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