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