Boiler Explosion: Gross-Profit Business Interruption Calculation
A food-processing company suffers a boiler explosion that stops production for 14 weeks. Its business-interruption policy is written on a gross-profit basis, with a 12-month indemnity period and a sum insured of ₹6.0 crore. Annual turnover is ₹40 crore and annual gross profit is ₹10 crore. The previous year's turnover for the same 12-month indemnity period was ₹30 crore; a verified 8% growth trend applies. Actual turnover during the indemnity period is ₹22 crore. The insured hires a temporary boiler for eight weeks at a cost of ₹35 lakh; standing charges saved are ₹12 lakh. The claim submitted is ₹4.8 crore, calculated as lost sales plus the temporary boiler cost. The loss adjuster finds that the boiler had skipped its last two statutory inspections and that the temporary boiler allowed 50% production from week seven.
1. Calculate the admissible gross-profit loss before increased cost of working, and comment on the sum insured.
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Step 1: adjusted standard turnover
₹30 crore × 1.08 = ₹32.4 crore.
Step 2: shortfall
₹32.4 crore − ₹22 crore = ₹10.4 crore.
Step 3: gross-profit rate
₹10 crore ÷ ₹40 crore = 25%.
Step 4: loss of gross profit
₹10.4 crore × 25% = ₹2.6 crore.
Step 5: deduct savings
₹2.6 crore − ₹0.12 crore = ₹2.48 crore admissible before increased cost of working.
Sum-insured issue
The annual gross profit is ₹10 crore, but the sum insured is ₹6 crore. If the policy contains an average condition, the claim is further reduced by ₹6 crore ÷ ₹10 crore = 60%, giving ₹1.488 crore before ICW. The insured is significantly underinsured. The adjuster should verify whether the sum insured was intended to cover a shorter indemnity period or whether it was simply inadequate. The submitted ₹4.8 crore is wrong because it uses lost sales rather than gross profit and ignores savings.
2. Evaluate the increased cost of working and the savings.
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The temporary boiler cost of ₹35 lakh is an increased cost of working. It is admissible only if it was incurred to avoid or reduce the gross-profit loss and does not exceed the loss avoided.
Weekly standard gross profit is ₹10 crore ÷ 52 = ₹19.23 lakh. From week seven, the temporary boiler restored 50% production for eight weeks, equivalent to four full weeks of output. Gross profit avoided is therefore approximately 4 × ₹19.23 lakh = ₹76.9 lakh. Since ₹35 lakh is well below ₹76.9 lakh, the expenditure is economically justified and should be admitted, subject to invoices and proof that the boiler was hired solely for the interruption.
The ₹12 lakh standing-charges saving must be deducted from the gross-profit loss, not added to the ICW. The adjuster should also check whether any savings continued after the temporary boiler was installed, and whether the business had any under-insurance or average condition that would scale down both the gross-profit loss and the ICW.
3. Critique the ₹4.8 crore claim and identify the documentation and investigation issues.
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The claim is conceptually wrong. Business interruption indemnifies loss of gross profit, not lost sales revenue. Using lost sales overstates the loss because it ignores the variable costs that were not incurred. The claim also fails to apply the growth trend, deduct savings, or account for the sum-insured adequacy.
Key investigation points:
- Obtain audited accounts and management accounts for the indemnity period and prior year.
- Verify the 8% growth trend with independent evidence; do not accept the insured's forecast alone.
- Examine production records to confirm the 14-week interruption and the 50% recovery from week seven.
- Check temporary boiler invoices, hire contract and whether the cost was capital or revenue.
- Review boiler inspection records; two missed statutory inspections may raise breach-of-duty, maintenance or subrogation issues against the boiler contractor.
- Confirm whether the policy has an average clause and how the ₹6 crore sum insured was calculated.
The adjuster should pay only the calculated gross-profit loss, net of savings and any average reduction, plus admissible ICW, and reserve rights pending the inspection and subrogation review.