Consequential Loss: Fire at a Key Supplier's Plant
A car assembler has a consequential loss policy covering loss of profit following fire at its own premises. Its only supplier of a critical wiring harness suffers a fire and cannot supply for 10 weeks. The assembler's plant shuts down; turnover falls by ₹12 crore and the gross profit ratio is 25%, so gross profit lost is ₹3 crore. The policy has no supplier's extension. The assembler claims ₹3 crore, arguing that the fire was a fire and the loss was consequential on its business. The insurer denies liability. The assembler also held a four-week stock of harnesses but did not use it because it wanted to preserve stock for a new model launch; if it had used the stock, the shutdown would have been six weeks. The policy contains the usual reasonable-precautions and mitigation conditions.
1. Is the loss covered under the consequential loss policy? Explain the requirement of damage at the insured's premises.
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The claim fails unless the policy contains a supplier's extension. A consequential loss policy is not a general business interruption cover; it is attached to the fire policy on the insured's own property. The trigger is damage to property at the premises by an insured peril. The fire at the wiring-harness supplier is damage to a third party's property. The assembler's loss is a loss of supplies, not damage to its own property. The fact that the remote peril was fire does not make the loss 'consequential' under the policy. Standard extensions that could respond are a supplier's extension (naming the supplier, with a limit and often a waiting period), a customers' extension, or a prevention-of-access extension. None is described. The insurer should deny the claim but explain the gap and offer a supplier's extension for the future, subject to underwriting. The four-week stock is relevant only if the policy responds; it does not create cover.
2. Assume the policy does contain a supplier's extension with a 30-day waiting period and a limit of ₹1.00 crore. How would the claim be assessed, and what effect would the unused four-week stock have?
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The interruption lasted 10 weeks. The waiting period is 30 days, about 4.3 weeks. Loss before day 30 is not covered. The insured held four weeks of harness stock. If it could have used that stock, the shutdown would have been six weeks; the insured must mitigate, and the insurer can reduce the claim to the loss that would have been suffered with reasonable mitigation. Covered period = 6 weeks minus 4.3 weeks = 1.7 weeks. Weekly gross profit = ₹3.00 crore / 10 weeks = ₹0.30 crore. Covered loss = 1.7 × ₹0.30 crore = ₹0.51 crore, within the ₹1.00 crore limit. If the insured unreasonably refused to use the stock to preserve it for the new model launch, that is a failure to mitigate; the insurer can settle on the mitigated basis. If the insured can show the stock was genuinely unusable for the new model, the full 10-week interruption applies: 10 minus 4.3 = 5.7 weeks × ₹0.30 crore = ₹1.71 crore, but capped at ₹1.00 crore. The difference between ₹0.51 crore and ₹1.00 crore turns on the mitigation evidence.