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- [email protected], [email protected], [email protected], [email protected] 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) This book is for private circulation amongst NICians only.

FIRE INSURANCE

BASIC PRINCIPLES OF FIRE INSURANCE CONTRACT: •

Insurable Interest :

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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 positionfacts 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 • Fire Policy is a strict indemnity policy

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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 ·Financial institutions that have advanced loans against the property.

• 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: • ·There must be ignition (accompanied with heat &/or flame i.e. some kind • Chemical reaction - oxidation/addition of oxygen from air). A loss or • 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). • ed for repairs/ renovation etc. • • • • • • • • • • • • • •

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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. Escalation (upto 25%)

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NEW ADD ON COVERS FILED WITH IRDA

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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

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GENERALCONDITIONS OFFIRE AND SPECIALPERILS POLICY:

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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

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CLAUSES OMISSION TO INSURE, ALTERATIONS, EXTENSIONS CLAUSE

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·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.

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TEMPORATYREMOVALOFSTOCKS- CLAUSE

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·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. ·Stocks in excess of 10% of sum insured to be covered specifically.

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REINSTATEMENTVALUE CLAUSE

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·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.

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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.

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AGREED BANK CLAUSE

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·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.

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DESIGNATION OFPROPERTYCLAUSE

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·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.

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DECLARATION POLICY

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·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.

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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. ·Stocks at Railway sidings

• 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 rate plus 10% loading shall apply.

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FLOATER DECLARATION POLICIES

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·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.

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VALUED POLICY

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

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LONG TERM POLICY

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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.

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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.

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PARTIAL INSURANCE : It is not permissible-

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·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:

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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 N.B.: Extension of short period policy (ies) shall not be permitted..

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CANCELLATION OFPOLICY:

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·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

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SUM INSURED FIRE INSURANCE POLICY- SI SHOULD BE ADEQUATE – OTHERWISE FOR UNDERINSURANCE WE NEED TO APPLY PRORATA CONDITION OF AVERAGE CLAUSE.

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·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.

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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 ·Profit not to be included - exception Declaration Policy

• 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

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RATING OFSTADARD FIRE & SPECIALPERILPOLICY RATING UNDER THE POLICY DEPENDS UPON THE FOLLOWING FACTORS:-

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·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.

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FORSTORAGE RISKS RATING DEPENDS UPON OCCUPANCY- TYPE OF STORAGE

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·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.

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FOR MULTIPLE OCCUPANCIES:-

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

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DISCOUNTS APPLICABLE

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·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.

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RATING OFRISKS IN MULTIPLE OCCUPANCIES

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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.

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SILENTRISK:

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·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.

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DUTIES & RESPONSIBILITIESAFTER LOSS (CLAIM PROCEDURE):

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·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. ·Enforce rights against third parties.

• 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.

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ISSUES RELATED TO FIRE CLAIMS:

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·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.

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INTIMATION OFCLAIM:

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·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.

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FINANCIALAUTHORITYFOR SETTLEMENTOFFIRE CLAIMS.

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Administrative Officer : Rs. 1,00,000/Assistant Manager : Rs. 2,50,000/Deputy Manager : Rs. 10,00,000/Manager : Rs. 15,00,000/D.C.C. : Rs. 30,00,000/Regional Manager : Rs. 40,00,000/R.C.C. : Rs. 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.

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PROCESSING OFCLAIMS:

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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.

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CLAIMS ARISING OUTOFACTOFGOD PERILS:

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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.

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LOSSES REPORTED UNDER THE RSDMD & TERRORISM.

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·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.

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CLAIMS ASSESSMENT: A. Market Value Basis:

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·Gross Loss ·Less: Depreciation ·Less: Salvage ·Gross Assessed Loss ·Less: Under Insurance ·Less: Excess. ·Net Loss Payable.

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B. Reinstatement Value Basis:

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·Gross Loss ·Less: Salvage ·Gross Assessed Loss ·Less: Under insurance ·Less: Excess ·Net Loss Payable

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C. Market Value Basis (Stock) –

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·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.

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DISPOSALOFSALVAGE:

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·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 control is to be maintained by the insurer.

•

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 concurrent policies & Agreed Bank (Financial Institute) Clause

•

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 OF PROFIT INSURANCE

•

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 NETRESULT - LOSS Rs. 20,00,000

• •

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 ·Not exceeding 5% of the total listed insured standing charges.

•

INCREASED COSTOFWORKING

•

Rent for temporary premises

•

·Payment of overtime

•

·Hire of machinery etc

•

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 earnings of the business lost during the indemnity period.

•

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.

•

EVIDENCE FOR ADMITTED MATERIALDAMAGE OR DESTRUCTION

• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

Basically, it is a precondition that there should be a claim towards material damages under the policy admissible as the terms and conditions of the standard fire policy. The insured peril must have operated and the damages resulted. Inotherwords, the resultant damages that has arisen out of the insured peril should have been admitted by the insured. A point should always remains the minds of the insurers that the policy is designed to cover the effect of a cause, which is falling under the scope of the policy and does not fall under any of the exception specified in policy. This brings two situations Insured peril The first one is the situation where the peril operates that is termed as insured peril as per the policy. Admit both claims material damages and loss of profit resulting the insured event. Other unknown peril The second situation is where a peril operates but is not found in the listed perils of the policy. Under the new circumstances, what do we do . Reference is made to ensure that it is not found in the exceptions mentioned in the policy and also verify whether this peril is an insured peril under any other product of the insurer . Where property suffers damage by a peril, which might not have been insured under the policy, the course of the damage may lead to a fire starting. If the proximate cause of the fire is not specifically excluded, the policy will respond to the fire damage. However, damage caused by the original peril will not be recoverable. It being so, a suitable adjustment need to be made necessarily in the business interruption period on the ' would have been basis' as if both unknown peril as well as insured peril had happened separately. Of course, the onus is on the insured to establish damages separately towards what is covered and what stands uncovered due to the operation of an other peril unknown to the policy. [ an international author of a book on practice of insurance says that the insured commits fatal to his policy if he fails to establish the distinction between the losses]. It is our view the similar effect would happen in the Business interruption policy too as it operates only on the admission of a claim towards material loss. It will be explained more in the paragraphs to follow

•

WHATIS TURNOVER?

• • •

It may be defined as consideration measurable in terms of money received or receivable by the insured for goods sold and delivered and services rendered in the course of the business carried out within his premises.

•

What does not fall under Turnover?

• • • • •

o Any sum receivable for the sale of redundant plant and machinery. o Income from any source not insured under the policy. Example rental income from the tenants. o Any other business carried out within the insured's premises or goods sold or services rendered but not insured under the policy.

•

STANDARD TURNOVER

• • • • •

The Turnover during that period in the 12 months immediately before the date of incident, which correspond, with the indemnity period. Example -Indemnity period for the restoration of the business disturbed is 01.06.2001 to 30.10.2001 and this period is the period of interruption. The standard turnover for this purpose means the turnover for a period from 1.6.2000 to 30.10.2000.

•

RATE OF GROSS PROFIT

• • • • • • • • • • •

The rate of gross profit earned on the turnover during the financial year immediately before the incident. This can be expressed by a formula Gross Profit/Turnover x 100 Turnover However, the estimated gross profit for the period of insurance should be based on the previous years audited accounts but not less than that of the nearest financial year. N.B. Standard turnover, annual turnover and rate of gross profit are subject to adjustment to take care of trend of business and special circumstances affecting the business. For example a workers' strike, a big event (like IPL for sports goods manufacturers) providing extraordinary business opportunity.

•

INCREASE IN COSTOF WORKING AND SAVING

• • • • •

The insured may have to incur any additional expenditure for the sole purpose of averting or minimizing the reduction in Turnover which, but for that expenditure, would have taken place during the indemnity period in consequence of the incident. But such expenditure should not exceed the sum produced by applying the Rate of Gross Profit to the amount of the reduction thereby avoided.

•

EXAMPLE:

• • • • • • • • • • • • • • • • • • •

Incurring expenditure for overtime or hiring alternate machinery or occupying the alternate premises on rent. Basis of Indemnity for IC The insured should remember that his payment would not exceed the amount arrived as under. Rate of Gross Profit x Reduction in T/o avoided. But, if the insured agrees to pay more, then this can be expressed in the policy. The limitations which are usually imposed are largely common sense and are that the increase in cost of working shall be ·Absolutely necessary and reasonable ·That increased cost, which is incurred with a purpose to avoid or minimize a reduction in turnover and therefore a loss of gross profit. ·Such IC is only in consequence of the damage [or incident] ·Necessarily incurred during the indemnity period and ·Equitably limited in the amount payable by insurers The effect of this equitable limit is to restrict the maximum recovery as increase in cost in working to the amount that would otherwise have been payable as a loss of gross profit if such expenditure had not been incurred . This is often referred to as 'the economic limit’

• • •

This limit is clearly equitable but there are occasions when expenditure is incurred with the agreement of insurers, which proves later to have been uneconomic. Insurers must then stand by their original agreement.

• SAVINGS • • • • • • • • • • • • • • • • • • • • • • • • • •

Any sum saved during the indemnity period in respect of such of these charges payable out of gross profit insured based on the past records, may be used to set off against the standing charges that are constant in nature. ANNUALTURNOVER It is the Turnover during the twelve months immediately preceding the incident. It is not the Turnover taken from the Audited accounts, as the figures shown in the Audited Final accounts must have become outdated. The rate of Gross Profit is applied to the Annual T/o and the proportion of the loss to be borne by the insured is Sum Insured ————————————————— = Amount payable Rate of Gross Profit x Annual T/o Those cost which should continue wholly or in part or deducted from the Gross Profit amount. PROVISION FOR UNDERINSURANCE The sum insured by this item is less than the sum produced by applying the Rate of Gross Profit on Annual T/o, the amount payable shall be proportionally reduced. EXCESS CLAUSE Every claim under the Fire Loss of Profits policy is subject to compulsory deduction as under: Other than Petrochemical Risks: 7 days Gross Profit Petrochemical Risks : 14 days GrossProfit ACCUMULATED STOCKS CLAUSE. If stocks of finished goods which is accumulated is used to maintain the turnover when production is affected adversely, during indemnity period, account is to be taken of this use and turnover figures are adjusted accordingly.

•

ACCUMULATED STOCKS CLAUSE.

• • •

If stocks of finished goods which is accumulated is used to maintain the turnover when production is affected adversely, during indemnity period, account is to be taken of this use and turnover figures are adjusted accordingly.

•

SUM TO BE INSURED

• • • •

The sum insured should be at least one year's gross profit, even if indemnity period is less that 12 months. ·If indemnity period is more than 12 months, the sum insured will be a multiple (i.e. proportionate) of the annual G.P.