S-08- Loss of Profits Insurance Mock Test 14
Consequential Loss or Business Interruption Insurance protects the insured against financial losses resulting from interruption of business following insured material damage. The Operative Clause requires damage by a peril covered under the Fire Policy and consequential interruption or interference with business. Gross Profit and Rate of Gross Profit are important for calculating indemnity, while the Output basis determines gross profit based on output. The Dual Basis method provides separate treatment for wages, helping manage Gross Profit sums insured more effectively. Underwriting decisions generally involve contacting the producer, putting coverage into effect, and recording policy information. Business Interruption insurance remains relatively uncommon in India compared with property insurance.
1. What does the Operative Clause of the Consequential Loss Policy state?
a) That the premium must be paid before any coverage starts
b) That if any building or other property or any part thereof used by the insured for the purpose of the business is damaged by the perils covered under the Fire Policy and the business carried on by the insured be in consequence thereof interrupted or interfered with then the company will pay to the insured in respect of each item in the schedule the amount of loss resulting from such interruption
c) That the insurer will not pay any claims under any circumstances
d) That only government-approved perils are covered
e) That the policy only covers total loss of business
2. In Case Study 1, what was the Rate of Gross Profit calculated from the previous year data?
a) 0.2
b) 0.25
c) 0.3
d) 0.35
e) 0.4
3. When Heath introduced his new comprehensive Business Interruption policy, what did some insurance companies call it?
a) A revolutionary product
b) A much-needed cover
c) Ruining fire insurance
d) An unnecessary cover
e) A profitable venture
4. What advantage does the Dual Basis method offer over insuring wages under gross profit?
a) It reduces the total premium payable by the insured significantly
b) It eliminates the need to maintain wage records
c) The wages are entirely removed from the gross profit cover and receive separate treatment, enabling the insured to manage the sum insured for gross profit more carefully, and facilitating adequate sums insured
d) It provides cover for 100% of wages without any limit
e) It allows wages to be insured against non-fire perils as well
5. How many steps does implementing underwriting decisions generally involve?
a) 2 steps
b) 4 steps
c) 5 steps
d) 3 steps: Contact the producer; Put coverage into effect; Record the policy and applicant information
e) 6 steps
6. How is Rate of Gross Profit defined under the Output basis of specification?
a) It is the ratio of gross profit to turnover for the prior financial year
b) It is the rate of gross profit per unit earned on the output during the financial year immediately before the date of damage
c) It is the net profit divided by total output during the indemnity period
d) It is gross profit expressed as a percentage of revenue
e) It is the proportion of standing charges to output
7. During which period did the Association of British Insurers (ABI) publish new Business Interruption wordings?
a) 1979 to 1981
b) 1969 to 1971
c) 1989 to 1991
d) 1999 to 2001
e) 1959 to 1961
8. Under the Period Basis (Pro-rata) wages insurance, what is the premium multiple for a period not exceeding 8 weeks?
a) 3.4 times the basic rate
b) 2.6 times the basic rate
c) 2.1 times the basic rate
d) 1.8 times the basic rate
e) 1.5 times the basic rate
9. Even today in India, what is the status of Business Interruption policies compared to total Property insurance policies?
a) They form the majority of policies issued
b) They are equal in number to property damage policies
c) The number of policies issued for Business Interruption are only a miniscule percentage of total policies which cover Property damage
d) They exceed property damage policies
e) They are growing at 50% per year
10. What is a key condition for the Operative Clause to trigger payment of a claim?
a) The business must have been operating for at least 5 years
b) A fire or other peril covered under the Fire Policy must occur and damage property used for the business at the insured's premises and the business must be interrupted or interfered with as a consequence
c) The business must have fire safety certificates
d) The business must have a minimum turnover annually
e) The business must have no prior claims history
