THE earthquake that happened in Gujarat in 2001 and the floods that crippled Mumbai in 2005 brought into focus the lack of awareness in availing an adequate insurance protection against such calamities, even among the educated professional entrepreneurs or small businessmen. In the subsequent months following the two events, there was some awareness about protection though appropriate insurance covers, public memory being short-lived, those who were not affected by a loss either ignored the need for taking insurance or postponed it for an 'appropriate' time.
Indian general insurance industry offers many different covers that can address the protection needs of various sections of society, from small households to big industries. Most of the big industries do take various insurance covers after looking at their risk exposures. Many a time, small businessmen or professionals do not understand their risk exposures or do not get adequate advice regarding the insurance cover that they should take.
Generally, small businessmen who avail loans from banks take a fire insurance policy on their bank's insistence. The fire insurance policy, available in India, is a comprehensive cover, which includes perils like storm, cyclone and flood. However, earthquake is an optional cover and one needs to specifically ask for it and pay an additional premium, though the premium rates are very low.
If a business is affected by flood and there is damage to the assets, having a proper fire insurance policy, to a large extent, will help in recovering the value of assets damaged. For many, this will be a small loss. A bigger loss could be the consequential loss that is suffered from the interruption in business, following damage caused by a flood. Depending on the extent of damage, business could be interrupted from a few hours to a few months or in some cases, even years. Though during such an interruption period, there is no production, an entrepreneur has to incur fixed expenses like rent, electricity charges, wages of employees and the like. And since there is no production, there is no revenue (or in some cases reduced production and reduced revenue), which means there isn't any net profit in the period, but fixed expenses continue to be incurred.
If the firm was making losses before the floods, following the floods, though there will not be any loss of net profit, the net loss may increase due to the continued fixed expenses. If there was no interruption in business, a part of these fixed expenses would have been covered through the margin realised from the revenue.
Due to the interruption in business, this margin is not available to cover the fixed expenses and this increases the loss to the concern. These risk exposures can be insured through a proper business interruption insurance. Such a cover, known as consequential loss (fire) insurance in the Indian market, is still not popular among small business concerns. Some insurance companies have come up with covers suitable for even small shopkeepers. This policy covers the loss of gross profit (net profit + fixed expenses), following an interruption in business. While availing a business interruption cover, the most important factor to be looked at is the way the sum insured is arrived at and the method of claim settlement. It is always better to take the help of your agent/broker/insurer to check these aspects, since it can have a major impact at the time of a claim.
