National Centre for Insurance Learning

NATIONAL CENTRE FOR INSURANCE LEARNING

NARENDRAPUR

Some thoughts…

Few preliminary observations:

1. The inspiration for the project came in the chamber of Shri K P Brahma, GM(P) when it was suggeste that we print a book & make it available to the aspirants in the Class I Promotion exercise. 2. 2. Our fundamental tenet is – the Democracy of knowledge. We believe that in the Age of Informationavailability

of information should be just a click away for everyone. The competitive edge of a user group should come from the depth of understanding & utilisation of the available information. (Incidentally , we at NCIL practice what we preach. We are trying to share with all NICians on the Company Intranet- all material - as basic reference or as PPT. Our endeavour is to further enrich & expand this information base.)

3. This is a Team Work. It is a compilation of the work earlier done at Ahmedabad & somewhat updated & re-organised by the team at HO/ NCIL in Kolkata.

4. For us at NCIL- this was our maiden foray in the field of editing. We tried to learn on the run. In retrospect we feel that we were somewhat overambitious to begin with- both in terms of tight time schedule & the content. Our initial target was to create a reference source which will have its utility beyond the current Promotion exercise & to ensure an uniform layout throughout the content. 5. We have partly succeeded in this but at the cost of time overrun.

6. The material is in your hands now. We await your feedback to improve on this in the next edition. 7. With our one edition experience, we have started working on the next one right now. Please mail your inputs to- s.singh@nic.co.in, s.k.pradhan@nic.co.in, a.k.das@nic.co.in,

u.bhattacharya@nic.co.in

We acknowledge with thanks the role of all who have inspired &/or contributed to this project now or in the earlier versions. At the same time, with humility, we regret our editorial shortcomingswhich we hope to overcome with more experience.

Contents

• 1. FIRE INSURANCE 1 - 24

• 2. BUSINESS INTERUPTION (LOP) 26 - 40 • 3. INDUSTRIAL ALL RISK 42 - 46

• 4. ENGINEERING INSURANCE 48 - 76 • TESTS 76 - 118 • 5. MISCELLANEOUS INSURANCE 120- 138 • TESTS 138-- 173 • 6. MOTOR INSURANCE 173- 206 • TESTS 206- 218 • 7. MARINE INSURANCE 240- 254 • 8. AVIATION INSURANCE 256- 299 • TESTS 299-324 • 9. RE-INSURANCE 326- 337 • TESTS 338-352 • 10. FINANCE TESTS 354- 408 • 11. HUMAN RESOURCE * 420 – 469 • TESTS 496-502

• ( * Page numbering error)

BASIC PRINCIPLES OF FIRE

INSURANCE CONTRACT:

•

Insurable Interest :

•

Essential Feature – The legal right to insure.

•

_{By ownership,}

•

_{Bailer/ Baillie,}

•

_{Leaser/ Lessee;}

•

_{By Agreed Bank Clause;}

•

_{Goods held in trust; etc.}

•

_{Actual time when the interest should exist – both at the time during issuance of}

•

_{policy and also at the time of claim. Assignment of Insurable interest in various}

•

_situations

• Utmost Good Faith

• The contract put the proposer in a superior position-

facts material to the risk with

• example - duty of utmost good faith evolves-reciprocal

duty- breach of duty may

• make the contract void or voidable depending upon the

nature of the breachbreach

• of condition - duration of observance of the duty-before

accepting the risk,

• throughout the policy- following a loss.

• Indemnity

• THIS INSURANCE IS MEANTFOR:

• ·

• ·Plant and machinery

• ·Furniture, fixtures and fittings

• ·Other contents

• ·Electrical installations

• ·Stocks of raw materials and finished goods

• ·Stocks in process

• WHO CAN TAKE THE POLICY?

• ·Those who are having insurable interest in the property

• ·Owners

• ·Lessor/lessee

• ·Mortgagors/mortgagees

• ·Bailees

• Buildings

• ·Trustees

•_{PERILS COVERED UNDER STANDARD FIRE & SPECIAL PERILS} •_POLICY:

• ·Fire- Excl. inherent vice, undergoing heating & drying, burning of • property by public authority.

• ·Lightning.

• ·Explosion/ Implosion excl. to pressure vessels by own explosion/ • implosion.

• ·Aircraft Damage.

• ·Riot, Strike& Malicious Damage

• ·Storm including hailstorm, cyclone, typhoon, tempest, hurricane, • tornado, flood & inundation.

• ·Impact damage- rail/road vehicles or animals not belonging to the • insured/ occupier.

• ·Subsidence & landslide/ rockslide.

• ·Bursting, overflowing of water tanks, apparatus & pipes. • ·Missile testing operations.

• ·Leakage from automatic sprinklers. • ·Bush fire- excl. forest fire.

• The loss/ damage under above perils may be of fire or non-fire in nature. Both • types of losses are covered under the policy. In other words the policy is Material • Damage policy which covers physical losses to the insured property arising out of • all above perils.

• STFI – Storm, tempest, flood and inundation (Flood group of perils) and RSMD – • Riot, Strike, Malicious Damage can be opted out with reduction in premium rate.

•

_{ALOSS ORDAMAGE MAY BE SAID TO BE BY FIRE WHEN:}

•_{damage may be said to be by fire when there has been ignition of insured} •_{property which was not intended to be ignited. When insured property} •has been damaged otherwise than by ignition as a direct consequence of •the ignition of other property not intended to be ignited.

•·Damage by smoke, sparks, water etc. consequent on ignition of other •_property.

•_{·Fire must be accidental and fortuitous}

• EXCLUSIONS UNDER THE FIRE POLICY:

• ·Excess- Applicable to all risks except dwellings with individual owners •For policies having S.I.upto Rs. 10 crs, per location:

•_{5% of claim amount subject to a minimum of Rs 10,000}

•_{For policies having S.I.more than Rs. 10 crs but upto Rs. 100 crs. per} •location:

•5% of claim amount subject to a minimum of Rs 25,000

•For policies having S.I.more than Rs. 100 crs but upto Rs. 1500 crs. per •_location:

•_{5% of claim amount subject to a minimum of Rs 5,00,000}

•For policies having S.I.more than Rs. 1500 crs but upto Rs. 2500 crs. per •location:

•5% of claim amount subject to a minimum of Rs 25,00,000 •_{For policies having S.I.more than Rs. 2500 crs per location:} •_{5% of claim amount subject to a minimum of Rs 50,00,000} •_{N.B. Excess is applicable per event per Insured}

• _{·War perils.} • ·Nuclear losses.

• _{·Pollution, contamination unless caused by insured perils.}

• ·Curios, documents etc. >10,000Rs., Goods held in trust or on commission • unless specifically covered

• _{·Change of temp. (Stocks in cold storage)} • ·Pure electrical fires.

• _{·Architects etc. fees (beyond 3% of claim amount) & Removal of debris} • (beyond 1% of claim amount).

• _{·Consequential losses.}

• ·Spoilage due to cessation of process. • ·Theft- during/ after loss.

• _{·Earthquake.}

• ·Terrorism damage.

· Shifting of property to other place – But Mechanical items & equipments are

• covered for 60 days if shiftOut of the above exclusions certain are covered as ADD-On Covers. e.g. • _{Terrorism, Earthquake, architects fees(beyond 3% of claim amount) & removal}

• of debris(beyond 1% of claim amount), spoilage (due to cessation of process), • curios /documents etc. > Rs.10,000/- can be covered for actual value under Misc. • _{Department (subject to declaration).}

• _{Out of the above exclusions certain are covered as ADD-On Covers. e.g.}

• Terrorism, Earthquake, architects fees(beyond 3% of claim amount) & removal • _{of debris(beyond 1% of claim amount), spoilage (due to cessation of process),} • curios /documents etc. > Rs.10,000/- can be covered for actual value under Misc. • Department (subject to declaration).

EXTENSIONS OR ADD ON COVERS OFFIRE POLICY:

• _{Architects, surveyors and consulting engineers' fees – in excess of 3% of} • claim amount.

• _{Removal of Debris –in excess of 1% of claim amount.}

• DOS in cold storage due to power failure/ change of temperature due to • _{insured Peril.}

• Forest fire.

• Impact Damage- Own vehicles. • _{Spontaneous combustion.}

• Omission to insure additions, alterations & extensions. • _{Earthquake (fire & shock).}

Spoilage (material damage) covers. • _{Leakage & Contamination cover.} • Temporary removal of stocks. • Loss of rent.

• _{Additional rent for alternative premises.} • Start up expenses.

•

_{NEW ADD ON COVERS FILED WITH IRDA}

• _{1. Housebreaking}

• _{2. Electrical apparatus clause}

• 3. Spontaneous combustion (wording modified)

• _{4. Insurance of jetties, docks and other properties erected in water &} • damage by water borne bodies clause

• _{5. Boiler explosion damage clause} • 6. Start up/shut down expenses clause • 7. Accidental damage clause

•

_{GENERALCONDITIONS OFFIRE AND SPECIALPERILS POLICY:}

• 1. Misrepresentation, non-discloser of material facts by the insured makes • _{the policy voidable}

• _{2. Cessation of cover on fall or displacement (other than by an insured peril)} • _{of insured property on expiry of 7 days}

• 3. Cessation of cover on material alteration, if unoccupied for more than 30 • days or passage of insurable interest

• 4. Loss covered under any marine policy is not payable • 5. Cancellation

• _{6. Duties of the Insured in the event of an occurrence giving rise to a claim} • 7. Rights of the Insurer in the event of a claim

• 8. Fraudulent means by Insured forfeits all benefits under the policy • 9. Insurer's rights to reinstate or replace the property in case of a claim • 10. Average clause

• 11. Contribution • _{12. Subrogation} • 13. Arbitration

• 14. All communications by insured to be in writing • 15. Reinstatement of Sum Insured after a claim

•

_CLAUSES

•

_{OMISSION TO INSURE, ALTERATIONS, EXTENSIONS CLAUSE}

•

_{·Buildings, plant & machinery, furniture, fixtures and fittings can be}

•

_{covered up to 5% of the sum insured without specific insurance.}

•

_{·5% additional premium to be paid at inception.}

•

_{·Within 30 days of expiry of policy all such additions, etc. to be declared}

•

_{and premium on this account to be adjusted.}

•

_{TEMPORATYREMOVALOFSTOCKS- CLAUSE}

• _{·Up to 10% of stocks in process can be covered whilst lying at un specified} • locations undergoing process.

• _{·10% extra premium to be paid in advance.} • _{·No adjustment of premium.}

•

_{REINSTATEMENTVALUE CLAUSE}

• _{·For building, plant & machinery, electric installations, F/F/F only.} • ·Sum Insured to represent Reinstatement value of the property insured. • _{·In the event of loss payment for Reinstatement Value of property of same} • kind or type, improvements, if any, to be borne by the insured.

• _{·Depreciation not to be deducted.} • ·Average clause is still applicable

• ·Reinstatement of property is compulsory.

• _{·Within 6 months intimation to reinstate to be given to insurer & actual reinstatement} • to be completed within 12 months- extension possible with

• _{prior approval of insurer. Otherwise it will follow normal indemnity} • without RIVbasis.

• _{·Reinstatement possible at other site provided liability of the insurers is} • not increased.

•

LOCALAUTHORITIES CLAUSE

• _{·Extension for Reinstatement Value policies endorsed by Local Authority} • Clause. Wherever RIV Clause is attached Local Authority Clause is a • must to attach.

• _{·No additional premium for this extension.}

• ·Covers additional cost to comply with local regulations in reinstating the • _property.

• ·Liability if reduced under policy- under clause also reduced • _{proportionately.}

• ·Applies only to the damaged property, prior to extension losses not • covered, additional tax, duty etc. not payable.

•

_{AGREED BANK CLAUSE}

• _{·To be applied when financial institution is interested.} • ·Any money payable to be paid to ‘Bank’.

• _{·Notice by Co. to 'Bank' sufficient.}

• ·Adjustment, settlement, arbitration- if made by 'Bank' binding on the • _insured.

• ·Alteration etc. in risk not to prejudice 'Bank' interest.

• ·Co. will be subrogated of 'Bank's rights of recovery from insured on • _payment.

•

_{DESIGNATION OFPROPERTYCLAUSE}

• ·Available without additional premium

• _{·Whatever designation is given to a particular item of property in Insured's} • _{books of accounts is accepted as such by the Insurers.}

•

_{DECLARATION POLICY}

• ·Applicable for policy covering stocks only. To take care of frequent

• fluctuations in stocks/stock values, Declaration Policy can be granted subject to the following conditions (Standard Declaration Clause J to be

• inserted).

• ·To take care of frequent fluctuations in the SI of stock (i.e. current asset) • this policy is issued.

• ·The minimum sum insured shall be Rs 1 crore in one or more locations • and the sum insured shall not be less than Rs. 25 lakhs in atleast one of • these locations. It is necessary that the declared values should

• approximate to this figure at sometime during the policy year. • ·Reduction in SI not allowed during the currency of policy.

• ·Maximum refund on downward adjustment 50% and no upward • adjustment is allowed.

• ·Basis of valuation- The basis of value for declaration shall be the Market • Value only anterior to the loss.

• ·If after occurrence of any loss it is found that the amount of last

• declaration previous to the loss is less than the amount that ought to have • been declared, then the amount which would have been recoverable by • the insured shall be reduced in such proportion as the amount of said last • declaration bears to the amount that ought to have been declared.

• _{Basis- Monthly declarations based on either}

• a) The average of the values at risk on each day of the month or

• _{b) The highest value at risk during the month shall be submitted by the Insured} • latest by the last day of the succeeding month.

• If declarations are not received within the specified period, the full sum insured • _{under the policy shall be deemed to have been declared. It is not permissible to} • issue declaration policy in respect of:

• _{·Insurance required for a short period.} • ·Stocks undergoing process.

•

FLOATER POLICY

• ·Floater Policy can be issued for stocks at various locations under one • _{Sum Insured (The Standard Floater Clause I, Annexure A shall be} • _{attached to such policies).}

• ·Unspecified locations are not allowed.

• _{·Applicable Fire Rate= Highest rate applicable to any of such locations} • +10%

• _{·Presence of "Kutcha" construction under any location may be ignored for} • rating.

• ·If stocks are in godown/ process blocks in same compound, no floater • _{extra premium.}

• ·In case Stocks in a process block are covered under the Floater Policy andthe rate for the process block is higher than the storage rate, the process

• _{FLOATER DECLARATION POLICIES}

• _{·Floater Declaration policy (ies) can be issued subject to a minimum sum} • insured of Rs 2 Crores and compliance with the Rules for Floater and • _{Declaration Policies respectively.}

• ·The minimum retention shall be 80% of the annual provisional premium. • _{·Standard Floater Clause I and Declaration Clause J – both shall be}

• attached to Floater Declaration policy.

•

_{VALUED POLICY}

• _{When market value cannot be ascertained, agreed value policy can be issued for} • work of art, curious, etc.

•

_{LONG TERM POLICY}

• It can be issued only for dwellings issued for minimum period of three years and • _{maximum can be for any number of years but discount is maximum for 10 years –} • Policies for a period exceeding 12 months shall not be issued except for

• "Dwellings".

• Mid-term Cover may be granted for the deleted perils of STFI &/or RSMD.

• Generally, it is not permissible to grant mid-term cover for STFI and/or RSMTD • perils. The following provisions shall apply, where such covers are granted midterm: • Insurers must receive specific advice from the insured accompanied by payment • of the required additional premium in cash or by draft. This additional premium • shall not be adjusted against existing Cash deposits or debited to Bank guarantee. • Mid-term cover shall be granted for the entire property at one complex

• /compound/location covering the entire interest of the Insured under one or more • _{policy(ies). Insured shall not have any option for selection.}

• Cover shall commence 15 days after the receipt of the premium.

• The premium rates as under shall be charged on short period scale (as per Rule 8) • _{on full sum insured at one complex/compound/location covering the entire}

• interest of the insured for the balance period i.e. up to the expiry of the policy.

• Payment of Premium: Premium shall be paid in full and shall not be accepted ininstallments or by deferred payments in any form.

• _{N.B:- It is not permissible to split sum insured of the same property under various} • policies for different periods of insurance to derive advantage of deferred

• _{installments for payment of premium. Notwithstanding the above, different} • policies may be issued for stocks where circumstances necessitate issuance of • such policies.

• _{Minimum Premium: Minimum premium shall be Rs.100/- per policy except for} • risks ratable under Section III and 'Tiny Sector Industries' under Section IV where • _{the minimum premium shall be Rs. 50/ per policy.}

•

_{PARTIAL INSURANCE : It is not}

permissible-• _{·to issue a policy covering only certain portions of a building.}

• Notwithstanding this, the plinth and foundations or only the foundation • _{of a building may be excluded.}

• ·to issue a policy covering only specified machinery (except Boilers), • _{parts of machine or accessories thereof housed in the same block/} • building.

• ·N.B. Where portions of a building and/or machinery therein are under • _{different ownership, it is permissible for each owner to insure separately} • but to the full extent of his interest on the building and/or machinery • _{therein. In such cases, the Insured's interest shall be clearly defined in the} • policy.

• _{·Rates for Short Period Insurance: Policies for a period of less than 12} • months shall be issued at the rates set out hereunder:

• _{For a period not exceeding 15 days 10% of the Annual rate} • –do– 1 month 15% of the Annual rate

• _{–do– 2 months 30% of the Annual rate} • –do– 3 months 40% of the Annual rate • –do– 4 months 50% of the Annual rate • _{–do– 5 months 60% of the Annual rate} • –do– 6 months 70% of the Annual rate • _{–do– 7 months 75% of the Annual rate} • –do– 8 months 80% of the Annual rate • _{–do– 9 months 85% of the Annual rate}

• For a period exceeding 9 months The full Annual rate

•

_{CANCELLATION OFPOLICY:}

• ·At insured's option – Short period scale. • _{·At Insurer's option – Pro-rata.}

• _{·Replacement of policy by new annual policy with same or higher} S.I.-• _Pro-rata

•

_{SUM INSURED}

•

_{FIRE INSURANCE POLICY- SI SHOULD BE ADEQUATE –}

•

_{OTHERWISE FOR UNDERINSURANCE WE NEED TO APPLY PRORATA}

•

_{CONDITION OF AVERAGE CLAUSE.}

• _{·S.I. represents the limit of liability under the policy.} • _{·S.I. is the amount on which the premium is charged.}

• ·Consequences of insuring for < or > than actual value of property is • underinsurance or over insurance.

•

SUM INSURED FOR BUILDINGS:

• ·Original cost- Inadequate for insurance purpose except when new. • _{·Book value- Not considered in Insurance (Adequate only for the first} • _{year and not for succeeding years- considering the depreciation aspect).} • ·Market value- Present cost less depreciation for age and/ or usage. • _{·Reinstatement value- Present cost of replacement ( No depreciation} • applied)

• _{·Formulae: Market Value = Reinstatement Value less (-) Depreciation.} • ·Land value not to be included.

• ·No fixed rate of depreciation- it depends upon the age and future • _{expected life.}

• ·Items like electrical installations and fittings to be included in the • _{building value.}

•

_{SUM INSURED FOR PLANT& MACHINERY}

:

• ·SI = Landed cost at site + installation charges.

• _{·Reasonable depreciation depending upon the age and future life to be} • deducted.

• _{·RIVpolicy has no depreciation.}

• _{·Items like accessories, electrical fittings and other things which are} • necessary for running of the machinery to be included in the machinery • _value.

SUM INSURED FOR STOCKS

Raw materials- Cost price including all the expenses like octroi, freight • _{etc. to bring up to the place.}

• _{·Stocks in Process: Cost of raw materials + process cost including labour,} • _etc.

• ·Finished goods –Manufacturer - Cost of manufacturing. • ·Wholesaler - Purchase price from manufacturer.

• ·Retailer- purchase price from wholesaler

•

TARIFF PROVISIONS

• ·General Rules & Regulations

• _{·Standard Fire and Special Perils Policy}

• _{·Dwellings, Offices, Hotels, Shops Located outside the compounds of} • Industrial/Manufacturing Risks

• _{·Industrial Manufacturing Risks}

• ·Utilities located outside the compound of Industrial/Mfg. Risks • _{·Storage Risks (Godown &/or in Open) outside the compound of} • industrial/mfg. Risks.

• ·Tank Farms/Gas Holders outside the compound of Industrial/MFG. • _Risks

• ·Add-on Covers

• _{·Annexure A: Standard Clauses} • ·Annexure B : Proposal Form

•

_{RATING OFSTADARD FIRE & SPECIALPERILPOLICY}

•

_{RATING UNDER THE POLICY DEPENDS UPON THE FOLLOWING}

•

FACTORS:-• ·Occupancy • _{·Construction}

• ·Fire Extinguishing Appliances.

• _{·Option to delete RSMD &/or STFI Add on covers.}

• ·Voluntary Higher Deductible (Excess) opted by Insureds. • ·Claims experience

• ·Principle of 'One Risk One Rate' –whichever will be higher of Process • (Mfg.) risks, or ii) Storage risk,

• _{·Entire property in one complex/ compound will attract the same rate} • irrespective of kind of occupancy (Mfg./ storage/ utilities etc.).

• _{·Dwelling exempted from the above rule.}

• ·Two or more factories in the same compound /independent products – per • se rating if detached, otherwise the highest rate.

•

_{FORSTORAGE RISKS RATING DEPENDS UPON OCCUPANCY- TYPE OF STORAGE}

• _{·Non- hazardous} • ·Category I goods • _{·Category II goods} • ·Category III goods • _{·Open storage} • ·Tank farms, etc.

• For simple risk like dwellings, offices, hotels, shops etc. rating Per Se i.e. on its • _{own without considering other occupancies in the building.}

•

_{FOR MULTIPLE}

OCCUPANCIES:-• ·For Entire Building Tariff Rate Rs. 1.80%o less De-Tariff Discount. • ·For Contents of individual owner - Per Se (Partially on-merit).

•

_{DISCOUNTS APPLICABLE}

• _{·For fire fighting appliances.}

• ·For deletion of certain perils like STFI & RSMD

• _{·If sum insured is more than 50 Crores – for claim experience.} • ·For opting voluntary deductibles.

• _{·Discount for paid up capital.}

• ·De-Tariff Discounts for good features/ technical features/ ISO • Certification or other Accreditations.

•

_{RATING OFRISKS IN MULTIPLE OCCUPANCIES}

• _{One of the principles of rating in fire insurance is that if risks with different degrees} • of fire hazards are close to one another then the higher hazard risk may cause

• _{spread of fire to other risks close by. Hence this factor should be considered while} • rating a risk. For simplification the tariff has allowed per se rating for contents of • _{each insured as per their occupancy.}

•

_SILENTRISK:

• _{·Factories where no manufacturing / storage activities are carried out} • continuously for 30 days or more.

• _{·Premium rate is lower than working rate.}

• ·The silent rates are not applicable if a risk goes silent following a loss • under the policy.

CLAIMS

•

_{DUTIES & RESPONSIBILITIES BEFORE LOSS:}

• _{·To intimate}

insurer-• ·In case of any fall / displacement of building or any part without • operation of any insured peril within 7 days.

• _{·Alterations of trade, manufacturing, occupational change immediately.} • ·If un-occupancy for more than 30 days.

• _{·Change of interest by sale etc.}

•

_{DUTIES & RESPONSIBILITIESAFTER LOSS (CLAIM PROCEDURE):}

• _{·Intimation to fire brigade, police, etc.}

• ·Loss minimization exercise to be taken by the insured. • _{·Notice to insurer within 14 days.}

• ·Co operation with surveyor when appointed.

• _{·Lodge claim within 15 days with supporting documents.}

• ·Furnish particulars of other insurances available with the affected • properties.

•

_{COSTREDUCTION MEASURES}

•_{·Opt for clause like Designation of Property clause- No Extra premium.} •_{·Insure non-stock items on Reinstatement Value basis.}

•·For non-stocks items opt for 'Omission to insure …. Clause' and see that •at the end of policy within 30 days the insured send the declaration. •·Go for stocks declaration policy for finished goods and raw materials, •send declarations in time to take the maximum advantage.

•_{·Floater cum declaration policy decision depends upon the fluctuations in} •_{the stock levels.}

•·When many locations are covered and when it is not possible to keep a •track of sum insured at every location, better to go for a floater policy. •·Opt for suitable voluntary excess.

•·Keep fire fighting system in good working condition, obtain periodical •_{certificates.}

•_{·Intimate to the insurer when in any unit production stops for more than 30} •days.

•·Advice decrease in sum insured immediately.

•·As far as possible go for annual cover- avoid short period covers they are •Costly.

•_{·Though it is cost saving it is not advisable to go for deletion of flood, etc.} •_{unless the unit is situated in area where chances of flood are NILHowever} •this should be a thoughtful decision.

•·Riot etc. perils not to be deleted.

•·Premium can be saved by deleting from the cover the value of plinths and •_{foundations of the buildings.}

•

_{ISSUES RELATED TO FIRE CLAIMS:}

• _{·The processing and settlement of claims constitute one of the most} • important functions in an insurance organization. Indeed, the payment • _{of claims may be regarded as the primary service of insurance to the} • client. The prompt and fair settlement of claims is the hall mark of good • _{service to the insuring public.}

• ·The proper settlement of claim requires a sound knowledge of the law, • principles and practices governing insurance contracts and in particular, • _{a thorough knowledge of the terms and conditions of the standard}

• policies and various extensions and modifications there under.

• _{·Finally we can conclude that prudent underwriting of the policy ensures} • prompt settlement of claims which is main stream to satisfy the insured.

•

_{INTIMATION OFCLAIM:}

• _{·Claim intimation is to be given in time along with estimated amount of} • loss. In case, claim intimation is delayed, proper clarification is required • _{to be obtained. Further, amount of loss is not ascertainable instantly, then} • sum insured of the affected property may be the point of consideration for • _{the purpose of appointment of surveyor.}

• ·On receipt of claim intimation, the first step is to examine the policy from • the underwriting point of view to confirm the acceptance of liability

• _{under the policy.}

• ·Claim is registered and claim no. is allotted and surveyor is appointed • _{based on the estimated amount of loss declared.}

• ·As per present practice, the financial authority for appointment of • _{surveyor is same as the financial authority for settlement of claim.} • ·As per IRDAguide line, the surveyors are categorized as'A', 'B' and 'C' to • survey and assess the loss under Fire and Engineering Deptt. with the • _{limit of under noted estimated amount of loss.}

• ·Category 'A' : Above Rs. 20.00 lacs (LOP-above 50.00 lacs) • _{·Category 'B' : Above Rs. 5.00 lacs ( do -upto 50.00 lacs)} • ·Category 'C' : Upto Rs. 5.00 lacs (no provision)

• _{In case, Interruption Loss is reported, estimate amount of loss is to be added with} • estimate amt. of loss under M.D. Policy and then surveyor would be appointed.

•

_{FINANCIALAUTHORITYFOR SETTLEMENTOFFIRE CLAIMS.}

80,00,000/-• _{Deputy General Manager : Rs.} 100,00,000/-• General Manager : Rs.

200,00,000/-• _{Chairman-cum-Managing Director : Rs.} 400,00,000/-• H.C.C. : ---

Actuals.---• _{Under Fire Insurance variety of buildings, machinery, equipments and stocks are} • involved. In addition to a competent surveyor it is recommended that the

• Company officials should visit the site of loss as far as possible.

• _{If the estimated loss is within Rs.20,000/- and loss of profits claim is not involved,} • the underwriting office shall have the discretion to waive an independent survey • _{and settle the claim on the basis of the claim form and other supporting documents} • after being satisfied that it is admissible under the policy and that the amount • _{claimed is reasonable and consistent with the extent of damage. Where necessary,} • _{an official in the underwriting office may inspect the damage.}

•

_{PROCESSING OFCLAIMS:}

• _{The documents generally required for processing fire claims:} • ·Copy of the policy complete with term, conditions and

• _·warranties

• ·Section 64VB compliance confirmation

• ·(iii) Claim form duly completed by the insured • ·(iv) Survey report which should include:

• ·Occurrence of loss

• _{·Indication of the cause of loss} • ·Establishment of liability • _{·Assessment of loss}

• ·Confirmation of compliance of policy terms, conditions • _·warranties

• ·Admissibility of the claim • ·Photographs

• _{·Police Report* (i) Fire Brigade Report *}

• *these two reports may be waived if the survey report is clear and does not cause • _{and doubt on the occurrence as well as extent of loss.}

•

_{CLAIMS ARISING OUTOFACTOFGOD PERILS:}

• _{Documents like newspaper cuttings, photographs and meteorological reports are} • helpful in substantiating such losses. Where the incident is localized, not reported • _{in the media, the surveyor should enquire about the incident from local}

• government/statutory authorities and is required to be supported by photographs • _{of the damage.}

•

_{LOSSES REPORTED UNDER THE RSDMD & TERRORISM.}

• _{·In case of isolated losses under the above endorsements, copy of the FIR} • lodged with the police is required to be furnished.

• _{·Disposal of claims where all records are destroyed in fire &/or allied} • perils like flood.

• _{·Settlement in these circumstances would generally be a negotiated one} • because of non-availability of accounting records and other evidences. • Therefore, the surveyor should be advised to assess such losses on a • _{realistic and reasonable basis after discussions with the}

• insured/Bank/Financial Institution (if involved), and if required with • _{suppliers/customers/statutory bodies like tax authorities, excise} • authorities etc.

• _{·At present post-loss inspection by LPAis not required. Instead Company} • Engineer/Officers may carry out such inspection.

•

_{CLAIMS ASSESSMENT:}

_{A. Market Value Basis:}

• ·Gross Loss

• _{·Less: Depreciation} • ·Less: Salvage

• ·Gross Assessed Loss • _{·Less: Under Insurance} • ·Less: Excess.

• ·Net Loss Payable.

•

_{B. Reinstatement Value Basis:}

• ·Gross Loss • ·Less: Salvage

• _{·Gross Assessed Loss} • ·Less: Under insurance • ·Less: Excess

• _{·Net Loss Payable}

•

_{C. Market Value Basis (Stock) –}

• ·Gross Loss • _{·Less: Salvage}

• ·Gross Assessed Loss • ·Less: Under insurance • _{·Less: Excess}

• ·Net Loss Payable.

• Under single loss, if Buildings, Machinery and Stocks are affected, only ONE • _{excess will be applicable. In other words, excess is applicable “per event per} • Insured.

•

_{DISPOSALOFSALVAGE:}

• _{·Salvage is deteriorated faster. Therefore, disposal of salvage should be} • undertaken on priority basis for and on behalf of the concerned parties • _{without waiting for the liability to be established with the help & under} • supervision of the surveyor. This disposal of salvage guidelines should • _{always be followed.}

• ·Insured officials also need to visit the site of loss and hasten disposal of • salvage. It will also give moral support to the clients at the time of need. • _{·When the surveyor is required to undertake reconditioning and sale of} • salvage on behalf of the Account/interest concerned, he may be paid fees • _{and actual expenses maximum up to 5% of value realized.}

•

_{SETTLEMENT OF CLAIM WHERE ALL RECORDS REQUIRED FOR}

•

_{THE ASSESSMENTOFTHE CLAIMS ARE DESTROYED IN FIRE &/OR}

•

_{ALLIED PERILS RISK:}

• ·In all such cases like what happened in Mumbai during July 2005 flood – • _{settlement was generally be a negotiated one because of non-availability} • of accounting records and other evidences.

• _{·The surveyors should be advised to assess such losses on a realistic and}

• reasonable basis after the discussions with the insured (even with theBank/ other Financial Institutions whenever involved).

• ·If required with suppliers/ customers/ statutory bodies like Tax • _{Authorities etc. and definitely with the Insurers.}

•

_{LOSS OF PROFIT /CONSEQUENTIAL LOSS/ BUSINESS}

•

_{INTERRUPTION LOSSES:}

• _{·Claims need to be monitored regularly by the insurer to ensure that the} • insured is doing the needful to minimize the period of indemnity as much • as possible. If the insured has opted for more indemnity period more is • _{the likely chances of higher liability for the insurers.}

• ·In case the surveyor for MD loss is different from the LOP policy, coordination • _{between both the surveyors is definitely needed and effective}

•

_{SURVEYOR APPOINTMENT:}

• _{·Points to be noted}

• ·The surveyor must be holding a valid license

• _{·Selection of surveyor should be restricted depending on the type of loss} • and the nature of the subject matter involved

• _{·When for assessment of some losses specific technical expertise is} • required - consultants having such technical expertise normally are

• associated with the usual surveyors. The consultants' remuneration needs • _{to be negotiated in advance bearing the expertise in mind and the same} • will be in addition to the survey fee payable to the surveyor.

• _{·Category of Surveyors (i.e. A,B,C) will be checked and appointment of} • surveyor must commensurate with this category & quantum of loss • _{·Appointment of joint surveyor may be done on the merits of the claim.} • ·No second surveyor may be deputed.

• ·Wherever the Loss of Profit losses are involved, the surveyors for the • _{material damage and the business interruption losses, if several, should} • be competent to complement one another. One surveyor can be utilized • _{for both the material damage}

• Guidelines on the financial authority for appointment of surveyor ( i.e. H.O. / • _{R.O./ D.O./ B.O.) will be as per scale followed by each insurer.}

•

_{DOCUMENTS REQUIRED FOR PROCESSING OFCLAIMS:}

• ·Policy copy complete with terms, conditions and warranties. • _{·Claim form duly completed by the insured}

• ·Survey report indicating-• ·Cause of loss;

• ·Establishment of liability • ·Assessment of loss

• ·Confirmation of compliance of policy terms& conditions, warranties and • endorsements.

• ·Admissibility of the claim

• ·Photographs/ Bills & vouchers/ Police report/ Fire brigade report may be • submitted along with the survey report

• Since under Fire Insurance variety of buildings, machineries, equipments and

• stocks are involved, in addition to a competent surveyor it is recommended that the • insurer should visit site of losses reported as far as possible.

•

_{FOR CLAIMS ARISING OUTOFAOG PERILS:}

• _{·In addition to the documents specified earlier, other documents like} • newspaper cuttings, photographs of the devastating damage and • _{meteorological reports are normally required in substantiating such} • losses. When the incident is localized, not reported in the media or not • _{recorded by any Meteorological Department, the surveyor should}

• enquire about the incident from local Government / statutory authorities • and support the description of the occurrence and the loss by taking the • _{photographs of the damage.}

• ·The surveyor should cover in his report the vivid details of the loss, • _{confirm the incident clearly & unambiguously - then only the documents} • of Meteorological Report may be waived. Attention must be paid for

•

_{LOSSES REPORTED UNDER THE RSMTD PERILS:}

• _{·In case of isolated losses under the RSMD Perils, copy of the first} • information lodged with the police and their Final Investigation Report • _{of police must be furnished.}

• ·The surveyor needs to give detailed report on the occurrence and confirm • _{that the loss/damage is admissible under the policy.}

• ·Loss / damage, if any, arising out of omission or commission not • involving physical damage must be segregated.

•

_{FOR “ON ACCOUNT” PAYMENTTO BE MADE:}

• Pending final assessment of a claim an “On Account” payment may be considered • _{subject to confirmation of the following:}

• _{·Loss due to occurrence of a peril covered by the policy .} • _{·The establishment of liability leaves no doubt.}

• ·The minimum liability based on assessment on market value basis (in • case of Building, P&M and accessories) that arises under the policy has • been specifically examined & stated by the surveyor.

•

_{PROCEDURES FOR FINALPAYMENT:}

• _{·When the Final Survey Report is submitted by the surveyor the Claim} • Processing Official / Authority will process and recommend the exact • _{claim amount for approval by the Competent Authority (as per the} • Financial Settlement Authority of various claims laid down by each • _insurer).

• ·The insured / claimant should be advised of the final amount of claim • approved, with details thereof.

• _{·The full & final discharge by the insured (The bank/ financial institution's} • discharge – where required) must be obtained before release of the

• _{amount of claim.}

• ·If the loss or any part thereof is recoverable from a Third Party, a letter of • _{subrogation and/or assignment and Special Power of Attorney, to suit} • special cases, is to be sent to the insured for completion on requisite • stamp paper and return before settlement.

• _{·In case of Close Proximity Cases detailed investigation should be}

• immediately instituted when a loss occurs in close proximity, i.e. within 5 • _{days for all classes of insurance under Fire & Engg. Dept. of the date of} • inception of risk. The close proximity mentioned here is in reference to • _{new insurance or where there has been a break in insurance. Close} • proximity investigation should also be carried out in cases where it is

• found that insurance has been taken out significantly later than it ought to • _{have been taken, i.e. the risk has remained un-insured or inadequately} • insured prior to the insurance cover under reference.

•

_{PROCESS OFCLAIM SETTLEMENTIN CASE OFCO-INSURANCE:}

• _{·The leader will process the claim on behalf of all the co-insurers. A} • decision by the leader regarding claim settlement, taken at the • _{appropriate level according to the existing tenets of delegation of} • financial authority, shall be final and binding on all the co-insurers. • _{Claims decided at the appropriate level by the leader will not be}

• processed again by co-insurers, regardless of the amount. The leader will • intimate to the co-insurer details of a claim settled by him with copies of • _{all relevant reports and documents. The coinsurer will settle his share of}

• the claim within 15 days from the date of receipt of such intimation from the leader without any delay. • _{·In case of a claim requiring Board decision the decision taken by the}

• Board of the leader shall be binding on the other co-insurers. There shall • _{be no separate need for the co-insurers to approach their respective} • Boards for decision in respect of such claims. A suitable note may, • however, be placed by the co-insurers before their respective Boards for • _{information in such cases.}

•

_{APPOINTMENTOFINVESTIGATOR:}

• _{·Depending on the circumstances it may be necessary to appoint an} • investigator to verify the claimed version of a loss. A separate surveyor • _{appointment may be considered if any actual physical survey/}

• assessment are possible and called for. While referring such matter to • _{R.O. from DO/BO, specific terms of references must be mentioned} • clearly to justify its necessity.

• ·The letter appointing the investigator should mention the terms of

• _{reference and make it clear that the report should contain no references or} • doubts unless these are well documented and substantiated and can stand • _{the scrutiny of a court, if so required.}

• ·In the absence of any laid down schedule of fees for investigators, it is • _{advisable to negotiate and decide the fees to be paid in addition to} • expenses actually incurred before formally appointing the investigator • and that decided fee to be recorded in the letter of appointment.

• _{·Investigator's fees are required to be negotiated and are to be paid in} • addition to the expenses actually incurred. The negotiated fees to be • _{recorded in the letter of appointment to avoid any dispute in future.}

•

_{CLOSE PROXIMITYCLAIM:}

• _{Detailed investigation should be initiated immediately when a loss close}

• _{proximity i.e. within 5 days of the date of occurs in inception of the risk. Reference} • is to be made to R.O. along with underwriting details to verify the close proximity • _{aspect. The Close Proximity aspect is applicable for new business or where there} • has been a break in insurance.

•

_{RECTIFICATION OFPOLICYAFTER ALOSS:}

• ·When collection of additional premium is required, the same is to be • _{charged on the affected policy period only in which the claim has arisen.} • _{Rectification can be done by the authority competent for settlement of the} • _claim.

• ·Rectification of a policy after a loss is reported for reasons other than • breach of condition/ warranty should be carried out as under:

• ·Where rectification involves collection of additional premium, the

• additional premium may be charged only on the affected policy period in • _{which the claim has arisen.}

• ·Rectification can be done by the Authority Competent for settlement of • the claim.

•

_{REPUDIATION OFCLAIM:}

• If a claim warrants repudiation, the competent authority would be the authority • _{competent to settle the claim. Letter of repudiation must state the reasons and/or} • _{the policy condition under which it is repudiated.}

•

_{RE-OPENING OFCLAIM FILES:}

• Re-opening of the claim file can be done by the authority one step higher than • _{the appropriate claim settlement authority.}

•

_{LOSS OFPROFITPOLICY}

• _{Whereas, the insured may have to incur the loss of profit, constant expenses} • irrespective of business interruption brought by the accidental fire and allied • _{perils. The standard fire policy does not offer such benefits. Therefore, there is} • a need for a separate policy to take care of the consequential loss. This benefit • _{is offered by a separate policy which can be an extension of fire policy , or} • engineering policy and or project insurance.

• ·The extension of LOPto Fire Insurance is known as FLOP (Fire Loss of • _Profit).

• ·The extension of LOP to Engineering Policy is known as MLOP • _{(Machinery Loss of Profit).}

• ·The extension of LOP to Project Insurance is knows as ALOP ( Advance • _{Loss of Profit).}

• ·Loss of Profit Policy can also be termed as Consequential Loss Policy or • Business Interruption Policy.

• NEED FORBUSINESS INTERRUPTION COVER

• Business Interruption [also known as consequential loss or loss of profits and • hereinafter known as BI) is of recent origin. It was only with the improvement in • the standard of accountancy practice that the possibility of covering financial loss • following fire could be met with a practical solution.

• Fire destroys everything that men possess. Fire destroys buildings, Hotels, cinema • theatres, factories, and contents therein such as machinery and stock, shops and • warehouse leaving only crippled remains of man's labour. The only solution to this • ever-present threat is Fire Insurance

• When a property is destroyed or damaged [whether by fire or any other insured • peril] the owner of the property is indemnified by the payment of a sum of money, • which will enable them to repair or replace it. This is not, however, the full extent • of their loss. If, for instance, they are a manufacturer then, as the owner of the • business, they will try to sell their products for more money than the sum spent on • buying materials and converting them to completed products. This is their reason • for being in business in the first place. If the facility to manufacture is diminished • because of the destruction of their property, their earnings will fall off or even • cease.

• The insurers offer standard fire and special perils policy, which can only take care • of the victim of fire. As a result, only the damaged buildings can be reconstructed, • destroyed plant and machinery can be reinstated and lost stock can be restored • with the compensation paid by the insurer towards such material damages.

•

_{WHAT HAPPENS TO BUSINESS DURING THE PERIOD OF}

•

_{RECONSTRUCTION?}

• _{The destruction caused by fire does not end with the smoldering shell of buildings} • or the mangled skeleton of expensive machinery or worthless stocks. Destruction • goes on, business comes to a standstill. The factory cannot produce goods, in other • _{words, money stops coming on.}

• The earnings of the business dwindle, if not cease totally while business expenses • _{have still to be met. Wages and salaries have to be paid. So also overheads, rent,} • rates and insurance. The net result - "LOSS". In extreme cases the business may • _{have to be wound up. This is a very real risk.}

• However, just as the Material/Property damage policy comes to the rescue of the • insured when he incurs material damage, the profit policy works to protect against • _{the consequent disruption to the business itself.}

• If damages occur to the property owned by the insured causing his business to • _{suffer, the policy would pay the amount of loss resulting from that interruption.}

•

_{SCOPE OF POLICY:}

• _{·Loss of earning (Net Profit)} • ·Standing Charges

• _{·Increased cost of working}

• Standing Charges include all fixed expenses such as rent, salary, electricity exp., • _{audit expenses etc. which have to be incurred by the insured irrespective of} • whether the business activities interrupted due to material damage or loss or • destruction brought by the operation of insured perils.

• _{The indemnification under this policy is admissible only when the insurer admits} • the claim for material loss or damage or destruction.

• NO CONSEQUENTIAL INSURANCE COVERS FOR VARIABLE

• _EXPENSES.

• An illustration to demonstrate the impact of fire accident on the business activity • _{BEFORE FIRE}

• I Income From Sales Rs.1, 00,00,000 • II Production costs Rs. 60,00,000 • Raw materials, Unskilled Labor and • Other variable charges Rs. 20,00,000 • III Over heads

• Rent, rates printing and stationery, • Wages and salaries etc. Rs. 20,00,000 • _{AFTER FIRE}

• 50% cut in production

• Income from sales Rs. 50,00,000 • Less: Production costs Rs. 30,00,000 • Overhead expenses Rs. 20,00,000 • Net Result Rs. 50,00,000

• Additional expenses Nil • Purchase of goods elsewhere • Premises on hire Rs. 20,00,000 • Overtime

•

_{THEREFORE, THERE IS A NEED FOR INSURANCE PROTECTION}

•

_{FORTHE RESULTING CONSEQUENCE.}

• _{If the premises are destroyed the ` cost of maintenance also is affected. So the} • indemnity under the Policy has the following components:

• 1) Loss of Income – When the factory is unable to function • _{2) Loss of Income – after the repairs and repurchase until the} • entire activity commences.

• _{3) Additional expense – to engage rented building until the damaged} • building is reinstated

• _{4) The machines are installed.}

• 5) Indemnity period – must be long enough to cover the above [i] • and [ii]

• _{6) Saving – due to the damage are deducted from the} • settlement.

•

_{THE CONSEQUENTIALLOSS POLICYCOVERS :}

• _{NET PROFIT : This policy is designed to take care of loss of net profit, which is} • differently meant by this policy unlike the net profit derived from trading and P& • Laccount. Such loss of profit should result from the cause of insured peril covered • under Standard Fire policy and that cause should have brought the interruption of • business.

• _{STANDING CHARGES/ FIXED CHARGES : In spite of the stoppage of the}

• business, the fixed remuneration and other standardized fixed expenses have to be • incurred by the insured. Such expenses have to be incurred irrespective whether • the business is carried on or not due to the occurrence of the insured peril. • _{INCREASED ALTERNATE COST OF WORKING : To pay the additional}

• expenditure incurred by the Insured to maintain the normal business activity • during the period in which the business is affe

• _{TURNOVER : Modern BI policies are based on the turnover of the business.} • Profit comes out of turnover and is supported by it. Turnover can be conceived of • as representing the activity of the business, but is defined as the money paid or • payable to the insured for goods sold and delivered and for services rendered in the • course of the business at the premises. Turnover actually consists of Variable • charges, standing charges and net profit as we have already seen. If the ratio of • variable charges of a business to it is turnover is a constant [and this must be so, • because the definition of variable charges is simply those charges, which vary • directly to the turnover.] Then the remainder [the turnover less such variable • charges]. Is also constant to the turnover of the business. Thus, on the basis that • turnover does represent the activity of a business. we can measure this fall in • activity of a business. we can measure this fall in activity [which we do by

• calculating the fall in turnover] and then, by applying the remainder constant to the • amount of this reduction, we can get at the true indemnity.

• _{It is against the background of the definition of 'rate of gross profit ' annual} • turnover' and standard turnover 'that financial loss will be calculated.

• _{GROSS PROFIT : It may be defined that it is the amount by which the sum of the} • turnover and the values of the closing stock shall exceed the value of the opening • stock and specified working expenses. DIFFERENCE BETWEEN

• _{ACCOUNTANT'S AND INSURERS'GROSS PROFIT. The basic difference is} • that accountants will take Turnover and deduct Purchases of raw materials to • _{produce gross profit.Insurers are, however, concerned with identifying that part of} • gross profit which

• _{·Relates to the business insured and}

• ·Can be the subject of an indemnity from insurance

• The insured pays only for insurance on those elements of gross profit which

• _{continue to be payable after an interruption in the business [and on net profit] by} • using the insurers definition and the premium relates only to the business insured. • _{Additionally, the insured's accountant will need to know on what basis to prepare} • the declaration of gross profit for the insurance company.

•THERE ARE TWO METHODS IN WHICH THE GROSS PROFIT CAN

•BE ARRIVED AT:

•ADDITIONAL METHOD : In this method, insured adds standing charges to the •net profit before taxation and excluding capital receipt as per the Profit and Loss •Account of the Company.

•DIFFERENCE BASIS : Under this method, gross profit is arrived at as the •"Difference between turnover and variable charges " as detailed below. •Turnover 10,00,000 •Less: Whatever trade discounts allowed 20% 2,00,000 • 8,00,000 •Add: Closing Stock as on 31.03.2001 50,000 • 8,50,000 •Less: Opening Stock as on 01.04.2001

•Specified working expenses

•Less: Purchases net of discounts 1,00,000 •Bad debts 50,000 1,50,000 •GROSS PROFIT 7 ,00,000

•The original definition of gross profit was net profit plus insured standing charges. •The insured's accounts were the starting point. All 'non –business' items were •taken out [such as rent and upkeep of let-out portions, stock market gains and •losses etc].

•Net trading profit was the surplus left after taking from the turnover of the business •insured All the costs of making it, from purchases of raw material to the cost of •delivery by the insured's vehicles or by post etc .

•The 'Difference 'method starts with the accounts but uses them the other way •round. Basically, it lists 'specified working expenses' such as purchases these are •the previously mentioned variable charges which vary directly in proportion to the •turnover. Obviously, if your turnover is down you do not need to buy so much. •Once you have deleted the variable charges you are left with the standing charges •and net profit or [to put it another way ]the gross profit.

•

_{STEPS INVOLVED}

• _{1) Take out all income and expenditure extraneous to the business insured.} • _{E.G rent of tenanted portions and costs of upkeep of that portion profit or} • loss on share transactions [in other firms].

• _{2) Identify the specified working expenses and take them off the total of the} • turnover and the closing stock. The result is gross profit.

• _{The term 'difference basis' describes the current definition of gross profit which} • can be phrased as The difference between turnover plus closing stock and opening • stock plus specified working expenses.

•

_{STANDING CHARGES - ILLUSTRATIVE LIST}

• _{·Salaries to permanent staff}

• ·Contribution to PF, FPF, Superannuation, Perquisites, ESI, etc. • _{·Rent, Rates, Taxes, Duties and License fees'}

• ·Director's fees, remuneration

• _{·Total audit fees and professional charges}

• ·Conveyance, Travelling expenses and other office expenses

• ·Interest on loan, debentures, bank charges, guarantee, commission • _{·Dividend on preference shares}

• ·Depreciation on various assets • _{·Miscellaneous standing charges}

•

_{INCREASED COSTOFWORKING}

• Rent for temporary premises • ·Payment of overtime

•

_{PERIOD OFINSURANCE:}

• Period of insurance of LOP policy is usually in consonance with material damage • _{policy. It runs and expires almost simultaneously.}

PERIOD OFINDEMNITY

•

_{THE SELECTION OFINDEMNITYPERIOD}

• _{The indemnity period commences with the date of damage and lasts till such time} • as the business is restored to its pre-damaged level or the period stipulated in the • _{policy, whichever comes first. A consequential loss insurance policy insures}

•

_{HOWTO ARRIVE ATTHE SUM INSURED}

•

_{The Sum Insured is based on the gross profit of the business. The sum insured is}

•

_{extracted from the previous year's account. If the indemnity period is 18 months,}

•

_{the amount is increased by 50%. This is the basic sum insured. Assuming the}

•

_{business would be interrupted for not more than 12 months, there are adjustments}

•

_{to be made and this is where a little forecasting comes in.}

•

_{Normally business does not standstill, year after year, it generally expands. Then}

•

_{there is another factor to be taken into consideration i.e. Inflation.}

•

_{Even if the business does not expand in terms of goods produced the expense and}

•

_{income levels do expand in terms of money, roughly in conjunction with the}

•

_{general inflation rate. Therefore, a sum to be insured needs to be drawn from the}

•

_{previous years accounts and an upward adjustment is done in such a way that takes}

•

_{care of any future influence of inflationary factors.}

•

_{It is not sufficient if the sum insured is influenced by such factors pertaining to a}

•

_{particular period of insurance as the indemnity period commences only in}

•

_{succession to the date of occurrence of insured peril causing material damages.}

•

_{Supposing, a loss takes place on the last date of a policy i.e. expiry date of the}

•

_{policy, the indemnity period may be twelve months from that date or may be}

•

_{twenty four months from that date or the period agreed between the parties to the}

•

_{contract. This makes it clear that factors pertaining to the period of indemnity}

•

_{chosen is very relevant while deciding the level of sum insured.}

ADDITIONAL ITEMS THAT WHICH CAN BE INCORPORATED AS

PARTOFSUM INSURED

• _{1. WAGES:}

• Two methods in which wages can be included. • _{a) PRO-RATABASIS:}

• It is possible to cover under a separate policy to claim wages for a Standard Period • for an amount to represent the wages for the selected period. E g

• _{·Wages of all employees}

• ·The wages of a specified category or categories of employees.

• _{·The wages of all employees who are normally paid on weekly basis.} • b) DUALBASIS:

• _{100% cover for a selected initial period and for the remainder of the indemnity} • period, a selected percentage only. On Dual basis it is necessary to have a

• minimum indemnity period of 12 months. The sum insured must represent the full • _{annual payroll. If saving in payroll are made during 100% cover period, such}

• saving can be carrieThe insured has the option of converting the combination to a straightforward • _{100% cover for a stipulated period longer than initial period.}

• DUAL BASIS PROVIDES A FLEXIBLE COVER : There are two main • _{advantages to the Dual Basis cover. They are}

• ·Carry over of saving • ·Option to Consolidate

• _{·Insurance of lay off and/or retrenchment compensation}

• ·Auditors feesd over to boost the partial cover period during the indemnity • _period.

•

_{ASCERTAINMENTOFTHE LIABILITYOFINSURANCE}

• What should be identified first before looking at the claim for business • _{interruption?}

• ·Whether there is a standard fire policy and claim for material damage has been • _admitted.

• ·What would be period of indemnity in case of reinstatement of property • damaged.

• _{·Turnover earned by the insured after the damage but preferably at the different} • premises of the insured.

• _{·The insurance is limited to reduction in turnover.} • ·Limited to increase in cost of working.

• _{·The amount payable as indemnity shall be additional cost of working with} • some standing charges of the business insured.

• ·How the premium is adjustable with the gross profit earned by the business • _{differs from the sum insured during the year.}