Page 3 - Communique - Raghnall Insurance Broking 21.9.20

21.09.2020 / MONDAY Volume 1 I Issue No 3

CASE STUDY PAGE 3

(b)Additional expenditure incurred to prevent more serious b. Turnover (March and April 2014): Rs.26,74,500
loss in Production or Sales. and Rs.27,05,900
c. Expenses for loss minimization: Rs. 20,500
Now impact of AOG perils like Amphan cyclone in West Bengal d. Reduction in insured costs: Rs. 20,500
& Orissa, the current Heavy Flood incidents in the desert areas e. Actual turnover during interruption: Rs. 39,93,100
of Rajasthan and continuous heavy flood incidents in Assam, f. Opening stock: Rs.25,80,000
Bihar, Delhi etc. will definitely increase the requirement of such g. Raw materials: Rs.2,11,62,000
cover of Business Interruption Insurance. h. Other expenses: Rs. 2,18,000
I. Closing stock: Rs.26,83,000
WHY NO CLAIM IS PAYABLE FOR INDIAN GENERAL
INSURANCE POLICIES? Solution:
GI Council has clarified during 1Q of FY2020-21 that Loss of Calculation of Loss of Profit of M/s. XYZ Ltd.:
Profit in not payable for Covid Pandemic. Trading Account for the year ended on 31.12.2014
The scope of cover of the policy if looked for will be found to
covered Consequential Loss Policy (Business Interruption
Policy) indemnity against loss of Gross Profit which is nothing
but the sum of Net Profit and Standing Charges as a result of the
loss of production caused by accident which is covered under
the Material Damage Policy. Apart from covering loss of gross
profit, it also covers Increased Cost of Working which relates to
the expenses incurred for reducing or minimizing the reduction Calculation of Gross Profit Ratio:
in turnover, but not any more than the loss that was purportedly I. Gross profit ratio: 1,00,52,000 / 3,13,29,000 * 100 = 32.1 %
avoided. This policy is always issued in conjunction with fire ii. Turnover for March and April 2014: 26,74,500 + 27,05,900
policy &/or under MB/EAR / CAR policy when admitted. = Rs. 53,80,400
So as per the Basis of Claim Settlement principle - The indemnity iii. Adjusted turnover (with increase trend @12%)
to be paid to the insured is arrived at by comparing the = Rs.60,26,048 (D)
production achieved during the preceding financial year. The iv. Actual turnover (March and April) = Rs. 39,93,100 (E)
policy provides for computation of a standard rate of gross v. Reduction in turnover (D – E ) = Rs. 20,32,948
profit (gross profit earned per turnover). This rate of GP when vi. Loss of gross profit: (reduction turnover x GP rate)
multiplied by the loss in production due to the loss derives the = (20,32,948 x 32.1%) = Rs. 6, 52,576/-
loss payable to the insured. vii. Actual loss suffered: Rs. 6,52,576 + 20,500 – 6,060
= Rs. 6,67,016/-

Claims Case Study: Is it acceptable?
Loss as calculated above is to be adjusted with turnover trend,
Business Interruption time excess, underinsurance, etc. as given below:
Insurance Claim: Time excess: 3 days
Gross profit loss: 24.25 + 14.75 = 39 days
Loss for 3 days: 6, 67,016 / 39 x 3 = Rs. 51.309
XYZ Ltd. manufacturer of pharmaceuticals products took a Indemnity for 36 days: 6, 67,016 – 51,309 = Rs. 6, 15,707
Business Interruption Insurance Policy (FLOP) for SI of Rs. 1, 11,
50,000 (Gross Profits). A fire occurred on 7. 3. 2015, causing
Now underinsurance is to be verified -
material damage of Rs. 20.50 lakh payable under Standard Fire Annual turnover (as per last account): Rs. 3, 13, 29,000
Policy. The Surveyors have collected the following information Adjusted turnover with increase trend 12%: Rs.3, 50, 88,480
for determination of loss under fire loss of profit policy: Gross profit @ 32.1 % on Rs. 3, 50, 88,480: Rs. 1, 12, 63,402
Business trend: Increase 12%
Period of insurance: 01.01.2015 to 31.12.2015 It is underinsurance as Rs. 1, 12, 63,402 is more than the SI of
Rs. 1, 11, 50,000
Indemnity Limit: 6 months, time excess: 3 days Therefore, admissible claim: Rs.6, 15,707 x 1, 11, 50,000 / 1,
Occurrence of accident: 07.03.2015 at 17:30 hours 12, 63,402 = Rs. 6, 09,508
Completion of repairs: 15.04.2015 at 17:00 hours Gross profit @ 32.1 % on Rs. 3, 50, 88,480: Rs. 1, 12, 63,402
Interruption period: 24.25 days in March and 14.75 days
in April. Total = 39 days. It is underinsurance as Rs. 1, 12, 63,402 is more than the SI of
Rs. 1, 11, 50,000
Other information collected in this regard: Therefore, admissible claim: Rs.6, 15,707 x 1, 11, 50,000 / 1, 12,
a. Net turnover (2014): Rs. 3,13,29,000
63,402 = Rs. 6, 09,508