Our experts are often asked to examine the financial implications of prolonged shutdown of production following fire or machine breakdown incidents. This study is multi-disciplinary with the contribution of the engineers and finance technicians of the CES among our permanent team and / or collaborating staff.
For a company, the damage caused by a fire, a storm or a machine breakdown is not limited to the material damage directly caused by the disaster. If he accident has been important enough to stop the production, the company will have to deal with the repairs required by the event, but will also dry up its revenue.
Certain expenses will no longer be incurred during the stop period of production: purchases of raw materials, energy, transport, etc., theses are costs that vary according to production. But others will continue to run: these are all fixed costs independent of the level of production: financial expenses, depreciation, structural costs and at least for a certain time wages and social charges.
If production is stopped for a long period of time (as after a fire or broken machine may take several months or even more than a year to repair), the capital can be quickly absorbed by the fixed costs and the The company may never recover if it has not taken out insurance which proves indispensable in addition to that of the direct damage: it is the insurance of the Losses of Exploitation after fire or after Breakown of Machines, formerly called imperfectly Losses of benifits (Loss of Profit).
As it is a question of ensuring the fixed costs and possibly the profit which would normally have had the company if it did not suffer from a disaster, the subscription of the contract requires a careful study of the account of exploitation. Only companies with fully and regularly kept accounts can be insured. Generally, the choice of insured capital is based on an average of the fixed costs incurred over the last three known financial years. multiplies by the duration of the compensation period.
This must be assessed by the technical services engineers of the insured who can assess the time required for the complete restoration of the production line after the disaster, taking into account the clearing, the administrative authorizations that may be required, the order and manufacturing timeframes imposed by the supplier of machinery and equipment, delivery times, assembly and installation and testing, reconstruction of buildings, etc.
The compensation period may be a few months (six months for example) or exceed the annual duration of the contrats (eighteen months or two years, for example, if one plans for particularly long rehabilitation work). A deductible of a few days to a month is often provided to avoid the complex work of calculating the indemnity owed by the insurer when the restoration is quick and the period of production stop is too short to have a impact on the company's operating account.
Salaries and additional costs
Among the fixed costs that must be insured, wages can pose a particular problem of evaluation. Indeed, these can be considered at least partly as variable costs because if the company stops working after a major disaster that prohibits reclamation for several months, the interest of the company orders to the management to put the staff out of work or to dismiss them during the period of the work, even if it is necessary to rehire them when the activity can resume.
However, for reasons related to the social peace in the company, the need to avoid that employees or some of them, are hired by competitors, the importance of retaining a research team or a commercial network, the dismissal may appear to be contrary to the long-term interest of the company. In any case, the dismissal is expensive because it requires the payment of various legal and contractual allowances.
Reading on PE Guarantees and Indirect
Losses The clauses of the "LOSS OF OPERATION" guarantee of the company multi-risk fire insurance contracts stipulate the following: CUMULATIVE WITH INDIRECT LOSS INSURANCE It is agreed to specify in the contract that the compensation for indirect losses will not be deducted from the compensation under this contract when the expenses incurred do not come within the framework of permanent general expenses. This clause is just a reminder of the basic principle of insurance law that double compensation for the same costs and sections in the same claim and compensation period for two additional coverages is not possible (unjust enrichment). The clause quite simply stipulates that the insured person has the right within the framework of the PE cover to compensation for permanent overheads without deduction of the indirect losses paid except those which fall into the category of permanent overheads (obviously to avoid the principle double compensation) In the same way and in order to respect the basic principle of the insurance of non-double compensation, if the PE cover is extended for additional costs (in addition to permanent general costs), the principle also applies to compensation additional costs ie: the insured is entitled under the PE cover (stolen additional costs) to compensation for costs of additional costs without deduction of indirect losses paid except those which fall into the category of additional costs (obviously to avoid the principle of double compensation) Indirect losses in the fire guarantee are granted with a ceiling of 10% of damage to the insured goods (building, equipment and goods) and it is granted up to a ceiling. Compensation is granted against the presentation of proof of other indirect losses suffered by the insured apart from direct material damage. If the indirect losses claimed by the insured include components of permanent overheads, these will be deducted from the compensation in PE (stolen permanent overheads) If the indirect losses claimed by the insured include additional cost components (apart from the permanent overhead costs), these will be deducted from the PE compensation (stolen additional costs) while reminding that the additional costs in the PE coverage are generally contractually capped. Consequently, if the insured presents proof of indirect losses of an additional cost nature (and not permanent overhead costs) which exceed the limit contractually granted to the insured, then the compensation in additional costs is granted up to the specified limit in the contract and the PE guarantee (stolen additional costs). The balance (if any) is granted as part of the "indirect loss" guarantee annexed to the fire cover (obviously without exceeding the - ceiling - limit of the PI guarantee). Very Important: In addition, the quotation in the clauses of the PE guarantee on the fact that the compensation for indirect losses will not be deducted from the compensation under this contract when the expenses incurred do not come within the framework of costs permanent generals, implicitly indicates that direct losses are established against a justified list of costs compensable in IP to distinguish between the nature of the components of indirect losses and in order to be able to apply the convention and the rule of compensation in PE raised. If not, and if the PI are granted at a fixed rate according to the percentage specified in the contract clauses, the notion of complementarity between indirect losses and operating losses for the two ends of fixed permanent charges and additional costs becomes absurd and contradictory to the spirit and application of the contract.
