Loss of Profits Insurance

Loss of Profits (LoP) insurance is the traditional term used in the Indian insurance market for what is globally known as business interruption coverage. While the two terms are often used interchangeably, LoP in India carries specific connotations rooted in the legacy tariff-era wordings that governed Indian general insurance before detariffing in 2007. An LoP policy attaches to and follows the fortunes of the underlying material damage policy — typically a Standard Fire and Special Perils (SFSP) policy — meaning it only responds when there is physical damage from a covered peril that causes a measurable interruption to business income. The policy indemnifies two components: the shortfall in gross profit (defined as net profit plus insured standing charges) during the indemnity period, and the increased cost of working, which are reasonable additional expenses incurred to reduce the loss of turnover. The indemnity period begins from the date of the incident and extends for the time required to restore business to pre-loss revenue levels, subject to the maximum indemnity period selected. A critical concept in Indian LoP practice is the distinction between standing charges and variable charges. Standing charges are fixed overheads that continue regardless of the interruption — such as rent, permanent employee salaries, and loan interest — while variable charges like raw materials and freight reduce with turnover and are typically excluded from the sum insured. IRDAI-regulated LoP policies in India require careful declaration of turnover, gross profit rate, and standing charges, and the application of the average clause for underinsurance makes accurate declarations essential to avoid claim shortfalls.