Departmental Clause

Going back to the basics, a Business Interruption policy covers the loss of profit due to interruption caused by material damage at the insured location (and in some cases- at other specified location/s). The revenue generated by the business, the profit lost and other financial details required in event of a claim, are all sourced from the financial statements of the company. This is the reason for the policy also being called as Earnings insurance.

Let us  look at two different businesses to understand the implications for purposes of a claim, of the manner in which financial information is being maintained.

A Hotel business may earn its revenue & profits from its restaurant/s, its room occupancy or ancillary services like paid gym, shopping area etc. It is obvious that the contribution of a component  like  rooms occupancy to the total profit would be different from another like restaurant. Assuming that the business maintains separate accounts of each component- the component wise profit generated by rooms versus restaurant versus gym can easily be worked out. If the rooms give a margin of say 100% and restaurant gives a margin of 40%, the impact on total profit of a  business interruption of a specific component is bound to be different. So a loss due to fire in a few rooms may have higher impact on total profits of the business. 

So the logical way forward may be - appropriate indemnity can be achieved by considering room as a distinct component rather than considering the total business as a whole. This is what the departmental clause  seeks to achieve. It helps the insured obtain  a  better indemnity if  separate verifiable financial data on each component of its business is maintained.

Looking at the second example- a Cement  plant has two broad processes-the first stage involving raw material to clinker stage and second stage of crushing of clinker to cement. In case the clinker crushing area is shut down due to an accident, the intermediate product can still be  sold to another crushing unit & some turnover & profit maintained. The benefit of maintaining separate financial details for such an industry is obvious.

The wording of the Departmental clause are:

• The first para is the enabling clause for considering department wise trading results.
• The two provisos relate to average clause applicability for Gross Profit & Wages respectively.

If the business be conducted in departments, the independent trading results of which are ascertainable, the provisions of clauses (a) and (b) of the item No.1 on Gross profit and item No.2 on Wages shall apply separately to each department affected by the damage, except that:

1. If the sum insured by item No.1 be less than the aggregate of the sums produced by applying the Rate of Gross Profit for each department of the business (whether affected by the damage or not) to its relative Annual Turnover thereof the amount payable under Item No.1 shall be proportionately reduced.
2. If the sum insured by item No.2 be less than aggregate of the sums produced by applying the Rate of Wages for each department of the business (whether affected by the damage or not) to its relative Annual Turnover thereof the amount payable under Item No.2 shall be proportionately reduced.