Impact of maximum lead time of repair/replacement on premium

The loss of profit insurance policy differs from other insurance policies in respect of concept of Indemnity period. In other policies, the period of insurance (From….to….date ) & period of indemnity indicate the same thing. Let us try to understand the difference for a LOP policy.

Period of indemnity in a LOP policy is defined as a period based on an estimate of the maximum time, which would be required to resume normal production after a serious accident. ( Hence, also called Maximum Indemnity Period). It is the obligation & decision of the Insured to choose an indemnity period, as defined above.

Deciding on a shorter period than necessary  would mean a lower compensation in event of a claim. Selecting a period longer than required would mean wasteful premium outgo. Using his experience of running the business, the Insured is to undertake this exercise of scenario  building for different contingencies that may arise & chose the best balance between too short & too long.

 “Time and tide wait for none”- is an old adage. Let's try to understand its applicability in case of an insured who needs to re-start his business after a loss.  The following factors & their time sensitivity need to be considered in any action plan to resume normalcy. These in turn lead to best estimation of optimum Indemnity Period to be selected.

1. Nature of Insured business- seasonal/ otherwise. A seasonal business will have higher degree of time sensitivity compared to other business
2. Is a continuity and disaster recovery plan in place, so that immediate action is initiated on  occurrence of a contingency
3. Based on past experience of  the insured/ others in the same business, which equipment/ part of the machinery is expected to be affected in an accident
4. Criticality (relative importance) of the effected machinery in the manufacturing process as a whole
5. Time and cost of repair facilities available- in-house/ in vicinity of the factory/in the country/ abroad
6. Availability of replacement machine, if required & expected time lag  for the process
7. Can repair/ reinstatement work be carried on at the affected premises immediately
8. Are any regulatory approvals required before & after repair/ replacements
9. The expected time for testing and re-commissioning the factory
10. The support of Insurers in quickly assessing & finalizing the payable loss including interim financial payout, if required.