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There is lot of confusion amongst Insurance officials on following  case study. If there is MD claim which led to interruption in business and insured incurs additional expenses to continue business operations. Now the question comes whether these additional expenses are payable if interruption period falls within the policy time excess. For the benefit of all it is clarified that Increased cost of working is very much payable subject to condition that it is within the economic limits and it is higher than the amount equivalent to time excess given in the policy. For example if by incuring Rs 2 lacs, insured avoids loss of gross profit to the extent of Rs 3 lacs then it would be payable under BI policy. However, if the policy excess of 7 days of standard gross profit is higher than Rs 2 lacs then nothing would be paid. It is further clarified that if 7 days of std gross profit comes to Rs 1.50 lacs then only the balance amount of Rs 50 K would be payable under the policy.

Under IAR policies there is an important exclusion no. 1.1 in BI section of the policy which says that no BI loss is payable if it is  caused due to any restrictions imposed by public authority in respect of reconstruction or continuing plant operations following an indemnifiable loss.  It is observed that few clients / brokers are demanding Local authority clause extension under BI section of IAR policy to avoid application of above exclusion in the event of claim. First of all please understand that there is no provision of local authorities clause under IAR policy. However, if this clause is allowed in IAR policy having sum insured above 2500 crores, it would not help in deletion of exclusion number 1.1 of BI section of the policy because Local authority clause is applicable to MD section of policy which says that at the time of restatement of damaged property if insured is required to incur additional expenses in compliance to local authority norms, such additional expense...

In the event of a claim under Fire Declaration policies, Under-insurance is applied two times. First, Policy Sum Insured is compared with total value of stocks at the time of loss and if it is found inadequate, it will attract under insurance. Secondly, Stocks Declaration of the  month prior to loss  will be compared with the actual average value of stocks held in that month. That means,  if a loss has taken place in the month of March then Surveyor would check the declaration of stocks for the month of Feb and if Declaration is found lower than actual value,  it will attract second Under-insurance & the claim shall be reduced proportionately. Example: A Fire declaration Policy is issued with SI of Rs 10 lacs from 1st Jan to 31st Dec. Insured suffered a fire loss of Rs 5 lacs on 15th June. Total stock value as on date of loss was found Rs 14 lacs. Insured submitted Declaration of Rs 6 lacs in the month of May as against the actual value of 7.5 lacs. what would be...

This clause says that if insured’s business is conducted in departments where independent trading results can be ascertained, Loss of GP shall be calculated    independently for the department affected by the loss based on its trading results. If more than one dept is affected, BI loss shall be computed for each dept affected by loss. But this would be subject to condition that if the Sum Insured under the policy is found less than the sum total of Gross profit of each department  (whether affected or not) then, the payable amount shall be reduced proportionately.” That means it would attract Under insurance.   In a nutshell, this shall mean a) Insured must have more than one production blocks or units in one compound.   b) Each Dept./section/production block must have proper accounting system to evaluate their respective Gross profit.   c) In the event of Loss in one Dept/Section/Unit, Loss of GP sh...

Let us understand a very important  Add on cover which is commonly demanded by market in large risk Mega policies.  This extension simply demands insurance company to pay for additional tax liability following a material damage and /or Business Interruption loss under their policy. This is to be understood by all that all MD claims received for  by insured for replacement of damaged property or for repairs, are not  taxable as per prevailing Income Tax norms. However, any BI loss which is received to compensate their lost income during the interruption period has to be added as taxable income and insured is liable to pay tax on this amount.  Insured may demand reimbursement of such tax liability but insurance companies are not supposed to agree to any such demands because in normal course insured would have paid these taxes even if no interruption would have taken place during the financial year. Sometimes, it is also observed that insured demands add o...

This clause is recommended mainly in policies where the property is simultaneously covered in any other policies having adverse terms like No waiver of Under insurance or high deductibles or imposition of Loss limits etc. In such a situation insureds /brokers demand that all claims should be settled in this policy as per terms agreed herein. Therefore the clause is worded as under "While observing all terms and conditions of the policy, it is hereby understood and agreed that company would pay all claims reported under this policy applying the terms and condition as agreed herein and without taking into consideration the existence  of any other concurrent policy covering the same property at the time of loss. This clause becomes unavoidable when a global policy is issued by a foreign reinsurer covering same property at the time of loss because master policy is invariably issued with loss limits and higher deductibles. In one of the case it was observed that the local IAR poli...

This cover is mainly  given to Aluminium Extraction plants like Hindalco, where due to failure of power supply, molten aluminium gets solidified inside pots and it leads to a major loss of 'stock in process' (liquid aluminium) and  Insured is required to incur additional expenses towards pot cleaning which is a time consuming process. It invariably leads to  major BI loss due to long interruption periods involved in cleaning of pots unless Insured has an alternate Power supply arrangement. Such losses can be paid under "Pot Freezing" cover where loss or damage to Molten metal which got solidified (frozen) inside the pot along with cost of cleaning of Pots is paid up to the selected Indemnity limits provided it is caused due to failure of Power supply to the plant. Such covers are allowed only in Large risk policies where top location Sum insured ( MD+BI) is above Rs 2500 crs, with consent of Reinsurers. This is given on First loss basis & the limit gets exhausted ...

Under IAR policy, one of the excluded cause says that policy does not cover loss or damage to property caused by faulty or defective design unless damage is caused by peril not excluded in the policy ensues then insurer shall be liable only for such ensuing damage. To understand this exclusion let us first understand  what does ensue mean?  It means happening afterwards. If there is a loss or damage to property due to faulty or defective design, that will not be paid but any subsequent loss caused by an ensuing peril, not excluded in the policy, shall only be paid. For example, if the roof of a building collapses due to faulty design and the debris falls on a working machinery inside the building then damage to building structure will not be payable under IAR but subsequent damage to machinery shall be payable as ensuing damage under MBD section of policy.  Hope it clarifies the concept of ensuing damage.

It is interesting to recall that few years back  due to unhealthy competition, companies were rating  chemical plants, using solvents with flash point below 32 degree C, at 99% discount on flexa rates and the premium was reduced to  minimum nat cat rates  During this period, many petrochemical plants declared themselves  as chemical plants  and were rated as chemical plants based on inspection reports where it was highlighted that even though the plant is processing hydrocarbons falling under category A and B,  the value of such plants is below 35% of total plant sum insured. Hence they do fall under the scope of petrochemical tariff.  Basic purpose was to enjoy reduced BI time excess 7 days in place of 14 days applicable to Petrochemical plants. This was a golden period for petrochemical plants when they not only enjoyed 99% discount on flexa rate but BI time excess  was also reduced to 7 days instead of 14 days. This situation continued til...