General Insurance

1. General Insurance

2. The Great Fire of London. Sunday, 2nd Sept. to Wednesday, 5th Sept 1666 gutted the medieval City of London inside the old Roman City Wall Destroyed the homes of 70,000 out of 80,000 of the city’s inhabitants Consumed 13,200 houses, 87 churches, most of the City authority buildings

3. What is Fire Insurance ? • “The business of effecting, otherwise than incidentally to some other class of business, contracts of insurance against loss by or incidental to fire, or other occurrence customarily included among risks insured against the fire insurance policies.” – Insurance Act, 1938. • A fire insurance is a contract under which the insurer in return for a consideration (premium) agrees to indemnify the insured for the financial loss which the latter may suffer due to destruction of or damage to property or goods, caused by fire, during a specified period. • The insurer is liable to make good the actual amount of loss not exceeding the maximum amount fixed under the policy.

4. Fire • 'Fire' means the production of light and heat by combustion or burning. • There is said to be a fire within the meaning of fire insurance when: • There is actual ignition. • The fire is purely accidental or fortuitous in origin so far as the insured is concerned. • There must be something on fire which ought not to be on fire.

5. Actual ignition • No Claim without a Flame. • The fire must result from actual ignition and the resulting loss must be proximately caused by such ignition. • The damage should be occasioned by fire. • Loss or damage caused by excessive fire heat cannot be included in ‘loss or damage fire’. • Loss or damage must be either by ignition of article or property or premises or part thereof. • If lightning causes ignition, there is actual ignition. • If water causes damage when used to put out fire, Fire, and not water is the villain.

6. Accidental or fortuitous • Fire must be accidental • or magnitude of the fire must be accidental – eg. Cooking stove. • The cause of fire is immaterial unless it as the deliberate act of the insured. • It is immaterial whether the fire comes to the insured property or the insured property comes to the fire.

7. Life assurance V Fire Insurance

8. Types of Fire Insurance • Specific Policy • Valued Policy • Average Policy • Floating policy • Reinstatement Policy • Consequential loss Policy • Comprehensive policy • A Blanket policy

9. Specific Policy • The insurer undertakes to make good the loss to the insured up to the amount specified in the policy. • The value of property is not relevant in determining the amount of indemnity in case of a specific policy. • Example: • A building worth Rs.2,00,000 is insured against fire for Rs. 1,00,000. • If the damage to the property is Rs.75,000 the insurer will get the full compensation. • If damage is Rs.2,00,000, Rs. 1,00,000 is payable.

10. Valued Policy • The value declared in the policy is payable by the insured in the event of a total loss irrespective of the actual value of loss. • The policy violates the principle of indemnity. • The insurer has to pay a specified amount quite independent of the market or actual value of the property at the time of loss. • So such a policy is very rarely issued. • It may be issued only on artistic work, antiques and similar rare articles whose value cannot be determined easily.

11. Average Policy • Under a fire insurance policy containing the ‘average clause’ the insured is liable for such proportion of the loss as the value of the uncovered property bears to the whole property. • This principle applies if the property is underinsured. • Example: • House insured for Rs. 4,00,000 though its actual value is Rs. 6,00,000. • Part of the house is damaged in fire and the insured suffers a loss of Rs. 3,00,000 • The amount of compensation to be paid by the insurer is Rs. 2,00,000

12. Floating policy • Used for covering fluctuating stocks of goods held in different locations. • With every transaction of sale or purchase, the quantities of goods kept at different places fluctuate. • It is difficult for the owner to take a policy for a specific amount. • The best way is to take out a floating policy for all the stocks of goods.

13. Reinstatement Policy • Also called ‘New for Old’ Policy • Such policies avoid conflict of indemnity. • The insurer has the right to reinstate or replenish the property destroyed instead of paying compensation to the insured in cash. • It may be granted on building, machinery, furniture, fixture and fittings only. • Restoration of damaged portion of the property to a condition substantially the same, but not better or more extensive than its condition, at the time of its renovation

14. Consequential loss Policy • Provides for loss of tangible and intangible properties. • The insured may suffer a greater financial loss on account of dislocation of business caused by fire • .e.g. close down business after fire for repair, to meet fixed expenses such as rent, salaries, taxes and other expenses as usual. • Such considerable loss to the insured is not covered by the ordinary fire policy. • In order to cover such loss by fire, the ‘Consequential Loss Policy’ has been introduced. • The loss so suffered is separately calculated from the loss actually suffered.

15. Comprehensive policy • It is also known as ‘all insurance policy’. • Covers the risks of the fire arising out of any cause that is civil commotion, lightening, riots, thefts, labor disturbances and strikes etc. • ‘Comprehensive’ does not mean that every type of risk is covered. • There may be exclusions and limitations.

16. Other types • Blanket policy : • to cover all the fixed and current assets of an enterprise by one insurance. • Declaration policy: • Trader takes out a policy for the maximum value of stock which may be expected to hold during the year. • At a fixed date each month, the insured has to make a declaration • regarding the actual value of stock at risk on that date. • On the basis of such declaration, the average amount of stock at risk in the year is calculated and this amount becomes the sum assured. • Sprinklers leakage policy. • It covers the loss arising out of water • leakage from sprinklers which are setup to extinguish fire.

17. Add-on Covers • Forest Fire • Spontaneous combustion • Deterioration of Stocks in cold storage • Earthquake (Fire & Shock) • Terrorism • Impact damage due to Insured’s own Rail/ Road Vehicles, fork Lifts, Cranes, stackers and the like and articles dropped there from

18. Rights of the Insurer • Right to avoid the policy- in case of willful act and misrepresentation. • Right of entry control over the property- on the happening of the event to take the possession of the property. • Right of reinstatement- replace the asset • Right of subrogation - entitled to all rights and remedies available to the insured after indemnifying • Right to contribution- when more than one policies are taken by the insured, loss will be shared with other insurers. • Right to salvage - assured to hand over the salvage to the insurance company in case of loss to the property insured.

19. Implied Conditions • Existence of Property when policy is effected • Insured Property must be property damaged • Insurable interest from the time of commencement of risk and up to the completion of the contract. • Observe good faith in disclosure, efforts to prevent and extinguish the fire with reasonable care. • The subject matter of insurance should be described in the policy as to identify it clearly. Express conditions are described in the policy.

20. Claims • Notice in writing to the insurer. • Evidence regarding loss by fire. • Filing the prescribed form with all details • Inspection of loss by Insurer • Double insurance – contribution • More than one fire, total pay out will not exceed the insured amount. • Waiver is the voluntary relinquishment of a known right. Insurer my pay as a waiver.

21. Rate Fixation Rate calculation is made in following manner; • Base rate for the class of property. • Reduction in rates based on exclusion and add on covers. • Extra tariff for hazardous assets. • Discount is allowed for claim experience. • Further discount is allowed for betterment of risk. Followings are to be considered on fixation of premium • Type of insured • Location of property • Storage facility and other infrastructure • Additional premium on ‘add-on covers’ and discount on ‘exclusion’.

22. Rate Fixation • Three steps: • Classification • Discrimination • Fixing or schedule rating.

23. Classification • The risks are classified into various classes according to factors affecting fire risk. • Construction of Structure • Occupancy • Nature of flooring • Height • Floor and Wall Opening • Exposure • Lighting heating and power • Place or situation • Protection • Time of loss

24. Discrimination • The differentiation of the rates for individual risks in a particular class. • Risks are differentiated from each other according to the merits and demerits of the individual risk. • Equitable basis of ratting.

25. Schedule Rating • An empirical standard for the measurement of relative quantity of fire hazard. • It is based on the theory that the aggregate fire hazard of any risk is capable of ultimate analysis into its component factors to each of which could be assigned an appropriate charge • A standard or average premium is determined as a base for calculating the premium. • The rate arrived at the is the net premium, which is just sufficient to meet all the losses in that particular risk. • This is loaded with expenses to arrive at the gross premium or office premium

26. Tariff Rating • Fire insurance business is governed by the tariffs formulated by the Tariff Advisory committee • TAC is a statutory body established under the provisions of The Insurance (Amendment ) Act 1968. • TAC control and regulate the rates, advantages, terms and conditions offered in respect of general insurance • Tariffs provide rates for almost all classes of risk • also provide rules and regulations for the business and standard form of wordings for the contract. • Regional committees at Delhi, Calcutta Chennai, Mumbai. • Each region has its own Tarff applicable to risks in in its territorial jurisdiction. • Tariffs are determined based on principles of rate fixation.

27. Documents • Proposal Form- contains details of proposer, type of coverage, details of subject matter, sum insured, insured declaration/authentication, risk inspection report. • Cover note- is issued pending issue of policy covers proposer’s detail, sum insured, details of risk covered, premium detail, date of issue and validity, date of commencement and expiry of cover, authentication, warranties and clauses. • Policy document- must follow the format prescribed by the tariff. Must contain all the information as contained in the cover note, and endorsement and alteration made to the policy.

28. MARINE INSURANCE

29. Marine Insurance - Defined • A contract of Marine insurance is a contract whereby the Insurer undertakes to indemnify the assured, in manner and to the extent thereby agreed , against marine losses, that is to say, the losses incident to marine adventure. • Section 2(13)A of The Insurance Act 1938: • “Marine Insurance business” means the business of effecting contracts of insurance upon vessels of any description including cargoes freights and other interest which may be legally insured in or in relation to such vessels, cargoes and freights, goods, wares, merchandise and property of whatever description insured for any transit by land or water or both and whether or not including warehouse risks or similar risks in addition or as incidental to such transit and includes any other risks customarily included among the risks insured against in marine insurance polices.

30. Marine Vs Fire Insurance

31. Types of Marine Insurance • Two broad categories - ocean marine insurance and Inland marine insurance. • Ocean marine insurance is a form of transportation insurance. It is classified into 4 categories: • Hull insurance • covers physical damage to the ship or vessel • Cargo insurance • covers the shipper of the goods if the goods are damaged or lost. Open cargo policy can be used for regular shipment. The open cargo policy has no expiration date and remains in force until it is cancelled. • Protection and Indemnity (P&I) Insurance • provides comprehensive liability insurance for property damage or bodily injury to third parties. • Freight Insurance • indemnifies the ship owner for the loss of earnings if the goods are damaged or lost and are not delivered.

32. Implied Warranties • Seaworthiness of Ship. • At the commencement of the voyage or at each stage of voyage. • Seaworthiness is relative term - suitability for the season, sea, etc. • suitability and adequacy of her equipment, adequacy and experience of the officers and crew. • Include cargo - worthiness • Legality of Venture • Eg. Trading with enemy, violating national laws, smuggling, ventures prohibited by law. • Non- deviation • No deviation and delay of voyage

33. Classes of Policies 1. Voyage Policy • insured against risk in respect of a particular voyage from a port of departure to the port of destination • covers the subject matter irrespective of the time factor. • not suitable for hull insurance as a ship usually does not operate over a particular route only. • The policy is used mostly in case of cargo insurance. 2. Time Policy • for specified period of time, usually not exceeding 12 months. • generally used in connection with the insurance of ship. 3. Mixed Policies • It is a mixture of voyage and time policies. • for a certain time period and for a certain voyage or voyages, • e.g., Kolkata to New York, for a period of one year. • generally issued to ships operating on particular routes.

34. Classes of Policies .. 4. Valued Policies • The value of the subject matter is agreed between the insurer and the insured at the time of taking the insurance. It includes • invoice price of goods • freight, insurance and other charges • ten to fifteen percent margin to cover expected profits. 5. Unvalued policy • the value of subject matter insured has to be ascertained wherever the subject matter is lost or damaged. 6. PPI Policies • Policy Proof of Interest • Honored by the insurer even in absence of insurable interest. • Issued on mutual understanding and is called honored polices. • Since this is not legally enforceable, it is called wagering policies.

35. Classes of Policies … 7. Floating Policy • A merchant who is a regular shipper of goods can take out a ‘floating policy’ to avoid botheration and waste of time involved in taking a new policy for every shipment.. • It does not include the name of the ship and other details. • the insured takes a policy for a huge amount • The other details are required to be furnished through subsequent declarations. • The underwriter goes on recording the entries in the policy. • When the sum assured is exhausted, the policy is said to be “fully declared” or “run off”. 8. Block Policy • This policy covers other risks also in addition to marine risks. • A single policy known as block policy may be taken to cover all risks. E.g. when the goods are dispatched by rail or road transport for shipment, a single policy may cover all the risks from the point of origin to the point of destination.

36. Assignment • A marine insurance policy may be transferred by assignment unless the terms of the policy expressly prohibit the same. • The assignment may be made either by endorsement on the policy itself or on a separate document. • The insured need not give a notice or information to the insurer or underwriter about assignment. • In case of death of the insured, a marine policy is automatically assigned to his heirs. • At the time of assignment, the assignor must possess an insurable interest in the subject matter insured. • An insured who has parted with or lost interest in the subject matter insured can not make a valid assignment. • After the occurrence of the loss also, the policy can be assigned freely to any person. The assignor merely transfers his own right to claim to the assignee.

37. Marine Losses • A loss arising in a marine adventure due to perils of the sea is a marine loss. Marine loss are classified into - Total loss and Partial Loss. Total Loss: implies that the subject matter insured is fully destroyed and is totally lost to its owner. • It can be Actual total loss or Constructive total loss. • Actual total loss • subject matter is completely destroyed or so damaged that it ceases to be a thing of the kind insured. • e.g. sinking of ship, complete destruction of cargo by fire, etc. • Constructive total loss • The ship or cargo insured is not completely destroyed but is so badly damaged that the cost of repair or recovery would be greater than the value of the property saved.

38. Marine Losses- Partial Loss • A partial loss occurs when the subject matter is partially destroyed or damaged. Partial loss can be general average or particular average. • General average • refers to the sacrifice made during extreme circumstances for the safety of the ship and the cargo. This loss has to be borne by all the parties who have an interest in the marine adventure. • e.g. A loss caused by Jettison must be shared by various parties. • Particular average • loss arising from damage accidentally caused by the perils insured against. Such a loss is borne by the underwriter who insured the object damaged. e.g. If a ship is damaged due to bad weather the loss incurred is a particular average loss

39. Insurable Interest • Insurable interest in the subject-matter insured must exist at the time of the loss. It need not exist when the insurance policy is taken. • Under marine insurance, the following persons are deemed to have insurable interest: a) The owner of the ship. b) The owner of the cargo. c) A creditor who has the security of the ship or cargo. d) The master and crew of the ship have insurable interest in respect of their wages. e) In case of advance freight, the person advancing the freight has an insurable interest if such freight is not repayable in case of loss.

40. Policy Conditions Conditions are inserted into policy in the form of clauses: • Hull clauses: • Institute time Clauses • Incorporated in Hull Policies • losses resulting from collision, standing, general average etc. • All risks policy may be issued or certain risks may be excluded from the policy by inserting suitable clauses • Cargo Clauses: • Institute Cargo clauses • Insurance of goods, nature, extent, and scope of the insurance • Additional marine perils are inserted through special clauses. • Freight Clauses • Institute Freight clauses • Loss of freight due to maritime perils which may be insured for a period or for a voyage.

41. Description of the Clauses • Assignment Clause • freely assignable and no notice is to be given to the underwriter. • But for hull insurance, consent of underwriter is essential • Lost or not lost • The merchant gets information of the shipment of his cargo very late after the sailing of the steamer and therefore, it is not known whether the subject matter was lost or not lost. • The insurer undertakes to indemnify the insured whether subject matter was lost or not before the issue of the policy. • At and from clause • Applicable for voyage policies insuring hull and freight. • Determines the time when the actual risk commences • Cover available while it is lying at the port of departure. • If the policy contains ‘from’ only instead of ‘at and from’ , the risk commences from the time of departure of the ship and not earlier. • Warehouse to warehouse clause • Risk commences form the specified place and continues to the specified place of destination named in the policy. • The risk of land, craft transport and transshipment are covered under a single marine policy.

42. Description .. • Deviation, touch and stay cause • Any departure form the specified course of the voyage or a customary course (if not specified in the policy) amounts to deviation. • A deviation is different form the change of voyage. • In change of voyage, the agreed upon destination is changed – intention to change the voyage is sufficient to end the liability of the underwriter. • In deviation, there should be actual deviation. Once deviation has taken place, the risk ceases to attach for the rest of the voyage. • Deviating is excused if it is caused by: • It is caused by circumstances beyond the control of the master and his employer. • It is necessary to comply with an express or implied warranty. • It is necessary for the safety of the ship or subject matter insured. • For the purpose of saving human life or aiding a ship in distress where human life may be in danger. • Deviation caused by barratrous conduct of the master of the crew, if barratry be one of the perils insured against.

43. Description .. • Inchmaree Clause • Named after a steamer called “Inchmaree’, in 1887, where claim was denied since the donkey pump of the steamer was damaged. • This clause provide indemnity to the insured for damage to the hull or machinery resulting from the negligence of the master or crew or from explosion or latent defects. • This clause is also inserted in cargo polices. • Running Down Clauses • Also called collision clause and is included in hull polices. • The amount of damage extends to include damage done by the vessel to other ship, her cargo and compensation for loss of employment in consequence of collision . • Only three fourth of the liability is met by the insurer and rest is to be borne by the owner of the ship.

44. Description .. • Sue and Labour Clause • Underwriters pay expenses in addition to the loss. • Limitations of Expenses in the above clause: • must be incurred for the benefit of the subject mater insured. • Must be reasonable • Must be incurred by the assured, his factors, his servants or assigns. • incurred to avert or minimise a loss form a peril covered by the policy. • Reinsurance clause • Reinsurer is liable only for claims for which the insurer is legally liable • Alteration in the original policy to be with consent of the reinsurer. • Memorandum Clause • Provide minimum limit to the underwriters liability regarding claims for particular average by exempting him from such claims. • Continuation clause • The vessel continue to be covered even after completion of voyage under the policy at a pro rata premium to her port of destination.

45. Marine cargo coverage • Marine policy generally subject to: • ICC – A, ICC B, ICC C( For sea transits) • Inland Transit ( Rail/ Road)Clauses – A • Institute Cargo Clauses( Air Cargo) • Extensions are: • SRCC • Institute War clause, • FOB

46. Institute Cargo Clauses “C” Covers the following : • Loss or damage to the subject- matter insured reasonably attributable to: • Fire or explosion • Vessel or craft being stranded, grounded, sunk or capsized • Overturning or derailment of land conveyance • Collision or contact of vessel / craft or conveyance with any external object other than water • Discharge of cargo at the port of distress ii. Loss / damage to the subject –matter insured caused by: • General Average sacrifice • Jettison • General Average contribution and Salvage charges incurred to avoid loss from any cause (s) except those excluded • Liability under “Both to Blame Collision” clause of contract of Affreightment

47. Institute Cargo Clause “B” • covers the aforesaid risks of ICC (C) and • Loss / damage reasonably attributable to earthquake, volcanic eruption or lightning; • Loss or damage caused by • Entry of sea, lake, or river water into vessel, craft, lift van or place of storage • total loss of any package lost overboard or dropped whilst loading into or unloading from vessel or craft • General Average contribution and Salvage charges incurred to avoid loss from any cause (s) except those excluded • Liability under “Both to Blame Collision” clause of contract of Affreightment

48. Institute Cargo Clause (A) • Covers the following risks • All Risks of loss / damage to the cargo insured except those specifically excluded. • General average and salvage charges incurred to avoid loss form any cause covered under the insurance. • Liability under “Both to Blame Collision” clause of contract

49. Exclusions • Willful Misconduct of the Assured • Ordinary Leakage, wear & tear • Insufficiency of packing • Inherent vice • Delay - even if delay is caused by a peril insured • Insolvency or financial default of owner manager charterer etc • Arising from use of nuclear weapons • Malicious damage-only in ICC-B&C • Un-seaworthiness of vessel • This may be waived unless the assured or their servant is privy to such Un-seaworthiness or un cargo worthiness • War/capture seizure arrest/derelict mines • Caused by strikers/resulting from strikes/terrorist.

50. Return of Premium • The premium is refundable under the following circumstances: • By agreement in the policy • Improvement of the character of insurance eg. Change of ship to safer routes, first class liner, good packing etc • If claim does not arise. • Cancellation of policy due to change of ownership of the hull. • Mutual cancellation of the policy. • For reasons of equity • Non attachment of risk. • Undeclared balance in an open policy • Total failure of an apportionable part of the consideration • When assured had no insurable interest throughout the life of policy. • Insurer can cancel when there is unreasonable delay in commencing the voyage. • Over insurance.