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.
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