Before we explore the area of LOP extensions, we need to appreciate the difference between Material damage insurance policy and the other policy, known by different names- like Consequential Loss (CL)/ Loss of profit (LOP)/ Business interruption (BI) policy.
So, a basic underwriting requirement for a LOP policy is- there has to be a corresponding material damage policy before a LOP policy can be issued. In event of a claim, liability under the basic material damage policy is the pre-condition for liability under the LOP policy.
At the same time, it also needs to be appreciated that there can be factors other than - say the physical damage to a machinery- which can disrupt the functioning and hence the revenue and profit of the industrial unit.
For example- Let us consider a car manufacturing unit not being able to get the various components for car assembly, due to spare parts vendor being affected by-say pandemic/ catastrophe of nature. It is to be noted that there is no material damage to the machinery/ building etc. at the car assembly unit; but still the revenue and profits of the car assembly unit are being affected.
In fact, this is what had happened during the 2011 floods in East Asia. The component vendors' units having been affected by flood, it prevented them from supplying parts to Japanese automobile factories. As a result, the Japanese auto industry almost came to a complete halt.
Similar argument can be extended on the other end- to a buyer/customer . If the dealers of the Car manufacturing unit are not able to take delivery of the vehicles manufactured (due to say flood/fire damage at the Dealers' end), the car unit is forced to reduce its production resulting in lower revenue and profits.
The insurance solution for this need is- the option of extending the material damage proviso to the supplier/ customer premises. ie. the consequence of a loss or damage at either of these ends (supply or customer) - effecting the profits off the Car unit, can be covered by way of supplier/customer extension.