S-08- Loss of Profits Insurance Mock Test 12
Loss of Profits Insurance becomes especially important when a claim occurs, as the insured then understands the practical value of the policy. Underwriting considers ownership, external risks, business circumstances, and other factors affecting potential losses. ALOP insurance primarily protects against revenue loss caused by delay in project start-up. The measure of indemnity is generally based on the rate of gross profit applied to reduction in turnover. Output basis can create issues where accumulated stocks maintain turnover despite reduced production. Additional Increase in Cost of Working may cover temporary premises, outsourcing, advertising, temporary plant, overtime, and additional staff. MLOP policies also contain specific exclusions for unlisted machinery and related losses.
1. According to the Chapter 9 introduction, when does the insured truly understand the importance of a policy?
a) At the time of purchasing the policy
b) At the time of policy renewal when premium is paid
c) It is only when the insured incurs a loss that the insured understands the importance of the policy. Any Policy is a piece of printed paper for the insured until and unless there is a claim
d) When the insurer sends policy documents
e) When the agent explains the policy features
2. What does the Ownership of the business indicate as an underwriting factor?
a) Sole proprietorship is always preferred by underwriters
b) Partnership firms are always rejected by underwriters
c) Large companies always get the lowest premiums
d) The ownership of the business is an important factor - Sole proprietorship firms are totally dependent upon the single person with lot more uncertainty compared to businesses owned by single individuals or by companies registered under companies act
e) Only public limited companies are insurable
3. What does the ALOP policy primarily cover in the context of project insurance?
a) Loss of profits due to fire damage to a completed factory
b) Loss of Revenue on account of delay in start-up of the project. The insured has to provide Financial statements/details of revenue earned during the indemnity period plus the indemnity period equal to the indemnity period after full production has been achieved
c) Loss of profits during the warranty period of machinery
d) Loss of profits from natural disasters only
e) Loss of revenue from theft of finished products
4. What is the Measure of Indemnity under Loss of Profit insurance?
a) The total value of the fire-damaged property
b) The replacement cost of all destroyed assets
c) The sum produced by applying the rate of gross profit to the reduction in turnover during an agreed period following damage - when the rate of gross profit is applied to reduction in turnover the amount of trading loss is ascertained
d) The difference between material damage claim and business income loss
e) The fixed premium paid for the consequential loss policy
5. What is the major risk to the insured under the Output basis of specification when accumulated stocks are involved?
a) The insurer may dispute the valuation of stocks at time of loss
b) The output basis does not provide fair indemnity when accumulated stocks are used by the insured to maintain turnover, in which case there will be no reduction in turnover although there is reduction in output
c) The insured may face double counting of output in multiple locations
d) The accumulated stock may be damaged in the same fire event
e) The insured cannot claim for shortage in output if stocks exist in warehouse
6. What types of extensions can be included under the Additional Increase in Cost of Working cover?
a) Only costs directly related to rebuilding damaged property
b) Additional rent for temporary premises, outsourcing of manufacture, advertising campaigns to win back customers, hire of temporary plant, overtime payments to staff, and employment of additional staff
c) Only costs that can be recovered from the responsible party
d) Legal costs and professional fees in connection with the claim
e) Only costs approved by the insurer prior to being incurred
7. Which of the following is listed as Standing Charge item number 2?
a) Interest on loans, bank overdrafts and debentures
b) Pensions
c) Rent, rates and taxes (Tax on profit is included in net profit)
d) Director fees and remuneration
e) Advertising and publicity expenses
8. Which of the following is specifically EXCLUDED under the MLOP policy?
a) Loss resulting from breakdown of any listed machinery
b) Loss resulting from increase in cost of working to maintain output
c) Loss or damage to machinery or other items which are not listed in the list of machinery insured even if the consequence of material damage to an item indicated in the list of machinery insured is involved
d) Loss arising from sudden and unforeseen physical damage to machinery
e) Loss due to failure of external electrical supply
9. What happens to variable expenses after a fire if turnover is reduced according to the chapter?
a) Variable expenses remain at full amount despite the reduction in turnover
b) Variable expenses increase due to disruption of normal production
c) Variable expenses may also be reduced in the same proportion as the reduction in turnover resulting in no loss to the insured on this account
d) Variable expenses must still be paid in full as per contractual obligations
e) Variable expenses are converted to fixed costs during the fire period
10. What are External risks as an underwriting factor?
a) Risks that are within the control of the insured
b) Risks that only affect the employees of the business
c) Risks that are only related to government regulations
d) Many risks that are involved due to surroundings and from the factors which are beyond the control of the insured
e) Risks that are only related to fire and theft
