Question

What is the loss of sales due to dislocation due to fire?

Answer 1

The effect of outbreak of fire on a firm not only causes the destruction of properties but also disorganizes the business to a stage of dislocation. During the dislocation period, there is a loss of profit which the business would have earned during the period, had there been no accident of fire.

When the business is dislocated, the profit-earning capacity is also reduced. This reduced capacity continues till the destroyed portion is restored as before. During the period, i.e. from the date of fire to the date of restoration, there may be no profit or very low profit. Profit reduces because of the reduced production capacity and in turn sales is affected.

As long as the abnormal state continues, a businessman experiences reduction in sales, non-recovery of fixed expenses, sharp decline of earn­ings etc. Consequence of fire accident is thus a loss of profit which the firm would have otherwise earned. This loss of profit is not covered by ordinary fire policy insuring existing items.