Departmental Clause

Purpose

Where a business is run in several departments with separately ascertainable accounting records, a purely business-wide loss calculation can allow a fortuitous increase in turnover in an unaffected department to offset, on paper, a genuine reduction in turnover in the department hit by the damage – masking the true extent of the loss. The departmental clause requires the loss to be calculated separately for each affected department, so that improvements in unaffected departments do not reduce the claim.

Effect and limits

The clause requires that departments maintain their own, demonstrable trading results (turnover, rate of gross profit); without such evidence it cannot be applied. For assessing underinsurance, however, the aggregate of all departments – including unaffected ones – is still compared against the sum insured, so reviewing the affected department in isolation is not sufficient. The clause governs loss calculation only and does not automatically change the agreed deductible, which generally continues to be assessed on a whole-business basis unless otherwise agreed.

Negotiation and practice

For diversified businesses with several product lines or units within one plant, the clause is advantageous because it enables a fairer loss assessment and tends to result in lower effective deductibles per department. When structuring the wording, it should be clarified whether the time-based deductible is also to be applied on a departmental basis, since standard wordings do not provide for this automatically.