Loss of Profits: Indemnity Period, Increased Cost of Working and a Lost Contract
Sunrise Foods Pvt Ltd operates a bakery in Nashik. It buys a fire consequential loss (loss of profits) policy with a sum insured of ₹2.00 crore on gross profit, a gross profit rate of 25% on turnover, and a 12-month indemnity period running from the date of damage. Fire destroys the main oven line on 1 April. Production is fully restored on 31 July, four months later. Turnover for the same four months in the previous year was ₹2.80 crore; turnover actually achieved during the interruption was ₹1.00 crore, partly by outsourcing baking to a neighbouring unit. The insured spent ₹0.20 crore on that outsourcing and on overtime, all of it demonstrably incurred to maintain sales. The insured also claims ₹0.35 crore for a supermarket contract lost permanently because the buyer shifted to a competitor during the interruption, arguing that the loss of the contract is a direct consequence of the fire. The audited accounts show standing charges continued largely unchanged throughout.
1. Compute the admissible loss of profits claim for the interruption, showing each step.
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Check the sum insured first. Annual turnover is ₹8.00 crore; at a 25% gross profit rate the annual gross profit is ₹2.00 crore, equal to the sum insured. No average applies.
Step 1 – Shortfall in turnover. ₹2.80 crore (corresponding period last year) − ₹1.00 crore (achieved) = ₹1.80 crore.
Step 2 – Apply the gross profit rate. ₹1.80 crore × 25% = ₹0.45 crore of lost gross profit.
Step 3 – Increased cost of working. ₹0.20 crore was spent to keep ₹1.00 crore of turnover alive. The gross profit on that saved turnover is ₹1.00 crore × 25% = ₹0.25 crore. Because ₹0.20 crore is less than the ₹0.25 crore of gross profit it preserved, the whole amount is economically justified and admissible.
Step 4 – Saving in standing charges. The accounts show standing charges were largely unchanged, so no deduction arises. Had wages or rent been saved during the shutdown, those savings would reduce the claim, because the insured must not recover more than the position it would have been in.
Admissible: ₹0.45 crore + ₹0.20 crore = ₹0.65 crore, subject to the policy limit.
2. Is the ₹0.35 crore claim for the lost supermarket contract payable?
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It depends entirely on when the loss of turnover occurs, and the claim as framed is wrong.
The policy indemnifies loss of gross profit measured as shortfall in turnover during the indemnity period. A permanent loss of a customer beyond 31 March of the following year is a capital or goodwill loss, not turnover lost within the indemnity period, and the policy does not insure the value of a contract.
But the indemnity period here runs a full twelve months while restoration took only four. If the defection of the supermarket chain depressed sales between 1 August and the end of the indemnity period, turnover was lost within the insured period and that element is claimable - provided causation by the fire is proved, which requires evidence that the buyer left because of the supply failure and not for price or range reasons.
So the ₹0.35 crore figure should be rejected as a valuation, and the insured invited to re-present the claim as a monthly turnover shortfall for the post-restoration months, with the buyer's correspondence as evidence of cause. Loss of a market is not insured; loss of turnover during the indemnity period is.
3. The broker argues that because production was restored in four months the insurer should pay six months of gross profit as a matter of course. How do you respond?
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That inverts the whole basis of consequential loss insurance. The indemnity period is the outside limit of liability, not a period of automatic payment. The insured is entitled to be put in the position it would have occupied had the fire not happened - no better.
Had the insurer simply paid six months of gross profit, the insured would recover profit it had in fact lost only for four months and would be over-indemnified for the balance. The measure is always actual shortfall in turnover multiplied by the gross profit rate, plus justified increased cost of working, less savings.
The only reason the indemnity period matters here is that it defines how long after the fire consequential effects will be looked at - which is precisely the point that keeps part of the lost-contract argument alive, since the period runs eight months beyond restoration. That is where the broker's point has some force, and it should be redirected there rather than used to justify a flat six-month payment.