Some of the general exclusions under consequential loss insurance are:

• Any loss of gross profits due to fire or special perils which are not covered in the policy and that result in the damage to the business property
• Any loss due to material damage to the organization’s property
• Loss of goodwill and any third-party claims generating out of the unfortunate events
• Claim due to war, invasion, act of foreign enemy

Companies Offering Consequential Loss Insurance in India

Insurance companies providing consequential loss insurance in India are:

• HDFC ERGO
• Bharti AXA
• SBI General
• Royal Sundaram
• Reliance General
• ICICI Lombard
• TATA AIG
• IIFCO-TOKIO

Important Aspects

• It is advisable for an organisations to go through the policy details and specific exclusions of the policy before choosing one
• For an adequate sum insured, profit projection must be made one year beyond the indemnity period in case damage occurs at the end of the period of insurance

Advantages of Consequential Loss Insurance

• Covers financial turnover losses due to fire in the company premises which is not covered by other standard insurance policies
• Some insurance companies also provide coverage to the gross profits and fixed costs in case the business is not able to meet its targets due to fire or other perils
• Additional expenditure incurred to maintain normal business activity during the period in which the business is affected is also covered
• Compensation to the employees due to layoffs or retrenchment
• This policy covers the risks which may arise due to the inability to use the business premises for product or service delivery resulting in a loss in profits
• Some insurance companies provide Rider options that cover power failures or inability to use public utilities after a fire in the insured property which may result in the halt of business operations

FAQs

Q1. Why should I buy consequential loss insurance?

Standard policy like Standard Fire and Special Perils Policy and fire insurance covers only the physical damage to the property. However, whilst the damaged property is being repaired or replaced, it causes interruption of business operations which results in huge loss. Consequential loss insurance is important as it covers profit loss due to reduction in turnover, thus, safeguard their business profits.

Q2. Does this insurance also cover the salaries of the employees?

Yes, some insurance companies compensate for the financial loss incurred by the organization by paying the salaries to the employees.

Q3. How the Sum Insured of Consequential Loss Insurance is calculated?

The sum insured under this policy during the indemnity period is calculated by evaluating the financial loss incurred from the time of fire to the time by which the business property is reinstated for delivery of goods or services to its customers. The maximum indemnity period permissible is 3 years.

Q4. Is there any deduction to the sum insured when the claims process for this policy is invoked?

Generally, there is no Excess Amount or deduction made to the sum insured by the insurance company under Consequential Loss Insurance Policy.

Q 5. How is premium calculated under Consequential Loss Insurance?

Premiums under Consequential Loss Insurance depends on the occupancy, annual gross profit, indemnity period selected and extensions selected.

Q 6. What are the additional covers offered under Consequential Loss Insurance?

On payment of additional premiums, mentioned below are the add-on covers offered by the insurers:

• Supplier’s Extension
• Customer Extension
• Failure of Public power supply/Gas works/Water Works
• Spoilage Risk Extension

Q 7. What is the time taken to settle the claims?

Each insurer offering consequential loss insurance settles the claim as early as possible from the date of receipt of last necessary documents submitted. Rejection or delay of claims if, any of the fraudulent activity is found.

Q 8. What is gross profit?

It is the sum of net profit and standing charges.