Indemnity Period Clause

Purpose

The indemnity period (also called the maximum indemnity period, MIP) limits how long an insurer will pay for lost gross profit and continuing costs after an insured property damage event. It begins with the occurrence of the damage, not with the actual suspension of trading, and ends once the results of the business are no longer affected by the damage – but no later than the agreed maximum duration. The clause makes the insured exposure time-bound and excludes cover for pure loss of market share once trading has resumed.

Effect and limits

The length of the indemnity period must reflect realistic reinstatement and start-up timescales; for specialised machinery, long-lead spare parts or large plant, periods of 18 to 36 months are not unusual. Two phases are typically distinguished within the period: the physical reinstatement phase and a subsequent recovery phase, during which turnover and profit only gradually return to pre-loss levels. Extension provisions such as an “extended period of indemnity” broaden cover deliberately beyond the point of physical reinstatement but are conceptually distinct from the base indemnity period and usually require a separate agreement.

Negotiation and practice

The indemnity period is a key negotiating point when structuring a programme: it drives not only the sum insured (projected gross profit over the period) but also the premium. Underestimated indemnity periods regularly create coverage gaps when actual reinstatement takes longer than originally assumed, particularly where global supply-chain dependencies and long replacement lead times for specialised components are involved. Regular review against current rebuilding and replacement timescales is therefore part of sound programme maintenance.