PRINCIPLES OF INSURANCE AND LOSS

ASSESSMENT

UNIT – 1
INTRODUCTION TO INSURANCE

1.1 What is Insurance?

There is normally expected lifetime for the asset, during which time it is
expected to perform. However, if the asset gets lost earlier, being destroyed
or made non-functional, through an accident or other unfortunate event, the
owner and those deriving benefits there from suffer. Insurance is a
mechanism that helps to reduce such adverse consequences.

1.2 Purpose and Need of Insurance

Assets are insured ,because they are likely to be destroyed or made non-
functional, through an accidental occurrence. Such possible occurrences are
called perils, like fire, earthquake, flood, break down, accident etc.

The damage that these perils may cause to the asset, is the risk that the asset
is exposed to.

The risk only means that there is a possibility of loss or damage, it may or it
may not happen. There has to be an uncertainty about the risk. If there is no
uncertainty about the occurrence of an event, it can not be insured against.
The risk may sometime be referred to as subject matter of insurance.

There are other meanings of the terms ‘risk’. To the ordinary man in the street
‘risk’ means exposure to danger. In Insurance practice, ‘risk’ is also used to
refer to the peril or loss producing event. For examples, it is said that fire
insurance covers the risks of fire, explosion, cyclone, flood etc. Again, it is
used to refer to the property covered by insurance, for example, a timber
construction is considered to be a bad ‘risk’ for fire insurance purpose.

Conceptually, the mechanism of insurance is very simple. People who are

exposed to the same risk come together and agree that, if any one of member
suffers the loss, the others will share the loss and make good to the person

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 who lost. By this method the risk is spread among the community and the
likely big impact on one is reduced to smaller manageable impacts on all
Insurance does not protect the asset. It does not prevent its loss due to the
peril. The peril cannot be avoided through insurance.

Insurance only tries to reduce the impact of the risk on the owner of the asset
and those who depend on that asset. It compensates, may not be fully, the
losses. Only economic or financial losses can be compensated

The purpose of insurance is to safe guard against misfortunes by making

good the losses of the unfortunate few, through the help of fortunate many,
who are exposed to the same, risk but saved from the misfortune. Thus the
essence of insurance is to share losses and substitute certainty with
uncertainty.

1.3 How Insurance Works?

People facing common risks come together and make their small
contributions to a common fund. The contribution to be made by each person
is determined on the assumption that while it may not be possible to say
beforehand, which person will suffer, it is possible to say, on the basis of past
experiences, how many persons, on an average, may suffer losses. The
following examples explain the above concept.

In a village, there are 400 houses, each valued at Rs.20,000/-.

Every year, on an average, 4 houses get burnt, resulting into a total loss of
Rs.80,000/-.

If all 400 owners come together and contribute Rs.200/- each, the common
fund would be Rs.80,000/-. This is enough to pay Rs.20,000/-, to each of the
4 owners whose houses got burnt thus the risk of 4no.house owners is spread
over 400 no. house owners of the village.

Rs.200/- paid by house owner is called premium payable.

Rs.20,000/- is the sum insured of the risk.

Similar risk is houses in a village, claim of few Rs.20,000/- each, total

Rs.80,000/-, loss suffered by the 4 house owners and shared by 400 house
owners insurer is in the position of trustee as it is managing the common fund.

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It has to ensure that that nobody is allowed to take undue advantage of the
arrangements. The decision to allow the entry is the process of underwriting
of risk. Both underwriting and claim settlement have to be done with great
care.

The Business of INSURANCE – POOLING FO RISK & RESOURCES

The business of insurance done by insurance companies, called insurers, is

to bring together persons with common insurance interests (sharing the same
risks), collecting the share of contribution (called premium) from all of them,
and paying out compensations (called claims) to those who suffer. The
premium is determined on the same lines as indicated in the example above
with some additions made for the expenses of administration.

Thus, insurance may be described as a method or a technique which provides

for collection of small amounts of premium form many individuals and firms
out of which losses suffered by the few are paid.

ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT.

An insurance company’s strength lies in the fact that huge amounts are
collected and pooled together, these amounts come by way of premiums.
Every premium represents a risk that is covered by that premium. In effect,
therefore, these vast amounts represent pooling of risk. The funds are
collected and held in trust for the benefit of the policyholders. The
management of insurance companies is required to keep this aspect in mind
and make all its decisions in ways that benefit the community. This applies
also to its investments. That is why successful insurance companies would
not be found investing in speculative ventures. Their investments benefit the
society at large.

The system of insurance provides numerous direct and indirect benefits to the
individual and his family as well as to industry and commerce and to the
community and the nation as a whole. Those who insure, both individuals and
corporate, are directly benefited because they are protected from the
consequences of the loss that may be caused by the accident or fortuitous
event. Insurance, thus, in a sense protects the capital in industry and releases
the capital for further expansion and development of business and industry.

Insurance removes the fear, worry and anxiety associated with this future
uncertainty and thus encourages free investment of capital in business
enterprises and promotes efficient use of existing resources. Thus insurance

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 encourages commercial and industrial development and thereby contributes
to a vigorous economy and increased national productivity.

No bank or financial institution would advance loans on property unless it is

insured against loss or damage by insurable perils.

Insurers are closely associated with several agencies and institution engaged
in fire loss prevention, cargo loss prevention, industrial safety and road safety.

Before acceptance of a risk, insurers arrange survey and inspection of the

property to be insured, by qualified engineers and other experts. The object of
these surveys is not only to assess the risk for rating purposes but also to
suggest and recommend to the insured, various improvements in the irks,
which will attract lower rates of premium.

Insurance ranks with export trade, shipping and banking services as earner of
foreign exchange to the country. Indian insurers operate in more than 30
countries. These operations earn foreign exchange and represent invisible
exports.

EXERCISE

1. What is insurance?
2. What are the purposes of Insurance?
3. How Insurance works?

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 UNIT – 2
FUNDAMENTALS/PRINCIPLES OF GENERAL INSURANCE

CONTRAT OF INSURANCE

When the insured pays the premium and the insurer accepts the risk, the contract of
insurance is concluded. The policy issued by the insurer is the evidence of the
contract.

2.1 Conditions Necessary for a Contract

1. There should be consideration, i.e. there should be offer and

acceptance of both parties, and one party will give offer the other party
will accept.
2. There should be consent of both parties, (agreement). – Both parties
should be of the same mind with a common intention. For example, if
the proposer desired fire insurance, and the insurers issue a burglary
policy, there is no consent arising out of common intention.
3. The parties to contract must be competent, minors and person of
unsound mind are not competent to sign contracts.
4. The object of contract must be legal and not against public policy. For
example stolen goods cannot be insured.

2.2 Principles of General Insurance

Insurance contracts are subject to certain special principles evolved under

common law in the U.K. and are generally followed by Indian courts. The
principles are known as fundamental or basic principles of law of insurance.

2.2.1 Utmost good faith

The parties to a commercial contract, according to law, are required to

observe good faith. The seller cannot mislead the buyer in respect of
the transaction, but he has no obligation to disclose all information
about the subject of the contract. It is the buyer’s duty to be careful
whilst entering into the contract. ‘Let the buyer beware.’ Is the legal
rule?

In insurance contract there is duty of utmost good faith and giving

material facts information. The proposer has duty to disclose all

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material informations/facts about the subject matter of insurance to the
insurer. The material fact is that, enables insurer to decide whether to
accept the risk and the rate of premium and terms and conditions of
acceptance. The duty applies not only to the material facts which the
proposer knows, but also extends to the material facts which he ought
to know.

The following are some examples of material facts

Fire Insurance (a) Construction of the building; (b) Occupancy (e.g.

office, residence, shop, godown, manufacturing unit, etc.) (c) The
nature of goods, i.e. non-hazardous, hazardous extra-hazardous etc.

Marine Insurance (a) Method of packing i.e. whether in single gunny

bags or double gunny bags, whether in new drums or second hand
drums’ etc. (b) the nature of goods (e.g. whether the machinery is new
or second hand);

Motor Insurance (a) Cubic capacity of engine (private car); (b) the year
of manufacture; (c) carrying capacity of a truck (tonnage); (d) the
purpose for which the vehicle is used; (e) the geographical area in
which it is used; etc

Personal accident Insurance (a) the exact nature of occupation;

(b) age, height and weight; (c) physical disabilities etc.

General (a) The fact that previous insurers had rejected the proposal,
or charged extra premium, or cancelled, or refused to renew the policy
(b) Previous losses suffered by the proposer.

Note: If the insurance is placed through an agent, the latter has similar
duty to disclose all material facts known to him or communicated
to him by the proposer.

Facts which are common knowledge or matters of law need not be

disclosed by the proposer. For example, if a proposer seeks riot cover,
he need not disclose the fact of prevalence of riot conditions. Insurance
are expected to know about it in the normal course.

The duty of disclosing material facts ceases when the contract is

concluded by the issue of a cover note or a policy. The duty arises
again at the time of renewal of the policy. However, a policy condition

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 provides the duty also arises during the period of the policy, if there is
any change in the risk.

The breach of duty of utmost good faith may arise unintentionally

through an oversight or because the proposer thought that it was not a
material fact, if there is non-disclosure or mis-representation with
fraudulent intention, the insurance contract will become void; it will not
be contract at all. If duty of utmost good faith is breached in any other
way, the contract becomes voidable, which will mean, the insurers
have the option to avoid the contract and reject the claim.

Unenforceable contracts are those which can not be produced as an

evidence in court of law, If an insurance policy is not stamped as per
the Indian stamp act ,the contract becomes unenforceable.

Contractual duty

Proposal forms are designed to obtain all material information about

the subject matter of insurance. Each form contains a declaration to the
effect that all the questions have been answered truly and correctly,
and that that the proposal and declaration shall be the basis of the
contract.

The legal effect of the above declaration is that insurers can avoid the
contract if any answer is inaccurate or incorrect, even if the answer is
not material to the risk. This is called the contractual duty of utmost
good faith, which is far stricter than the common law duty.

The duty of disclosure of “material information“ regarding a proposal or

policy also applies to insurers, agents or insurance intermediaries, as
provided in IRDA Regulations (Protection of Policyholders’ Interests)
2002.

2.2.2 Insurable Interest

The owner of property has a right under law to effect insurance on the
property, if he is likely to suffer financially, when property is lost or
damaged. This legal right to insure is called insurable interest. Without
insurable interest, the contract of insurance will be void. Because of
this legal requirement of insurable interest, insurance contracts are not
gambling transactions.

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Examples of insurable interest

(a) Ownership of property (and joint ownership) is a clear example

of insurable interest.
(b) A bank has insurable interest in the property on the mortgage of
which loans have been given. The interest is limited to the
amount of the loan. Usually, under such circumstances, the
policies are issued in the joint names of the insured and the
bank.
(c) A ship owner has insurable interest in the ship owned by him.
Cargo owners, both sellers and buyers, have insurable interest
in the goods owned by the.
(d) The owner of a motor vehicle has insurable interest in the
vehicle; he also has insurable interest in potential third party
liability. If a third party is injured in the accident, the damages
payable to the third party would be financial loss to the insured,
Hence, he can insure his third party liability.
(e) A person has insurable interest on his own life.

Insurable interest can arise in a variety of ways but the above

examples are sufficient to explain the concept.

Time When Insurable Interest should be Present

In fire and miscellaneous insurance, insurable interest must be present

both at the time of taking the policy and at the time of loss. For
example, if the property insured under a fire insurance policy is sold
and there is a loss after the sale, the insured cannot recover the loss
as he has no insurable interest at the time of loss.

In marine cargo insurance, insurable interest is required at the time of

loss. It may not be present at the time of effecting insurance. An
importer of goods may insure the goods under a marine policy,
although at the time, he may not be the owner of the goods. Ownership
of the goods passes from the exporter to the importer when the
payment is made. If goods arrive damaged at destination, and if the
importer had paid for the goods, he can recover the loss as he has
insurable interest at the time of loss and also has a policy. In marine
hull insurance, insurable interest must be present both at the time of
taking the policy and at the time of loss.

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 Assignment

Assignment means transfer of rights and liabilities of an insured to

another person who has acquired insurable interest in the property
insured. Generally fire and miscellaneous insurance policies are
assigned only with the consent of the insurers.

Marine cargo policies are, however, freely assignable without the

previous knowledge or consent of the insurer. The reason is that the
ownership of goods insured under a marine cargo policy frequently
changes when the goods are still in transit, and it is necessary that the
benefit of the policy should pass to the new owner, A marine hull policy
cannot be assigned without the consent of the insurers.

2.2.3 Indemnity

The principle of indemnity arises under common law and requires that
an insurance contract should be governed by principle of indemnity.
The object of the principles is to place the insured in the same financial
position as far as possible, as he occupied immediately before the loss.
The effect of this principle is to prevent the insured from making any
profit out of his loss or gaining any benefit or advantage.

The measure of indemnity applied to some types of property is

explained below:

Building
In these cases, the cost of reinstating the building or repairing the
damage portion, is assessed and from that an appropriate allowance is
made toward depreciation, depending upon the age and condition of
the building.

Machinery
In practice, the measure of indemnity is the replacement value at the
place and date of loss or damage. Less an appropriate allowance
towards depreciation.

If the damaged machinery is repairable, the measure of indemnity is

the cost of repairing the damage. If however, during repairs, any part is
replaced, an appropriate allowance is to be made towards depreciation
on the total cost of repairs including labour cost.

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Stocks
In respect of the stocks of wholesalers and retailers, the measure of
indemnity is not the selling price of the wholesaler or the retailer, but it
is the price at which he can replace the goods, the element of expected
profit does not pay any part in computing the measure of indemnity.

Fire insurance policies may be issued on Reinstatement Value basis.

Under these polices, generally issued for covering building or
machinery, the basis of indemnity is the cost of repairs or cost of
reinstatement or replacement of damaged or destroyed property by
new property of the same type. In as much as the insured gets new
property in the place of old, the principle of indemnity is modified, (this
is explained in Unit – 6 : Fire and Special Peril Insurance).

Motor Insurance

The indemnity shall not exceed.

(a) For total/constructive total loss of the vehicle the insured’s

Declared Value of the vehicle (including accessories thereon) as
per Schedule of the policy less the value of the wreck.

(b) For partial losses, costs of repair / replacement as per

depreciation limits specified in the policy.

Claims for third party liability are indemnified as per law, subject to
limits, if any, under the policy.

Marine Insurance

The values of cargo are subject to constant fluctuations during transit

from one country to another, Besides, the market values of ships
fluctuate widely, but the market value may not reflect the true value of
the ship to its owner, Therefore, almost all the marine ship/hull
insurance policies are issued as valued policies or agreed valued
policies, where under the sum insured is agreed between the insurers
and the insured as the value of the insured property. The agreed
amount is payable in the event of total loss, irrespective of
considerations of depreciation, etc.

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Personal Accident Insurance

Personal accident insurances are not contracts of strict indemnity. After

an accident in which the insured person is disabled, it is not practicable
to place him in the same financial position in which he was before the
accident, since no monetary value can be placed on human life. So,
these are fixed benefit policies.

Limitation of Liability of Insurer

(i) The sum insured is the maximum limit of liability under the policy
and is always defined in policy.

(ii) If sum insured is less than required the condition of average will
be applicable. In such case only that proportion of loss is
payable, which the sum insured bears to the market value of the
insured property at the time of loss.

(iii) Some policies are subject to “excess” or “franchises”.

The difference between ‘excess’ and ‘franchise’ should be

clearly understood. In either case, if the loss does not reach the
limit, it is not payable at all. If it exceeds the limit, the excess
only is payable under the ‘excess’ clause and the entire loss is
payable under the ‘franchise’ clause

For example, if there are two insurance policies ‘A’ and ‘B’ policy
‘A’ subject to an excess of Rs.1,000/- and policy ‘B’ subject to a
franchise of Rs.1,000/-, and if a loss of Rs.500/- is reported
under each policy, nothing will be payable under both the
policies.

If however, the loss under each policy was Rs.1,100/-, policy “A’
will pay Rs.100/- only but policy ‘B’ will pay Rs.1,100/-.

(iv) Salvage is property, which is partially damaged, by fire for

example, and if the full loss is paid, the insurers may take over
the salvage and dispose it off.

2.2.3.1Subrogation under Policy Conditions

The right of subrogation is implied in all contracts of indemnity

and is automatic and without any express condition in contract.

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Subrogation may be defined as the transfer of rights and
remedies of the insured to the insurer who has indemnified the
insured in respect of the loss. If the insured has any rights of
action to recover the loss from any third party, who is primarily
responsible for the loss, the insurer, having paid the loss, is
entitled to avail himself of these rights to recover the loss from
the third party. The effect is that the insured does not receive
more than the actual amount of his loss and any recovery
effected from the third party goes to the benefit of the insurer to
reduce the amount of his loss.

The principle may be illustrated by the following example:

If cargo is damaged due to the negligence of a carrier (e.g.

railways, truck operators, shipping companies etc.) who has an
obligation to make good the loss of the insured, the benefit of
this obligation passes to the insurer.

The right of subrogation is implied in all contracts of indemnity,

In other words its application to contracts of indemnity is
automatic without any express condition in the contract. It
arises, however, only after payment of a loss.

Fire and miscellaneous policies contain an express condition to

the effect that the right of subrogation can be exercised by the
insurer even before payment of a claim. In certain
circumstances, it becomes necessary to take action immediately
against a third party in order to ensure that the rights of recovery
are not prejudiced by any delay.

Marine insurance policies are subject to the doctrine of

subrogation, but the policies do not contain any conditions, and
the insurers are subrogated to the rights of the insured only after
payment of claim.

The IRDA Regulations make specific provisions that the

policyholders shall assist the insurer in recovery of claims from
other parties.

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 2.2.3.2Contribution under Policy Conditions

If an insured takes out more then one policy, say two policies,
he can not recover the claim two times, it would amount to
making profit, he can recover only one claim from any one of
insurance companies, or each company is liable for ratable
proportion of claim.

Sum Insured Rs.3,00,000/- Claim Rs.1,80,000/-

Claim
Sum insured with insurer A Rs. 50,000/- A pays Rs.30,000/-
Sum insured with insurer B Rs.1,00,000/- B pays Rs.60,000/-
Sum insured with insurer C Rs.1,50,000/- C pays Rs.90,000/-

Total Rs.3,00,000/- Total Rs.1,80,000/-

The application of the principle of contribution is subject to the

following pre-requisites.

1. The subject matter must be common to all policies.

2. The peril, which is causing loss, must be common.
3. The interest covered must be the same in all policies,
must be in favour of same insured.
4. The policies must be in force at the time of loss.
5. The policies must be legally enforceable.

2.2.4 Proximate Cause

In an insurance contract the claim/loss to the property is payable if it is

caused by a peril insured in the policy, similarly if it is caused by
uninsured peril it is not payable. If the loss is caused by one peril only it
is easy to decide if claim is payable or not. In actual situation the loss
may be the result of two or more causes acting simultaneously, or one
after the other. It becomes then, necessary to choose the most
important, the most effective, and the most powerful cause which has
brought about the loss. This cause is termed as the Proximate Cause
all other causes being considered as remote.

2.4.1.1Example

A person insured under a personal accident insurance policy

went out hunting and met with an accident. Due to shock and
weakness, he was not able to walk, whilst lying on the wet

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 ground he contacted cold, which developed into pneumonia,
which caused his death.

The court held that the proximate cause was accident covered in
the policy and the remote cause was pneumonia, hence claim
was payable.

2.4.1.2Example

A person was covered under personal accident insurance policy.

He suffered accidental injuries and was taken to hospital. While
undergoing treatment he contracted an infectious disease, which
caused his death. The court held that the proximate cause of
death was infectious disease and the remote cause was
accident. Hence the claim was not payable under personal
accident policy.

The proximate cause or theory of cause proxima enables one to

decide which one is remote cause and which one is proximate
cause. If there are more then one cause or concurrent causes
theory of cause proxima must be used.

EXERCISE

1. Name the conditions to an insurance contract

2. Name the principles of general insurance used by court of law in India, and
explain it by giving example in each case.
3. When is the insurance contract unenforceable?
4. Explain what is void contract and voidable contract.
5 Explain the corollary of principle of indemnity, i.e. subrogation and condition of
contribution.
6 What is duty of disclosure to material fact of a party in insurance contract?
Explain it with principle of utmost good faith.

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 UNIT – 3
INSURANCE DOCUMENTS

3.1 Proposal Form

1. The company’s printed proposal form is normally used for making an

application for the required insurance cover. The proposal form
contains questions designed to elicit all material information about the
particular risk proposed for insurance. The number and nature of
questions vary according to the particular class of insurance
concerned.

2. In marine cargo insurance, it is not the practice to use a proposal form,

although sometimes it is usual to obtain a questionnaire or a
declaration form duly completed. Proposal forms are used for marine
hull insurance.

3. In fire insurance, practice varies among the companies. Proposal forms

are not generally used for large industrial risks where inspection of the
risk is arranged before acceptance of the risk. Forms are used for
simple risks. Proposal forms are used in respect of risks, which are
normally declined but have to be accommodated to retain the goodwill
of the client.

4. In miscellaneous insurance, proposal forms are invariably required and

they incorporate a declaration which extends the common law duty of
good faith. Fire proposal forms may or may not have the declaration.

5. In proposal form questions are asked related to insurance contract.

Answers to questions will form basis of contract.

¾ Proposer’s name, address profession / occupation / business,

mortgage bank interests.
¾ Details of present previous insurance, including any insurer had
declined it.
¾ Loss experience.
¾ Sum insured.
¾ Signature, date, place, agent’s recommendation.
¾ There are special questions related to class of insurance / Risk
to be insured.

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 ¾ Purpose is to provide material facts information.
¾ The form includes declaration by the insured that proposal form
is the basis of insurance contract and any wrong answer will
give the right to insurer to avoid the contract.

3.2 Policy Form

It provides evidence of contract of insurance; it is also stamped document and

can be presented in court of law.

The schedule type of policy can be divided into certain distinct sections.

3.2.1 Heading
Giving name and address of insurance company.

3.2.2 Preamble or recital clause

It states name of parties to contract, refers to proposal form and
declaration, refers to premium paid as consideration.

3.2.3 Operative or insuring clause

It states the risks covered and risks excluded; it also defines sum
insured and limit of liability. It says the circumstances in which insurers
are liable to make payment to the insured.

3.2.4 Schedule
Generally gives following details.

Name of insured, address, policy no, date of issue, period of insurance,

risks covered/property covered, annual premium actual premium
payable.

3.2.5 Conditions
It contains do’s and don’ts of policy to regulate the insurance contract.
They are called express conditions.

Express conditions serve various purposes. Some conditions deal with

details of practice. Example is the condition which provides for
cancellation of policy, timely notification of loss to the insurers, etc. In
the absence of these express conditions, the contract of insurance
would be subject only to the implied conditions which relate to
(1) good faith,
(2) insurable interest;

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 (3) existence of the subject matter of insurance; and
(4) identification of the subject matter.

3.3 Warranties

Apart from express conditions, there are express warranties incorporated in

the policy. These may be printed on the policy itself, or more commonly,
attached to the policy in separate warranty forms. Having accepted a risk for a
certain rate of premium and subject to certain terms and conditions, the
insurer would like to ensure that the risk remains, throughout the duration of
the policy, the same as it existed at the time of the proposal. The insurer
would like to be protected against the introduction of some feature, which may
increase the risk. For this purpose, warranties are inserted in the policy.

Examples:

Fire insurance
Warranted that during the currency of this policy no hazardous goods will be
stored in the building herein mentioned.

Marine insurance
(i) Warranted that the goods are packed in double gunny bags.
(ii) Warranted that the goods are shipped by a ‘First Class’ steamer.

Burglary insurance
Warranted that the premises are guarded by a watchman at all times.

A warranty, therefore, is a condition expressly stated in the policy on the literal

fulfillment of which the validity of the contract depends. It is a condition
precedent to the contract. It must be observed and complied with strictly and
literally, irrespective of the fact whether it is material to the risk or not. If a
warranty is breached, the policy becomes voidable at the option of the
insurers even when it is clearly established that the breach has not caused or
contributed to a particular loss. However, in practice, if the breach of warranty
is of a purely technical nature and does not, in any way, contribute to or
aggravate the loss, losses are treated as non-standard claims and settled
according to certain norms and guidelines.

3.4 Cover Notes

It is issued as evidence of protection for temporary period of time and to prove

that cover is in force. Negotiations are going on for insurance, cover is

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 provided on provisional basis by charging provisional premium, when policy
can not be issued without risk details, cover note is issued.

3.5 Certificate of Insurance

Motor
In motor insurance, in addition to the policy a certificate of insurance is
required by the Motor Vehicles Act. This certificate provides evidence of
insurance to the police and Registration authorities. It contains the essential
features of the cover. Including the terms and conditions.

Marine
Certificates of insurance are issued to provide evidence of cover on
shipments insured under cargo open cover or floating policies.

3.6 Endorsement

This document is issued to modify terms and conditions of policy already

issued. It is done in memorandum form and it is called endorsement.

Endorsement can be issued during currency of policy to record alterations

like, change in sum insured, change in risk covered, transfer of property,
cancellation of cover, extension of risk, and change in name/address.

3.7 Renewal Notice

It is issued one month before expiry date of policy to the insured. It requests
insured to pay renewal premium on or before renewal date, to renew the
insurance contract. Insured is also requested to let them know if any change
is there or required in elements of policy.

3.8 Claim Form

The claim form is required to elicit full information regarding circumstances of

loss, date and time, cause of damage, brief estimate of repairs/replacements.

3.9 Survey Report

This report is issued by an independent surveyor who is having license to

survey the claim. Surveyors visit the site of accident; inspect the damage to
property, cause of damage, repairs/ replacements and issue report Surveyors

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 some time issue preliminary/interim/on account/ final survey report Based on
survey report claim settlement is offered.

QUESTIONS YOU ANSWER, TO CHECK YOUR UNDERSTANDING

1. Name the different documents used in general insurance industry.

2. Write a short note on each document, explaining the purpose and utility.
3. Differentiate between cover note and certificate of insurance.
4. Why should one check the insurance document, when received from insurer?
5. Explain the purpose of renewal notice.
6. What details will you check in the endorsement issued by insurer?

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 UNIT – 4
RISK MANAGEMENT AND CODE OF CONDUCT FOR
INSURANCE AGENTS AND BROKERS

RISK MANAGEMENT

Risk management is a new managerial discipline, which has become part of

business, in many corporate firms.

4.1 Definition

Risk management may be defined as a managerial function concerned with

the protection of the firm’s assets, earnings, or profits, legal liabilities and
personal liabilities against financial losses that may result from fortuitous
events i.e. accidental happenings.

Risk management follows a systematic process, which involves five steps

4.2 Risk Identification

It means identification of risk or loss producing event e.g. fire, flood, burglary
etc. A detailed check list of risk and physical inspection of premises,
processes, and products are some of the methods used for risk identification.

4.3 Risk Evaluation

It means evaluation of losses whether losses will occur occasionally /

frequently / regularly and what will be the size of losses medium / small /
large. It means what will be the frequency and severity of losses. The risk like
explosion / flood / earthquake have low frequency but high severity.

4.4 Risk Handling

It means appropriate technique or method of handling risk. It can be risk

avoidance, risk reduction, loss prevention, risk transfer, risk retention etc.

Risk avoidance means try to avoid the risk if you can, but this is always not
possible/practicable in all cases. Change of site of construction may avoid the
risk, but may not be worthwhile.

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 4.4.1 Risk reduction
Changing the process may result into risk reduction, will it be
acceptable to quality product manufacturing.

4.4.2 Loss prevention

A safety device may prevent loss; will it be worthwhile considering
cost?

4.4.3 Risk retention

Risk retention can be active or passive. Active retention means risk
retained as a part of deliberate management strategy, after conscious
evaluation of possible causes and losses, which is known as active
form of risk retention. Passive form of risk retention means risk retained
through negligence.

4.4.4 Risk transfer

It means that, activity that creates risk is transferred to a contractor/by
insurance/by law/by a contract. By insurance contract risk / loss can
be transferred from a party to an insurance company who has
experience of handling the risk.

4.5 Implementation

Out of all techniques available risk manager has to finally decide which
technique he wants to implement so that risk management purpose is served.

4.6 Feedback and Review

After annual period take a feedback of handling technique and review the
same and decide for next year the handling technique.

4.7 Insurance contracts are nothing but handling of risk management efficiently.

CODE OF CONDUCT FOR INSRUANCE AGENTS AND BROKERS

Insurance Regulatory & Development Authority has laid down a code of conduct for
the Insurance Agents and Brokers.

The regulations prescribes qualifications, practical training and passing of Pre-

recruitment Examination.

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Code of Conduct for Agents

(i) Every person holding a license, shall adhere to the code of conduct specified
below;
(a) Identify himself and the insurance company of whom he is an
insurance agent;
(b) Disclose his license to the prospect on demand;
(c) Disseminate the requisite information in respect of insurance products
offered for sale by his insurer and take into account the need of the
prospect while recommending a specific insurance plan;
(d) Disclose the scales of commission in respect of the insurance product
offered for sale, if asked by the prospect;
(e) Indicate the premium to be charged by the insurer for the insurance
product offered for sale’
(f) Explain to the prospect the nature of information required in the
proposal form by the insurer, and also the importance of disclosure of
material information in the purchase of an insurance contract;
(g) Bring to the notice of the insurer any adverse habits or income
inconsistency of the prospect, in the form of a report (called “Insurance
Agents’ Confidential Report”) along with every proposal submitted to
the insurer, and any material fact that may adversely affect the
underwriting decision of the insurer as regards acceptance of the
proposal, by making all reasonable enquiries about the prospect;
(h) Inform promptly the prospect about the acceptance or rejection of the
proposal by the insurer;
(i) Obtain the requisite documents at the time of filing the proposal form
with insurer; and other documents subsequently asked for by the
insurer for completion of the proposal;
(j) Render necessary assistance to the policyholders or claimants or
beneficiaries in complying with the requirements for settlement of
claims by the insurer;
(k) Advise every individual policyholder to effect nomination or assignment
or change of address or exercise of options, as the case may be, and
offer necessary assistance in this behalf, wherever necessary.

(ii) No Insurance Agent shall –

(a) Solicit or procure insurance business without holding a valid license;
(b) Induce the prospect to omit any material information in the proposal
form;
(c) Induce the prospect to submit wrong information in the proposal form
or documents submitted to the insurer for acceptance of the proposal
(d) Behave in a discourteous manner with the prospect;

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 (e) Interfere with any proposal introduced by any other insurance agent;
(f) Offer different rates, advantages, terms and conditions other than
those offered by his insurer;
(g) Demand or receive a share of proceeds form the beneficiary under an
insurance contract;
(h) Force a policyholder to terminate the existing policy and to effect a new
proposal from him within three years from the date of such termination;
(i) Have, in case of a corporate agent, a portfolio of insurance business
under which the premium is in excess of fifty percent of total premium
procured, in any year, from one person (who is not an individual) or
one organization or one group of organizations;
(j) Apply for fresh license to act as an insurance agent, if his license was
earlier cancelled by the designated person, and a period of five years
has not elapsed form the date of such cancellation;
(k) Become or remain a director of any insurance company.

(iii) Every insurance agent shall, with a view to conserve the insurance business
already procured through him, make every attempt to ensure remittance of the
premiums by the policyholders within the stipulated time, by giving notice to
the policyholder orally and in writing.

Direct Broker

“Direct Broker” is licensed to carry out specified functions in life insurance or general
insurance or both on behalf of his clients.

Functions of Direct Broker

Code of conduct as applicable to the Agents, also applies to the broker. In addition,
the functions of a direct broker shall include any one or more of the following:

(a) Rendering advice on appropriate insurance cover and terms;

(b) Submitting quotation received form insurer/s for consideration of a client;
(c) Providing requisite underwriting information as required by an insurer in
assessing the risk to decide pricing terms and conditions for cover;
(d) Acting promptly on instructions from a client and providing him written
acknowledgements and progress reports.
(e) Providing services related to insurance consultancy and risk management;
(f) Assisting in the negotiation of the claims; and
(g) Maintaining proper records of claims.

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QUESTIONS YOU ANSWER, TO CHECK YOUR UNDERSTANDING

1. Define risk management.

2. Name the steps of risk management and explain each in brief.
3. What is called handling of risk?
4. Name and explain the way risk can be transferred.
5. Explain the risk management matrix of frequency and severity; explain the
handling technique in each quadrant.
6. Explain the risk retention technique
7. Prepare the list of information required for identification of risk
8. Prepare the list of information required for evaluation of risk.
9. What is the risk financing? How it is done in practice?
10. What are the functions of Insurance Agent?
11. What an Insurance Agent shall not do?
12 Functions of Insurance Broker.

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 UNIT – 5
THEORY AND PRACTICE OF RATING

INTRODUCTION

The most important question in underwriting is, what should be the premium
rate/consideration that should be charged for covering risk under a policy contract.

The rate of premium is fixed according to certain principles.

Firstly : The premium varies according to the degree of hazard or exposure to

loss or damage of the property

Secondly : To assess the variations in the degree of hazard, property must be

classified according to the hazards involved.

Thirdly : The degree of hazard is determined on the basis of past loss

experience.

5.1 Degree of Hazard

The first principle – Greater the risk, higher is the premium

The more probable the loss – higher is the premium

The more severe the loss – higher is the premium

Example: In a building of wooden construction premium rate is higher than

in building with concrete construction.

5.2 Classification of Risk

The risk is classified into groups/individual that are facing similar type of risks /
degree of hazard.

Example: The risk of Motor vehicles are classified into private cars, motor
cycles, three wheelers, commercial vehicles etc.

The fire risk is classified into dwellings, shops, godowns, manufacturing etc.
Within the broad group further sub-division is made e.g. godowns are further

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 classified as non-hazardous, hazardous or extra-hazardous depending upon
the commodities stored.

5.3 Past Loss Experience

The rate of premium is arrived at on basis of past loss experience and that is
mathematical value of the risk.

If the loss experience of a large number of motorcycles is collected for a

period of 10 years.

The same can be expressed as mathematical value as under:

L
---------- x 100
V

Where, L is sum of the losses and

V is the value of motorcycle

Example:

The following hypothetical figures are used for illustration

- Value of a motor cycle Rs.50,000/-

- Loss experience. Out of motor 1000 cycles, in say, 10 years, 50 cycles
are stolen.
- On an average, five motorcycles become total losses due to theft every
year.

Applying the formula, the result will be :

Losses (Rs.50,000 x 5)

Rs.2,50,000
----------------- x 100 = ½%
5,00,00,000

Values (Rs.50,000 x 1000)

Therefore the rate of premium that a motorcycle owner pays is ½% of

Rs.50,000/- i.e. Rs.250/- per year. This is called the ‘pure’ premium.

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 The final rat of premium will consist of the following components:-
(i) Loss payments
(ii) Loss expenses (e.g. survey fees)
(iii) Agency commission
(iii) Expenses of management
(v) Margin for reserves for unexpected heavy losses e.g. 7 total losses
against assumed
(vi) Margin for profits

5.4 The Law of Probability / The Law of Large Numbers / The Law of
Averages

5.4.1 It provides a good basis for forecasting future events according to this
law, the greater the number of instances considered and longer the
period examined, more probability that past loss experience will be
repeated in future. This law is valid only if the events being studied are
random and not deliberately created.

5.4.2 It is said that for successful operation of the insurance business, a

large number of risks should be available for insurance. The insurers
are able to anticipate future losses more accurately and fix premium
rates.

5.4.3 The law of probability is subject to the qualification that conditions

remain same, no new parameters.

5.4.4 The fixing of premium rate calls for mathematical calculation based on
past loss experience as also good deal of judgement and foresight.

5.4.5 Tariffs
In India, until end of year 2006, premium rates were fixed by tariff
advisory committee, appointed by Government for some class of
insurance. Government / Statutory Body appointed to fix premium rate
is called Tariff Advisory Committee. With the withdrawal of tariff, there
is no such committee now.

5.5 Market Agreements / Tariff

Insurance companies for new class of business provide uniformity in policy

wording and minimum premium rates to be charged. This agreement is called
market agreement. Now all PSU companies are working independently and
no such market agreement exists.

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5.6 Short Period Premium Rates

Premium rates fixed are usually for annual period, if any one needs premium
rates for shorter period, the same is agreed before policy starts and are
usually higher than normal. Short period rates are also applicable when
annual insurance is cancelled by the insured.

5.7 Pro-rata Premium Rates

Policy is already issued and now required to be cancelled by the insurer, the
refund is payable for unexpired period, which is payable at pro rata premium
rates.

QUESTIONS YOU ANSWER, TO CHECK YOUR UNDERSTANDING

1. Name three important aspects of premium rating and explain each one of the
aspects in details
2. Explain what is market agreement?
3. Explain what is called pure premium rate and technical premium rate in
insurance.
4. Explain the law of large numbers or the law of probability.
5. What is called short period rate?
L
6. Explain the formula x 100 for arriving at premium rate.
V

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 UNIT – 6
FIRE AND SPECIAL PERILS INSURANCE

INTRODUCTION

Fire insurance offers financial protection against property damage due to fire or
specified special perils.

6.1 Subject Matter Insured – Examples of Insurable Property

- Building.
- Electrical installation.
- Contents of building (plant & machinery, equipment, accessories)
- Goods in open/storage in building, Raw material, in process, semi
finished, finished, packing materials,
- Utility, boiler, water treatment plant, sub-station, pump-house
- Furniture, fixtures, fittings,
- Pipelines (including content), inside/outside premises.
- Contents in dwelling, shops, hotels etc.

The standard fire and special perils policy covers the following perils:

The perils specified in the policy are -

1. Fire

Excluding destruction or damage caused to the property insured by -

(a) (i) its own fermentation, natural heating or spontaneous

combustion.
(ii) its undergoing any heating or drying process.
(b) Burning of property insured by order of any Public Authority:

Note: Spontaneous Combustion can be covered at extra premium

2. Lightning

3. Explosion / Implosion

Explosion / Implosion cover excludes loss, destruction of or damage.

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 (a) To boilers (other than domestic boilers) or their contents
resulting form their own explosion / implosion.
(b) Caused by centrifugal forces.

Note: This risk be covered by Boiler Explosion policy in Engineering

Insurance

4. Aircraft Damage

Destruction or damage caused by Aircraft, other aerial or space

devices and articles dropped there from excluding those caused by
pressure waves.

5. Riot, Strike and Malicious Damage

Loss of or visible physical damage or destruction by external violent

means directly caused to the property insured by riot, strike, and
malicious damage.

Terrorism damage exclusion warranty:

Notwithstanding any provision to the contrary within this insurance it is

agreed that this insurance excludes loss. Damage cost or expense
directly or indirectly caused by, any act of terrorism.

For the purpose of this endorsement an act of terrorism means an act,

including but not limited to the use of force or violence and / or the
threat thereof, of any person or group(s) of persons whether acting
along or on behalf of or in connection with any organization(s) or
government(s), committed for political, religious, ideological or similar
purpose including the intention to influence any government and / or to
put the public, or any section of the public in fear.

Terrorism cover

When the insured opts for Terrorism Damage cover by paying

additional premium as provided, cover will be granted by attaching an
endorsement:

Terrorism cover will be a separate cover which can be granted only in

conjunction with Riot, Strike and Malicious Damage cover (RSMD),
Terrorism cover will not be given in isolation without RSMD cover.

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 Deductibles

Every claim under terrorism cover will be subject to a deductible as

under:

Industrial Risks: 0.5% of Total Sum Insured subject to a

minimum of Rs.1 Lakh.

Non-industrial Risks: 0.5% of Total Sum Insured subject to a

minimum of Rs.25,000/-

6. Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood

and Inundation

The natural perils cover is defined as :

Loss, destruction or damage directly caused by Storm, Cyclone,

Typhoon, Tempest, Hurricane, Tornado, Flood or Inundation excluding
those resulting from earthquake, volcanic eruption or other convulsions
of nature (wherever earthquake cover is given as an “add cover” the
words “ excluding those resulting form earthquake, volcanic eruption or
other convulsions of nature” shall stand deleted.)

7. Impact Damage

Loss or visible physical damage or destruction caused to the property

insured due to impact by any Rail / Road vehicle or animal by direct
contact not belonging to or owned by –

(a) The insured or any occupier of the premises or

(b) Their employees while acting in the course of their employment.

8. Subsidence and Landslide including Rockslide

“Loss, destruction or damage directly caused by subsidence of part of

the site on which the property stands or Landside/Rockslide
excluding….”

(a) The normal cracking, settlement or bedding down of new

structures
(b) Demolition, construction, structural alterations or repair of
property or ground works or excavations.

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 9. Bursting and/or Overflowing of Water Tanks, Apparatus and Pipes

10. Missile Testing Operations

11. Accidental Leakage from Automatic Sprinkler Installations

12. Bush Fire

Excluding destruction or damage caused by forest Fire.

6.2 General Exclusions

This policy does not cover –

(a) The first 5% of each and every claim subject to a minimum of

Rs.10,000/- in respect of each and every loss arising out of “Act of
God” perils such as Lightning, STFI, Subsidence, Land slide and
Rockslide.

(b) The first Rs.10,000/- for each and every loss arising out of other perils
(the excess is not applicable to dwellings).

(c) Loss, destruction or damage caused by war, and kindred perils.

(d) Loss, destruction or damage directly or indirectly caused to the

property insured by nuclear peril.

(e) Loss destruction or damage caused to the insured property by pollution

or contamination excluding -

(i) Pollution or contamination which itself results form a peril hereby

insured against.
(ii) Any peril hereby insured against which itself results from
pollution or contamination.

(f) Loss, destruction or damage to bullion or unset precious stones, curios

or works of art for an amount exceeding Rs.10,000/- manuscripts,
plans, drawings, stamps, coins or paper money, cheques, books of
accounts or other business books, computer systems records,
explosives etc. Unless otherwise expressly stated in the policy.

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(g) Loss, destruction or damage to the stock in cold storage premises
caused by change of temperature.

(h) Loss, destruction, or damage to any electrical machine, apparatus,

fixture or fitting arising from or occasioned by over-running, excessive
pressure, short circuiting, arcing, self-heating or leakage of electricity
from whatever cause (lightning included) provided that this exclusion
shall apply only to the particular electrical machine, apparatus, fixture
or fitting so affected an not to other machines, apparatus, fixture of
fitting which may be destroyed or damaged by fire so set up.

This is known as “electrical Risks” exclusion. These risks can be

covered under Machinery Insurance policy (Engineering Insurance).

It is to be noted that only damage to the particular electric machine, etc

by specified electrical risks is excluded; but resulting fire damage to
other machines, etc is covered.

(i) Expenses incurred on

(a) Architects, Surveyors and Consulting Engineer’s Fees; and

(b) Debris Removal necessarily incurred by the insured following a
loss destruction or damage to the property insured by an insured
perils in excess of 3% and 1% of the clam amount respectively.

Note: Cover for expenses in excess of 3% and 1% can be arranged by

endorsement

The other exclusions under the policy are –

(a) Loss or damage by spoilage from the interruption of any process

caused by any of the perils covered.

(b) Loss or damage by earthquake.

(c) Loss or damage to insured property if removed to any building or place

other than the insured premises (except machinery temporarily
removed for repairs etc for a period not exceeding 60 days)

(d) Theft during or after the occurrence of any insured perils.

Note: Add-on cover is available for (a), (b), and (c)

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6.3 Sum Insured

6.3.1 Market value basis/depreciated value basis which is arrived at by

deducting, depreciation from its present day replacement value.

6.3.2 Reinstatement value basis, which is arrived at by reinstating the

property with same kind or type by new property.

6.4 Period of Insurance

6.4.1 Usually 12 months, expires at mid-night on last day.

6.4.2 The policy can be taken for short period by paying short period rate.

6.5 Premium Rate

Premium rate depends on following:

1. Nature of industry
2. Nature of storage in open/inside building etc.
3. Nature of property
4. Nature of operation/construction/processing etc.
5. Nature of segregation of property etc.

6.6 Policy Conditions

6.6.1 Refers to misrepresentation, misdescription or non-disclosures of

material facts. In such event the policy becomes voidable.

6.6.2 Refers policy ceases after 7days from the date of fall or displacement
of any building or part there of. Insurer can continue on revised terms.

6.6.3 Refers to discontinuing risk, if there is any change in risk insured must
inform.

6.6.4 If there is concurrent marine policy claim will be preferred in marine

and then under fire.

6.6.5 Cancellation of policy by insured on short period basis of premium

rates, cancellation of policy by insurer on pro rata basis of premium
rates.

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6.6.6 Refers to duty of insured after happening of claim, notice of claim,
15days to file claim details, of other insurances going to court,
arbitration, etc.

6.6.7 Refers to rights of insurers after the happening of claim, this does
mean that insured cannot abandon damaged property, whether the
insurers takes possession or not.

6.6.8 Refers to fraudulent false, claim willful negligence, etc all benefits will
be forfeited.

6.6.9 Refers to option available to the Insurance Company to reinstate or

replace instead of paying claim, i.e. when insured prefers highly
exaggerated claim.

6.6.10 Refers to condition of average, when sum insured selected in policy is

lower than its value. This is the condition of average. An insured is
expected to insure his property for its full value. In the event of claim if
it is found that he has not covered the property for its full value, then he
has to bear a portion of the claim on his own account.

Example

Value of property = Rs.2,00,000/-

Sum insured = Rs.1,50,000/-

Loss = Rs.80,000/-

1,50,000
The amount payable= x 80,000 = Rs.60,000 / −
2,00,000

6.6.11 Refers to condition of contribution, i.e. risk covered in more than one
policy.

6.6.12 Refers to condition of subrogation, i.e. if third party is responsible for

causing damage.

6.6.13 Refers to provision for arbitration.

6.6.14 Refers to all communication to insurers in writing or printed.

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 6.6.15 Refers to re-instatement of sum insured i.e. after the claim is Settled
the sum insured is required to be reinstated by paying premium.

6.7 Extensions (Add on covers)

1. Architects fees in excess of 3.0%

2. Debris removal expenses in excess of 1.0% of claim amount
3. Deterioration of stocks in cold storage premises due to temperature
rise
4. Spontaneous combustion
5. Forest fire
6. Impact damage
7. Omission to insure, additions alterations or extensions
8. Earthquake (shock and fire)
9. Spoilage material damage cover under a separate item in the policy
10. Temporary removal
11. Loss of rent
12. Start up expenses
13. Escalation clause

Escalation clause:

This clause, applicable to policies on buildings, machinery and accessories

only, can be incorporated in policies on payment of additional premium.

The clause allows automatic regular increase, not exceeding 25% in the Sum
Insured throughout the period of the policy. The automatic increase operates
from the date of inception up to the date of occurrence of any of the insured
perils. Pro rata condition of average will apply as usual.

6.8 Special Policies

1. Floater Policy

These policies cover stock at various specific locations under one sum
insured. The insured may have stocks in two or more godowns, He is
able to declare for insurance the total value of goods in all godowns but
not separate values for each godown.

Unspecified locations are not allowed. Similarly, in a manufacturing

risk, the stocks in the process blocks, godowns and /or in the open can
be covered under one sum insured

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2. Declaration Policies

To take care of frequent fluctuations in stocks / stock values,

Declaration policy(ies) can be granted subject to the following
conditions.

a. The policy is issued for a sum insured selected by the insured

(Insurers stipulate a minimum Sum Insured).
b. Monthly declarations based on the average of the value at risk
on each day or highest value on any day of the month shall be
submitted by the insured. If declarations are not received within
the specified period, the full Sum Insured under the policy shall
be deemed to have been declared.
c. Refund of premium on adjustment based on the declaration /
cancellation shall not exceed 50% of the total premium.

IIIustration

Sum Insured Rs.1,00,00,000 (1 crore)

Rate Re.1/- per mille
Premium Rs.10,000/-
Monthly declaration:
January 52,00,000
February 56,00,000
March 46,00,000
April 46,00,000
May 30,00,000
June 30,00,000
July 30,00,000
August 30,00,000
September 40,00,000
October 40,00,000
November 40,00,000
December 40,00,000

Total Declaration ------------- Rs.4,80,00,000/-

Average Sum Insured Rs.40,00,000/-
Premium Rs.10,000/-

Premium on average S.I. Rs.4,000

Rs.6,000

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 According to rules above refund cannot exceed 50% of the total
premium. Therefore, refund is Rs.5,000/- and not Rs.6,000/-

3. Reinstatement Value Policy

This is the fire policy with the reinstatement value clause attached to it.
The clause provides that in the event of loss, the amount payable is the
cost of reinstating property of the same kind or type, by new property.

This basis of settlement differs from the basis under the fire policy
where the losses are settled on the basis of market value i.e. making
deductions for depreciation, etc.

The reinstatement value clause incorporates the following special

provisions:

(a) Reinstatement must be carried out by the insured and

completed within 12 months after the destruction of damage,
failing which the loss will be settled on the normal indemnity
basis i.e. according to the fire policy.

(b) The reinstatement basis of settlement will not apply.

- If the insured fails to intimate to the insurer within 6

months or any extended time his intention to replace the
damaged property.

- If the insured is unable or unwilling to replace the

damaged property. In such cases the loss will be settled
on the normal basis of indemnity.

(c) The work of reinstatement may be carried out upon another site
and in any manner required by the insured provided the liability
under the policy is not thereby increased.

These insurances are granted to insured whose bona fides are

satisfactory and, are generally issued only in respect of building, plant
and machinery in a comparatively new condition.

These insurances are not granted on stocks.

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 4. Industrial All Risks Policy

This is package cover designed for industrial risks (both manufacturing

and storage facilities) with an overall sum assured of Rs.100 crores
and above. The policy provides cover for the following:

- Fire and special perils

- Burglary
- Machinery Breakdown / Boiler Explosion / electronic equipment
(Material Damage)
- Business Interruption (Fire & allied perils )
- Business Interruption (machinery Breakdown). This is an
optional cover.

Discounts in rates are provided. Under insurance of up to 15% is

permitted. Apart from the reduced costs of premium, there is
administrative convenience both for the insured and the insurer.

6.9 Consequential Loss (Fire) Insurance

Fire insurance is designed to provide protection in respect of loss of or

damage to buildings, machinery, furniture and fittings, goods and
merchandise, etc. by fire and allied perils. The insurance affords cover for
“material damage”. However an indemnity for the “material damage” does not
provide complete protection to the insured who may also suffer trading losses
due to total or partial stoppage of the business.

The purpose of consequential loss or loss of profit insurance (also known as

Business Interruption Insurance) is therefore, to make good these losses,
namely net profit, standing charges and increased cost of working.

Turnover of a business consists of the following elements:

(a) Variable Charges:

These are expenses incurred in producing the goods (e.g. purchase of
raw materials, wages, etc.)

(b) Standing Charges:

These expenses are fixed in amount irrespective of the volume of the
business transacted (e.g. taxes, bank interest, salaries to permanent
staff, etc.)

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(c) Net Profit:
This is turnover minus variable and standing charges.

(d) Gross Profit:

Standing charges, and net profit together constitute the gross profit of
the business.

Indemnity Period

The profits policy provides indemnity in respect of loss of gross profits during
the indemnity period which is selected by the insured. The indemnity period
chosen by the insured may very from 3 months to 3 years.

The indemnity period is to be distinguished from the period of insurance which

is usually a year; the insured peril must occur during the period of insurance
and the indemnity period commences on the date of loss and terminates
when the business returns to normal level or on the completion of selected
period which ever is earlier.

The Sum Insured

The sum insured is to be fixed by the insured. As the indemnity provided by

the consequential loss policy is in respect of loss of gross profits for the
indemnity period naturally the sum insured should represent the gross profits
of the indemnity period selected. Where the indemnity period is 12 months or
lees, the sum insured should be the annual amount of the gross profit i.e. the
annual amount of the net profit and the insured standing charges. Where the
indemnity period is 24 months, the sum insured should represent twice the
annual gross profit and so on.

The sum insured is to be computed form the insured’s accounts. The standing
charges have to be computed from the insured’s accounts. The standing
charges have to be specified by the insured. Some examples of the standing
charges are :-

- Interest on loans, bank overdrafts and debentures, including brokerage

on deposits;
- Rent;
- Directors fees and remuneration;
- Legal, auditing and other professional fees and expenses;
- Insurance premiums;
- Advertising and publicity expenses;

40
 - Conveyance, Stationery, Postage, Telephone, Telex, Telegram,
Telephone expenses;
- Office and General Establishment expenses;
- Salaries to permanent staff including Employees State Insurance
contributions;
- Wages including Employees State Insurance contributions etc.

When Loss becomes Payable

(a) Fire or other insured peril must occur at the insured premises

(b) Property used for the business of the insured at the insured premises
must be destroyed or damaged and the loss must be admissible in
material damage policy.

(c) The business must be interrupted or interfered with as a consequence.

(d) The resulting loss is paid in accordance with the provisions of the
policy.

Note: A formula is incorporated in the policy to calculate the loss. (This is

known as “specification”).

Payment of loss under the L.O. P. policy is subject to payment or admission of

liability for the loss under the material damage insurance i.e. fire and special
perils policy. (This is the material damage clause)

QUESTIONS YOU ANSWER, TO CHECK YOUR UNDERSTANDING

1. Name the risks covered in the fire and special peril policy.
2. Name the add on covers that can be covered in fire and special peril policy.
3. List out the risks not covered in the fire and special peril policy
4. What are the basis of sum insured in the fire and special peril policy?
5. What are the basis of claim settlement in the fire and special peril policy?
6. What are the basis of premium charging in fire and special peril policy?
7. What are the special types of covers available under fire and special peril
policy?
8. Write note on Reinstatement Value Policy.
9. What is the importance of Loss of Profit (Fire) Insurance?
10. How the Sum Insured is Fixed under Loss of Profit (Fire) Insurance Policy?
Name some of the Standing Chares.

41
11. Explain in brief what is meant by -
(i) Variable charges
(ii) Standing charges
(iii) Net profit
(iv) Gross profit
(v) Indemnity period
(vi) Material damage proviso.

42
 UNIT – 7
CLAIMS

7.1 The processing and settlement of claims is one of the important functions in
an insurance organization. Indeed, the payment of claims may be regarded as
the primary service of insurers to the public.

For proper settlement of claims, it is necessary to have a sound basic

knowledge of General Law of Contract as applicable to insurance and the
special principles of law governing in Insurance contracts. In addition it is
necessary to have a thorough knowledge of the terms, conditions and
warranties incorporated in the policies as also the loss assessment
procedures.

The settlement of claims has to be prompt as well as fair. It is also necessary

that the personnel handling claims must have the personal qualities of
patience, tact, diplomacy and courtesy.

The settlement of claims involves examination of the loss in relation to the

coverage under the policy and compliance with policy conditions and
warranties;

The first aspect to be dealt with is whether the loss is within the scope of the
policy. The legal doctrine of proximate cause provides guidelines to decide
whether the loss is caused by an insured peril or an excepted peril.

The burden of proof, or to use the legal expression, the onus of proof that the
loss is within the scope of the policy is upon the insured. However, if the loss
is caused by an excepted peril the onus of proof is on the insurer. However,
this onus of proof under some policies is shifted back to the insured so that he
has also to prove that the loss was not caused by an excepted peril.

The second aspect to be decided is whether the insured has complied with
policy conditions, especially conditions which are precedent to liability. These
conditions relate to immediate notification of loss to the insurers, submission
of proof of cause and extent of loss, providing assistance and cooperation to
the insurers in recovering losses from third parties, or others responsible for
the loss.

If a breach of condition is alleged, the onus of proving it is on the insurers. If

the insurers, after having learnt of breach of conditions, have ignored the

43
 breach then they are deemed to have waived their rights and cannot rely upon
the breach of condition to repudiate liability.

The third aspect is in respect of compliance with warranties. The survey

report would indicate whether or not warranties have been complied with.
Insurers, however, take a liberal view when the breach of warranty is purely of
a technical nature and is not in any way connected with the cause of loss or
the extent of loss.

The fourth aspect relates to the examination of the observance of utmost

good faith by the proposer before the conclusion of the contract, and if
provided by policy conditions, during the currency of the policy. Especially on
the occurrence of a loss the insured is expected to act as if he is uninsured. In
other words, he has a duty to take measures to minimize the loss.

The fifth aspect concerns the determination of the amount payable. The
amount of loss payable is subject to the sum insured. However, the amount
payable will also depend upon the following:

(i) The extent of the insured’s insurable interest in the property affected
(ii) The value of salvage
(iii) Application of pro-rata average
(iv) Deduction for any excess or franchise
(v) Application of contribution and subrogation conditions

The sixth aspect relates to resolution of disagreement between the insurers

and the insured. The majority of property and liability policies incorporate an
Arbitration condition to resolve disputes regarding the amount of loss, the
liability being admitted under the policy. If question of liability is involved, the
matter has to be settled through a court of law. In marine policies there is no
arbitration condition.

The final aspect deals with recovery from the third parties under subrogation
proceeding and requisite contributions from co-insurers, facultative and treaty
reinsures, etc.

7.2 The claims which are dealt with under insurance policies fall into the following
categories:

(a) Standard claims:

These are claims which are clearly within the terms and conditions of
the policy. Settlement of these claims present no difficulty.

44
 (b) Non-Standard claims:
These are claims where the insured has committed a breach of
condition or warranty. The settlement of these claims is considered
subject to certain rules and regulations framed by the insurers.

(c) Ex-gratia payments:

These are losses which fall outside the scope of cover under the policy
and hence are not payable. However, in very special cases, to avoid
hardship to the insured, settlement of these losses is considered as a
matter of grace. For example, due to genuine oversight a certain item
of property is not included in the insurance although it was the intention
of the insured to include it.

Ex-gratia settlements are never made on the basis of the full amount of
the loss. A certain percentage only is paid.

Also, such claims are paid “without precedent” so that the insurers do
not have an obligation to meet similar claims in future. Although, there
is no legal liability to pay for such losses yet the courts have approved
of such settlements. In the English case Taunton vs. Royal Insurance
Co., the court held that the directors were authorized, for the benefit of
the business, under the discretionary powers vested in the managers
of a trading concern to pay such losses, the payment being akin to an
expenditure upon an advertisement. Thus ex-gratia payments can be
justified on grounds of good business policy.

Since the payments are made without admission of legal liability,

subrogation rights do not arise under these payments. Where co-
insurance is involved the leading office has to consult the co-insurers
before deciding on ex-gratia settlement. In any case, ex-gratia
payments require the approval of the Boards of Directors of the
companies.

7.3 Claim Settlement – Preliminary Procedure

7.3.1 Notice of loss

1. Policy conditions usually provide that the loss be intimated to the

insurer immediately. The purpose of an immediate notice is to
allow the insurer to investigate a loss at its early stages.

45
 2. Under certain types of policies (e.g. Burglary) notice is also to be
given to police authorities. Under Rail transit cargo policies,
notice has to be served on the Railway also.

7.3.2 On receipt of intimation of loss or damage insurers check that:

- The policy is in force on the date of occurrence of the loss or

damage;
- The loss or damage is by a peril insured by the policy;
- The subject matter affected by the loss is the same as is insured
under the policy; and
- Notice of loss has been received without undue delay.

7.3.3 Investigation and assessment of loss

Surveyor will carry out investigation for following Property damaged.

What is the most probable cause of damage?

If property will be repaired/ replaced or combined, no temporary repairs

will be permitted; Photographs will be taken as evidence. Surveyor will
assess the cost of repairs/replacements and give final assessment.

7.3.4 Survey report

Surveyor may give preliminary/ interim /final report considering status

of claim progress. Surveyor may give adjustment of loss in terms of
policy conditions. It will include salvage, under insurance, deductibles,
parts not payable etc. He must give clear opinion regarding cause of
damage and if that is covered in terms of insurance contract. He must
give opinion about sum insured of damaged item and its replacement
value as on the date of damage

Insured will submit claim form, photographs and estimate/bills of

repairs to surveyors to facilitate the procedure of claim.

7.3.5 Insurer will offer claim settlement along with claim discharge voucher.

7.3.6 Arbitration

If the claim is payable and there is difference of opinion regarding

quantum of loss, insured can go for arbitration. If there is difference of

46
 opinion regarding cause of damage, the insured can go to court of law
within 12 months from date of disclaimer.

7.3.7 Salvage

The parts, which require repairs/replacements will become property of

insurer, Surveyors must assign / assess salvage value, which must be
deducted from claim amount.

7.3.8 Recoveries

After the claim settlement, the insurers under the law of subrogation
are entitled to the rights and remedies of the insured and to recover the
paid loss from third party who may be responsible for loss under
respective law applicable.

7.3.9 Loss minimization

Surveyors are finding out the cause of damage/accident and therefore

they have to suggest the measures of loss minimization in their survey
report for avoiding the loss in future.

7.3.10 Reinsurance

If a policy is having reinsurance, then the loss can be recovered from

reinsurers. Details may be submitted to reinsurers.

QUESTIONS YOU ANSWER, TO CHECK YOUR UNDERSTANDING

1. Name the three types of claims and distinguish each type of claim.
2. Name the 5 legal aspects of claim settlements.
3. Name the important aspects of management of claim settlement.
4. What is the role surveyor play in claim settlement?
5. Explain the following aspects of claim:
Recoveries, loss minimization, and reinsurance.
6. When can claim be referred to arbitrators?

47
 UNIT – 8
EXAMPLES – PRINCIPLES OF CLAIM SETTLEMENT

8.1 Example on Reinstatement Basis

M/s. Adarsh Chemicals had taken a Fire and Special Perils Insurance Policy
for their Chemical Plant at Karamsad for the period 01/01/03 to 31/12/03 on
Reinstatement value basis as under:

Item Sum Insured

a. Building Rs.1,00,00,000/-
b. Plant and Machinery Rs.3,50,00,000/-
c. Electrical Installation including sub-station Rs.75,00,000/-
d. Furniture Fixtures and Fittings Rs.40,00,000/-
e. Stocks and Stocks in Process Rs.3,00,00,000/-

On 25th February 2003 there was a fire in the plant and they reported the loss
to their insurance company. The insurance Company appointed M/s. Arun
Dasgupta & Co. as surveyor, who surveyed the loss and submitted their final
Survey Report on April 15th, 2003. Following is an extract from the survey
report.

1. Fire affected building was partly repaired and replaced and the cost
incurred was Rs.12,00,000/-. The reinstatement value of the building
was found to be Rs.1,20,00,000/- on the date of repair
completion/reinstatement.

2. The cost of repairs and replacement of Plant and Machinery affected

by the fire was Rs.57,00,000/- net of salvage. The re-instatement value
of the plant and machinery was found to be Rs.5,25,00,000/- at the
time of reinstatement.

3. Electrical installation was affected by fire to the extent of Rs.8,00,000/-

its present re-instatement cost was Rs.1,00,00,000/-

4. Furniture Fixtures and Fittings were affected to the extent of

Rs.9,00,000/- by fire and were re-instated by them. The re-instatement
value of Furniture Fixtures and Fittings was Rs.60,00,000/- on the date
of the loss.

48
5. Cost of stocks and stocks in process was affected by fire to the extent
of Rs.30,00,000/- (market value). The sum insured was adequate.

Insured had incurred a cost of removal of debris of Rs.1,25,000/-

What is amount of claim M/s. Adarsh Chemicals will get from the insurance
company?

Compute the loss on reinstatement basis.

SOLUTION
(Assessment on Reinstatement value basis)

A. Building

Repairs to building Rs.12,00,000/-

Insured value Rs.1,00,00,000/-
Reinstatement value Rs.1,20,00,000/-

They are found under insured in the proportion of

1,00,00,000
----------------
1,20,00,000

Therefore claim payable on building will be

1,00,00,000
12,00,000 x ---------------- = Rs.10,00,000/- (A)
1,20,00,000

B. Plant & Machinery

Repairs and replacement of Plant & Machinery Rs.57,00,000/-

Insured value of Plant & Machinery Rs.3,50,00,000/-
Reinstatement value of Plant & Machinery Rs.5,25,00,000/-

They are found under insured in the proportion of

3,50,00,000
----------------
5,25,00,000

Therefore claim payable on plant & machinery will be

3,50,00,000
57,00,000 x ---------------- = Rs.38,00,000/- (B)
5,25,00,000

49
C. Electrical Installations

Repairs/replacements Rs.8,00,000/-
Insured value Rs.75,00,000/-
Reinstatement value Rs.1,00,00,000/-

They are found under insured in the proportion of

75,00,000
----------------
1,00,00,000

Therefore claim payable on electrical installations will be

75,00,000
8,00,000 x ---------------- = Rs.6,00,000/- (C)
1,00,00,000

D. Furniture, Fixtures and Fittings

Cost of Repairs/replacement Rs.9,00,000/-

Insured value Rs.40,00,000/-
Reinstatement value Rs.60,00,000/-

They are found under insured in the proportion of

40,00,000
--------------
60,00,000

Therefore claim payable on furniture, fixtures and fittings will be

40,00,000
9,00,000 x -------------- = Rs.6,00,000/- (D)
60,00,000

E. Stocks and Stocks in Process

Stocks value affected (market value) Rs.30,00,000/-

Insured value (market value basis) Rs.3,00,00,000/-
(No under insurance)

Therefore claim payable on stocks will be Rs.30,00,000/- (E)

Therefore total claim will be Rs. A + B + C + D + E

= Rs.10,00,000 + Rs.38,00,000 + Rs.6,00,000 +
Rs.6,00,000 + Rs.30,00,000
= Rs.90,00,000/-
============

50
 Removal of debris claim

As the insured has not covered the ADD ON cover for removal of debris,
insured is covered for removal of debris only up to 1.0% of claim amount i.e.
Rs.90,000/- and therefore insured will get claim only up to Rs.90,000/- out of
their claim for Rs1,25,000/-.

Final claim of insured will be Rs.90,00,000 + Rs.90,000 = Rs.90,90,000/-

An excess of Rs.10,000/- will be further applicable

8.2 Example on Market Value Basis

M/s. Indian Chemicals had taken a Fire and Special Perils Insurance Policy
for their Chemical Plant at Vadodara for the period 01/01/05 to 31/12/05 on
market value basis as under

Item Sum Insured

a. Building Rs.1,00,00,000/-
b. Plant and Machinery Rs.3,50,00,000/-
c. Electrical Installation including sub-station Rs.75,00,000/-
d. Furniture Fixtures and Fittings Rs.40,00,000/-
e. Stocks and Stocks in Process Rs.3,00,00,000/-

On 25th February 2005 there was a fire in the plant and they reported the loss
to their insurance company. The insurance Company appointed M/s. Arun
Dasgupta and Co. as surveyor, who surveyed the loss and submitted their
final Survey Report on April 15th, 2005.

Following is an extract from the survey report:

1. Fire affected building was partly repaired and replaced and the cost
incurred was Rs.12,00,000/-. The reinstatement value of the building
was found to be Rs.1,20,00,000/- on the date of repair. Market value
was Rs.1,08,00,000/-arrived at by deducting 10% depreciation from
RIV on date of damage.

2. The cost of repairs and replacement of Plant and Machinery affected

by the fire was Rs.57,00,000/-. The re-instatement value of the plant
and machinery was found to be Rs.5,25,00,000/- on the date of
damage. Market value was Rs.3,94,00,000/- arrived at by deducting
25% depreciation from RIV on the date of damage.

51
3. Electrical installation was affected by fire to the extent of Rs.8,00,000/-
its present re-instatement cost was Rs.1,00,00,000/- on the date of
damage. Market value was Rs.80,00,000/- arrived at by deducting 20%
depreciation from RIV on the date of damage.

4. Furniture Fixtures and Fittings were affected to the extent of

Rs.9,00,000/- by fire and were re-instated by them. The re-instatement
value of Furniture Fixtures and Fittings was Rs.60,00,000/- on the date
of the loss, market value was Rs.48,00,000/- arrived at by deducting
depreciation of 20% from RIV on the date of damage.

5. Cost of stocks and stocks in process was affected by fire to the

extent of Rs.30,00,000/-(market value).

Insured had incurred a cost of removal of debris of Rs.1,25,000/-

What is amount of claim M/s. Indian Chemicals will get from the insurance
company? Compute the loss on the market value basis. Assume that fire has
taken place after 5 years of operation.

SOLUTION
(Assessment on Market value basis)

A. Building

Repairs to building Rs.12,00,000/-

Insured value Rs.1,00,00,000/-
Reinstatement value Rs.1,20,00,000/-

Less depreciation 10% = Rs.12,00,000/- (at 2% per year or part thereof)

Therefore market value = Rs.1,08,00,000/-

The insured were found under insured on market value basis and under
insurance is applicable as under:

1,00,00,000
10,80,000 x ---------------- = Rs.10,00,000/- (A)
1,08,00,000

52
B. Plant & Machinery

Cost of Replacements net of salvage Rs.57,00,000/-

Insured value Rs.3,50,00,000/-
Reinstatement value Rs.5,25,00,000/-

Less depreciation 25% = Rs.1,31,25,000/- (at 5% per year or part thereof for
5 years)

Therefore market value = Rs.3,94,00,000/-

The insured were found under insured on market value basis and under
insurance is applicable as under:
3,50,00,000
42,75,000 x ---------------- = Rs.37,97,589/-
3,94,00,000
Say Rs.38,00,000/- (B)

C. Electrical Installations

Cost of Reinstatement by repairs/replacements Rs.8,00,000/-

Insured value Rs.75,00,000/-
Reinstatement value Rs.1,00,00,000/-

Less depreciation 20% = Rs.20,00,000/- (at 4% per year or part thereof for 5
years)

Therefore market value = Rs.80,00,000/-

The insured were found under insured on market value basis and under
insurance is applicable as under:
75,00,000
6,40,000 x ------------- = Rs.6,00,000/- (C)
80,00,000

D. Furniture, Fixtures and Fittings

Cost of Reinstatement by repairs/replacement Rs.9,00,000/-

Insured value Rs.40,00,000/-
Reinstatement value Rs.60,00,000/-

Less depreciation 20% = Rs.20,00,000/-

53
 Therefore market value = Rs.80,00,000/-

The insured were found under insured on market value basis and under
insurance is applicable as under:
40,00,000
7,20,000 x ------------- = Rs.6,00,000/- (D)
48,00,000

E. Stocks and Stocks in Process

Stocks value affected (market value) Rs.30,00,000/-

Insured value (market value basis) Rs.3,00,00,000/-

Total market value - fully insured Rs.3,00,00,000/-

The insured were adequately covered and they get their claim in full for
Rs.30,00,000/- (E)

Therefore total claim will be Rs. A + B + C + D + E

= Rs.10,00,000 + Rs.38,00,000 + Rs.6,00,000 +

Rs.6,00,000 + Rs.30,00,000

= Rs.90,00,000/-
============

Removal of debris claim

As the insured has not covered the ADD ON cover for removal of debris, their
claim is covered in the policy to the extent of 1% of claim amount =
Rs.90,000/- out of Rs.1,25,000/-.

Final claim on Market Value

Insured will get total claim of Rs.90,00,000 + Rs.90,000 = Rs.90,90,000/-

An excess of Rs.10,000/- will be further applicable

8.3 Guiding Principles of Claim Settlement

1. Insured must have insurable interest in property damage at the time of

claim.

54
2. There must be insurance contract and property should be damaged by
perils covered in the policy, (claim is admissible) if damage is caused
by more then one peril use principle of proximate cause and arrive at
efficient, powerful, effective cause.
3. Surveyor must assess the claim after physical inspection of damaged
property, observe the principle of indemnity and observe the basis of
claim settlement provided in the policy.
4. Surveyor must list out the damaged parts and assess the salvage
value of damaged parts, if insured wants to retain damaged parts as
emergency spares, surveyor should give proper comment on the same.
5. If the damage is caused, for which third party is responsible the
subrogation rights must be reserved for insurer.
6. If the property insured is covered with more then one insurance
company the condition of contribution must be observed.
7. If the cause of damage is not clear, surveyor must resort to laboratory
testing and try to find the most probable cause of damage.
8. If there is breach of any warranty surveyor must bring it to the notice of
insurer and insured.
9. If there is any difference of opinion, surveyor must consult insurer and
appoint technical expert.

55
 UNIT – 9
OBJECTIVE QUESTIONS ON FIRE INSURANCE

(The Correct option is given at the end of four options for each question)

1. Which of the following is not insured under standard fire and special
perils policy?

(a) Goods in factories

(b) Goods in Open
(c) Goods in transit by rail / road
(d) Goods in godown (c)

2. The term ’Fire‘ under the fire policy means

(a) Natural heating

(b) Burning by order of public authority
(c) Spontaneous combustion
(d) Accidental ignition (d)

3. Which of the following are covered in fire insurance?

(a) Raw materials

(b) Semi-finished goods
(c) Packing materials
(d) All the above (d)

4. Which of the following statements is true?

1. Explosion is covered under Standard Fire and Special Perils

Policy.
2. Implosion is covered under Standard Fire and Special Perils
Policy.

(a) 1st is true

(b) 2nd is true
(c) Both are true
(d) Both are false (c)

56
5. Which of the following meanings of Aircraft damage is not correct?

(a) Damage by aircraft

(b) Damage by other aerial devices
(c) Damage by pressure waves
(d) Damage by other space device (c)

6. Which of the following statements is true?

1. Terrorism is included in Riot, Strike and Malicious Damage.

2. Terrorism is a separate cover at extra premium without Riot,
Strike and Malicious Damage

(a) 1st is true (b) 2nd is true

(c) Both are true (d) Both are false (d)

7. Terrorism cover for industrial risks is subject to a deductible of

(a) 0.5% of total Sum Insured

(b) 1.0% of total Sum Insured
(c) 2.0% of total Sum Insured
(d) 3.0% of total Sum Insured (a)

8. Which of the following is not impact damage covered under

Standard Fire and Special perils? Visible physical damage by
direct contact with

(a) Any road vehicle

(b) Any rail vehicle
(c) Insured’s own forklift on the premises
(d) Any animal (c)

9. Which of the following is not covered under Standard Fire and

Special perils policy?

(a) Cyclone
(b) Hurricane
(c) Earthquake
(d) Flood (c)

57
10. Subsidence covered under Standard Fire and Special Policy means

(a) Normal cracking

(b) Settlement
(c) Bedding down of new structures
(d) Subsidence of part of the site on which the property stands (d)

11. The deductible for Act of God perils under Standard Fire and
Special perils policy is

(a) 1% of each and every loss

(b) 3% of each and every loss
(c) 4% of each and every loss
(d) 5% of each and every loss (d)

12. The deductible for perils other than Act of God Perils under
Standard Fire and special perils policy is

(a) Rs.5,000/- for each and every loss

(b) Rs.10,000/- for each and every loss
(c) Rs.15,000/- for each and every loss
(d) Rs.20,000/- for each and every loss (b)

13. Which of the following is true under Standard Fire and Special
perils policy?

1. Pollution which itself results from an insured peril is covered

2. Insured peril itself results from pollution is covered

(a) 1st is true (b) 2nd is true

(c) Both are true (d) Both are false (c)

14. The Standard Fire and Special perils policy automatically covers
works of art for an amount not exceeding

(a) Rs.5,000/- (b) Rs.10,000/-

(c) Rs.20,000/- (d) Rs.25,000/- (b)

58
15. Which of the following statements is true?

1. All disputes regarding claim under the fire policy are to be

referred to a civil court.
2. Disputes regarding the amount of claim payable are to be
referred to arbitration.

(a) 1st is true (b) 2nd is true

(c) Both are true (d) Both are false (b)

16. The maximum limit (of the adjusted loss) of cover under Architects
Fees ‘add on‘ cover is ______%

(a) 2.5% (b) 5.0% (c) 7.5% (d) 10.0% (c)

17. The sum insured under Debris Removal add-on cover cannot exceed
______% of the total sum insured under the fire policy.

(a) 2.5% (b) 10% (c) 15% (d) 20% (b)

18. Which of the following is paid under Debris Removal add-on cover?

(a) Costs of removal of debris

(b) Costs of dismantling
(c) Costs of demolishing
(d) All the above (d)

19. Which of the following peril is covered under fire policy at extra
premium?

(a) Impact damage (b) Bush fire

(c) Forest fire (d) Subsidence (c)

20. According to policy condition the fire policy ceases cover if the
building insured becomes unoccupied for more than

(a) 15 days (b) 30 days (c) 45 days (d) 60 days (b)

21. Under fire policy pro-rata average applies when there is

(a) Double insurance (b) Over insurance

(c) Under insurance (d) Subrogation (c)

59
22. Which of the following property is covered under the fire policy if
expressly stated in the policy?

(a) Books of accounts (b) Business books

(c) Computer system records (d) All the above (d)

23. If liability for a claim under the fire policy is disclaimed by the
insurer, the insured has to file a suit in a court of law within how
many months of the date of disclaimer.

(a) 6 months (b) 12 months

(c) 24 months (d) 36 months (b)

24. Which of the following is excluded under deterioration of stocks

add-on cover to the fire policy?

(a) Act of government

(b) Act of municipal authority
(c) Rationing etc. of power supply
(d) None of the above (d)

25. Which of the following perils can be an ‘add-on’ cover at extra

premium under the standard fire and special perils policy?

(a) Flood (b) Explosion

(c) Earthquake (d) Cyclone (c)

26. Which of the following perils is not covered under Standard Fire
and Special Perils Policy?

(a) Flood (b) Subsidence

(c) Bush fire (d) Forest fire (d)

27. Debris Removal expenses are covered up to ______% of the claim

amount under Standard Fire and Special Perils Policy.

(a) 1% (b) 2% (c) 3% (d) 4% (a)

28. Architect’s fees are covered up to what % of the claim amount under Standard
Fire and Special Perils Policy.

(a) 1% (b) 2% (c) 3% (d) 4% (c)

60
29. Which of the following statements is true?

1. Terrorism is exclusion under the Standard Fire and Special

Perils Policy only.
2. Terrorism can be covered at extra premium along with Riot,
Strike and Malicious Damage.

(a) 1st is true (b) 2nd is true

(c) Both are true (d) Both are false (c)

30. Which of the following statements is true?

As per fire policy condition on the happening of a loss

1. The insurers have a right to take possession of the premises
where the loss has occurred.
2. The insured can abandon the damaged property to the
insurers.

(a) 1st is true (b) 2nd is true

(c) Both are true (d) Both are false (a)

31. Under fire policy sum insured is Rs.1,00,000/- loss is Rs.60,000/-,

value of property at the time of proposal Rs.1,50,000/- value of
property at the time of loss Rs.2,00,000/-. What is the amount of
loss payable?

(a) Rs.40,000/- (b) Rs.30,000/-

(c) NIL (d) Rs.60,000/- (b)

32. Which of the following commodities are susceptible to spontaneous

combustion?

(a) Groundnuts (b) Copra cake

(c) Dyes and chemicals (d) All the above (d)

33. Under Earthquake add-on cover, excess is what % of each and

every claim?

(a) 2% (b) 3% (c) 4% (d) 5% (d)

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34. Which of the following is not covered under Spoilage Material
Damage extension?

(a) Loss of stock in process

(b) Loss of stock in godowns
(c) Damage to machinery
(d) Damage to containers & equipment (b)

35. Escalation clause added to the fire policy allows automatic regular
increase not exceeding what % in sum insured throughout the
period of the policy?

(a) 5% (b) 10% (c) 25% (d) 50% (c)

36. Which of the following statements is true or false under fire

insurance?

1. Escalation clause applies to buildings and machinery only.

2. Escalation clause applies to fluctuating stocks.

(a) Statement 1 true

(b) Statement 2 is true
(c) Both statements are true
(d) Both statements are false (a)

37. Which of the following is not covered under fire floating policy?

(a) Stocks in process blocks (b) Stocks is godown

(c) Stocks in the open (d) Stocks in transit (d)

38. Where there is frequent fluctuations in stocks / stock values which

of the following provides suitable cover?

(a) Fire floating policy

(b) Fire policy with Escalation clause
(c) Fire Reinstatement value policy
(d) Fire Declaration policy (d)

39. The minimum retention of premium under fire declaration policy is

what % of the annual premium.

(a) 10% (b) 25% (c) 50% (d) 75% (c)

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40. Sum insured (provisional) under fire declaration policy is
Rs.100,00,000/- Rate of premium is Re.1/- per mille. Average Sum
Insured is Rs.50,00,000/-. What is the refund premium?

(a) Rs.5,000/- (b) Rs.6,000

(c) Rs.10,000/- (d) NIL (a)

41. Fire reinstatement value policy is not issued in respect of ______.

(a) building (b) Plant (c) machinery (d) plant (d)

42. Under which of the following circumstances market value only is

payable under fire reinstatement value policy?

(a) Insured is unwilling to reinstate

(b) Heavy under insurance
(c) Breach of warranty
(d) Breach of utmost good faith (a)

43. Under which of the following circumstances reinstatement basis of

settlement will not apply under Fire reinstatement value policy?

(a) Insured fails to intimate to the insurer within 6 months of any

extended time to replace the damaged property
(b) Insured is unable to replace the damaged property
(c) Insured is unwilling to replace the damaged property
(d) All the above three (d)

44. Which of the following is correct in relation to fire reinstatement

value policy?
1. Depreciation applies to claim
2. Pro-rata average applies

(a) 1st is true (b) 2nd is true

(c) Both are true (d) Both are false (b)

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45. Which of the statements is correct?

Fire Reinstatement value policy is granted on

1. Building and Machinery only
2. Stock only

(a) Statement 1 is correct

(b) Statement 2 is correct
(c) Both statements are not correct
(d) Both statements are correct (a)

46. Of the following which is an optional cover under Industrial All Risks
policy?

(a) Machinery breakdown

(b) Electronic Equipment
(c) Business interruption (Machinery Breakdown)
(d) Business interruption (Fire & Special Perils) (c)

47. Fire consequential loss policy pays the insured

(a) Net profit (b) Standing charges

(c) Increased cost of working (d) All the above three (d)

48. The turnover of a business consists of

(a) Variable charges and standing charges

(b) Standing charges and net profit
(c) Variable charges and net profit
(d) Variable charges, standing charges and net profit (d)

49. Gross Profit in the context of consequential loss (fire) policy means:

(a) Turnover minus variable and standing charges

(b) Net profit and cost of production
(c) Net profit and standing charges
(d) Net profit and variable charges (c)

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50. Which of the following statements is true?

1. The sum insured under consequential loss (fire) policy is to

be fixed by the insured.
2. The sum insured is to be computed from the insured’s
accounts

(a) 1st is true (b) 2nd is true

(c) Both are true (d) Both are false (c)

51. Turnover is Rs.20 Lacs. Cost of production Rs.14 Lacs. Fixed

overheads Rs.4 Lacs. Net profit Rs.2 Lacs. Which is the correct
sum insured for a consequential loss (fire) policy?

(a) Rs.10 Lacs (b) Rs.18 Lacs

(c) Rs.2 Lacs (d) Rs.6 Lacs (d)

52. Turnover is Rs.10 Lacs. Cost of production Rs.7 Lacs. Fixed

overheads Rs.2 Lacs. What is the net profit for consequential loss
(fire) policy?

(a) Rs.1 Lac (b) Rs.3 Lacs

(c) Rs.5 Lacs (d) Rs.8 Lacs (a)

53. Which of the following statements is true?

1. The indemnity period is to be selected by the insured.

2. The period of indemnity may vary form 3 months to 3 years.

(a) 1st is true (b) 2nd is true

(c) Both are true (d) Both are false (c)

54. Which of the following statements is true?

1. The sum insured under consequential loss (fire) policy

should be equal to gross profit of the indemnity period
selected.
2. The sum insured should be equal to the net profit of the
indemnity period selected.

(a) 1st is true (b) 2nd is true

(c) Both are true (d) Both are false (a)

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55. Annual amount of gross profit is Rs.1,20,000/-. What should be the
sum insured under consequential loss (fire) policy for an indemnity
period of 24 months.

(a) Rs.60,000/- (b) Rs.90,000/-

(c) Rs.1,20,000/- (d) Rs.2,40,000/- (d)

56. Which of the following is not a standing charge under consequential

loss (fire) policy?

(a) Salaries (b) Office expenses

(c) Cost of stationery (d) Cost of raw materials (d)

57. Which of the following are standing charges?

(a) Insurance premiums (b) Rent

(c) Interest on loans from banks (d) All the above (d)

58. Annual gross profit is Rs.1,20,000/-. What should be the sum

insured under consequential loss (fire) policy for a period of 9
months?

(a) Rs.60,000/- (b) Rs.90,000/-

(c) Rs.1,20,000/- (d) Rs.1,80,000/- (c)

59. Which of the following must occur before a loss under

consequential loss (fire) policy becomes payable?

(a) Insured perils must occur

(b) Property is damaged by the insured perils
(c) Insured’s business is interrupted/affected
(d) All the above (d)

60. Which of the following statements is true?

1. Consequential loss (fire) policy must be taken in conjunction

with Material Damage (fire) policy.
2. Payment of loss under consequential loss (fire) policy is
subject to payment of loss under fire material damage.

(a) 1st is true (b) 2nd is true

(c) Both are true (d) Both are false (c)

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 UNIT – 10
ASSIGNMENT

10.1 M/s. Adarsh Chemicals had taken a Fire and Special Perils Insurance Policy
for their Chemical Plant at Karamsad for the period 01/01/03 to 31/12/03 as
under:

a. Building Rs.1,00,00,000/-
b. Plant and Machinery Rs.3,50,00,000/-
c. Electrical Installation including sub-station Rs.75,00,000/-
d. Furniture Fixtures and Fittings Rs.40,00,000/-
e. Stocks and Stocks in Process Rs.3,00,00,000/-

On 25th February 2003 there was a fire in the plant and they reported the loss
to their insurance company. The insurance Company appointed M/s. Arun
Dasgupta & Co. as surveyor, who surveyed the loss and submitted their final
Survey Report on April 15th, 2003. Following is an extract from the survey
report.

(i) Fire affected building was partly repaired and replaced and the cost
incurred was Rs.12,00,000/-. The reinstatement value of the building
was found to be Rs.1,20,00,000/- on the date of repair.

(ii) The cost of repairs and replacement of Plant and Machinery affected
by the fire was Rs.57,00,000/-. The re-instatement value of the plant
and machinery was found to be Rs.5,25,00,000/- on the date of
damage.

(iii) Cost of stocks and stocks in process was affected by fire to the extent
of Rs.30,00,000/- (market value).

(iv) Electrical installation was affected by fire to the extent of Rs.8,00,000/-

its present re-instatement cost was Rs.1,00,00,000/-

(v) Furniture Fixtures and Fittings were affected to the extent of

Rs.9,00,000/- by fire and were re-instated by them. The re-instatement
value of Furniture Fixtures and Fittings was Rs.60,00,000/- on the date
of the loss.

(vi) Insured had incurred a cost of removal of debris of Rs.1,25,000/-.

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 What is amount of claim Adarsh Chemical will get from the insurance
company? Compute the losses, on reinstatement value and market value
basis. 10 marks

10.2 Write short notes on 10 marks

(a) Tariff and Market Agreements.

(b) Short period and pro-rata premium rates.
(c) Premium rate depends on?
(d) Basis of Loss and Claim settlements including adjustment of Loss.
(e) Process of Risk Management.
(f) Active and Passive Retention
(g) Reinstatement Value Policy.

10.3 Match the words with the corresponding options given below: 10 marks

(a) The duty of disclosing material fact ________1 when the contract is
________2 by issue of cover note or policy.

(b) When there is non-disclosure with fraudulent intention the insurance

contract becomes ________3. A ________4 contract has no
________5 ________6 or ________7. It is not a contract at all, if the
duty of disclosure is broken in any other way then the contract
becomes void able and the insurers have the right to ________8 the
contract and ________9 the claim. The amount payable under the
insurance contract is the actual ________10 or ________11 whichever
is ________12.

(c) Fire tariff provides that ________13 ________14 policy can only be
issued for ________15 whose market value cannot be ascertained like
curio, artwork.

(d) Any risk, which is not provided in the fire tariff, can be covered by
charging ________16 per mille provisional premium rate.

(e) Reduction in premium rates under the tariff is allowed for deletion of
________17 and ________18 Perils.

(f) The following types of discount in premium are available:

(i) For ________19 risk

(ii) For ________20 appliances.

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 (iii) For rating of risk in ________21 occupancy in Industrial Estates.
(iv) For ________22 of preceding three policy periods.

a. The onus of proof is on ________23 if the loss is within the

scope of perils covered. However the onus of proof is on
the insurer if the loss is caused by ________24 perils.
.
b. In Insurance Policy the claim can be settled under
arbitration clause only if the claim is ________25 under
the policy and there is a ________26 about the quantum
of loss.

c. Professional liability insurance covers errors and

omissions by professional persons while doing
________27 duties and arising out of negligence in
performance.

Select the words from following

1. Professional 27 15. Incurred Claim 22

2. Excepted 24 16. Admissible 25
3. Dispute 26 17. 2.5 16
4. Ceases 1 18. Concluded 2
5. Agreed 13 19. Value 14
6. S.T.F.I. 17 20. Silent 21
7. Fire Extinguishing 20 21. Multiple 18
8. Loss 11 22. Reject 9
9. Avoid 8 23. Sum Insured 10
10. Validity 7 24. Void 3
11. Void 4 25. Legal 5
12. Effect 6 26. Lower 12
13. Properties 15 27. R.S.M.D. 19
14. Insured 23

10.4 M/s. Rama Pharma have covered their stock in 12 godowns all over India on
Floater declaration basis as under:

Sum insured : Rs.5,00,00,000/-

Rate : Re.1/- per mille + 10 %
Deposit premium : Rs.55,000/-

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 Monthly declaration i.e. highest declaration on any one day in the month in all
12 godowns is as follows:

1. January 3.50 crore 7. July 4.70 crore

2. February 4.00 crore 8. August 4.10 crore
3. March 4.50 crore 9. September 4.90 crore
4. April 4.25 crore 10. October 4.35 crore
5. May 4.00 crore 11. November 4.80 crore
6. June 4.30 crore 12. December 4.20 crore

Total of 1 to 12 = 51.60 crore

Monthly average = 4.30 core

Will Rama Pharma get refund of premium at the end of policy period? If yes,
what amount? 10 marks

10.5 In Bombay Dock there was a major fire resulting in property damage. The
property affected by the fire was insured by different insurers called A, B, C
and D.

The sum insured with each of the insurer was as under :

A - Rs.5,00,000/- B - Rs.10,00,000/-
C - Rs.25,00,000/- D - Rs.50,00,000/-

The loss assessed was Rs.36,00,000/-. The total sum insured was adequate.

How will the loss be payable by each insurer? 10 marks

10.6 Fill in the blanks with the matching phrases given below: 10 marks

a. If under the fire policy the work of re-instatement is neither

completed within 12 months nor within extension permitted
then ……….
b. Engineering Insurance Part-I means ……….
c. The third step of risk management is to select appropriate
technique that is ……….
d. When limited knowledge of underwriters and claim
experience is available then the ……….
e. If a loss is brought about by two or more causes occurring
simultaneously or one after the other then the ……….

70
f. The claims where the insured has committed a breach of
condition or warranty are known as ……….
g. Loss of profit insurance policy covers loss of gross profit of a
company but the pre-requisite is that the ……….

1. Which may be risk avoidance, prevention, reduction,

retention,
2. The doctrine of proximate cause is used to find out
the important, effective and powerful cause.
3. The loss will be settled on market value basis.
4. Insurers prefer to have market agreement for
premium rates.
5. Non-standard claims and are settled subject to rules
and regulations framed by insurance companies.
6. Claim under property damage (for machinery
breakdown) policy must be payable.
7. Means Insurance of Plant and Machinery during
construction period.

a.3 b.7 c.1 g.6 e.2 f.5 d.4

71