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Financial Protection from Natural Calamities

Posted on: November 6th, 2019 by shiv No Comments

Earthquakes across the world have been having a crippling effects on the assets and operations of business enterprises. The latest earthquake in Nepal is a grim reminder. Losses caused by natural disasters have a severe financial impact on businesses and therefore it becomes important for business to be adequately covered.

We want to remind managers to assess their:

  • Adequacy of the sum insured
  • Need for Business Interruption insurance

How to get my Sum insured right ?

Sum insured represents the maximum liability of the insurers in the event of the claim.

A common question which puzzles the managers / owners is “What would be the right value for which we should get the insurance for ?” It may not be always possible to get the sum insured 100% accurate, but the attempt should be to reach as close as possible to the actual value of the assets .

The insurance of assets ( Building, plant and machinery , furniture, fixture and fittings) are mainly done on either of the following basis; “Reinstatement Value Basis ( RIV)” or “Market Value Basis”. The option lies with the client to choose any of these Insurance on reinstatement basis would mean that the sum insured should represent the “new replacement cost” of the assets , whereas the market value would mean insuring the assets on “depreciated basis “. The sum insured would definitely be higher in the former and consequently the premium outgo will be higher , but in case of a loss the insured gets enough reimbursement to buy a new asset to replace the lost / damaged asset. If the assets are insured on depreciated value basis the insured will get a fraction of the actual expenses done to rebuild or reinstate the damaged assets.

Few common mistakes which need to be avoided are :

  • Insure on book value / capitalised cost
  • Depreciate the capitalised cost
  • RIV clause incorporated under the policy, but the sum insured is on depreciated basis .

Please keep in mind that stocks should always be insured on market value basis .

Do we need to have Business Interruption (Loss of Profit) insurance?

The effects of natural catastrophe do not end with the damages to the assets. Large scale damage can result in shutdown of operations. Loss of revenue due to such a shutdown is often much larger than the material damage losses. Such losses put a financial strain on the company, which can lead to insolvency of the enterprise .

Therefore it is important for a business to have a Business Interruption (Loss of Profit) policy also. The policy commonly called Fire loss of profit policy( FLOP) covers the reduction in turnover/ output due to shutdown of operations following a loss. The sum insured under the policy represents the anticipated gross profit during the year , which for the purpose this insurance should be the sum of “Net profit” and “Fixed Cost”. The loss is computed based on the reduction of turnover/ output during the interruption period (shutdown period) X rate of gross profit .

An important consideration for the BI policy is arriving at the correct “indemnity period”…this represents the insured’s guesstimate of the maximum period of interruption which can happen following a loss. Natural catastrophes like earthquake can result in devastating damages which may require long period to rebuild and restart the facility. Thus while arriving at the indemnity period , few things one needs to keep in mind are; the maximum period which might be required to reconstruct the building ( including time to be taken to get the necessary clearance ), lead procurement time for machinery , installation time for machinery (it would take more time to procure machines, if they are imported ) and lead time for repair/ procurement of critical spares.

Insuring the assets adequately and having a suitable business interruption cover goes a long way to protect an organisation in times of disaster

For any query or comments, write to us on info@optima.co.in


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Managing Cyber Threat

Posted on: November 6th, 2019 by shiv No Comments

E commerce is growing. This explosive growth is being observed closely by various groups including cyber criminals who see it as a fertile ground for frauds This criminal activity affects the reputation of internet retailers and opens them to liability claims from their customers

In the last few years, e-­‐commerce has gone from being almost nonexistent to completely mainstream. But with the advent of Internet retail commerce, the Internet has also become fertile ground for the commission of cyber fraud.

This fraud affects everyone in the e-­‐commerce chain, and can cause catastrophic damage in the time it takes to click a mouse. For customers, cyber fraud can ruin credit scores and expose personal identification data that can result in identity theft. For retailers, who are responsible for the data of their customers that flows through the retailer’s cyberspace, damage can range from lost sales and devastation of brand reputation to regulatory fines and penalties.

How Cyber Fraud Happens

There are numerous ways e-­‐tailers are vulnerable to cyber crime:

  • A hacker breaches a computer network and steals personally identifiable information such as names, street and email addresses, phone numbers, and credit card information. The customer’s identity may be stolen for the purpose of other fraud, costing the customer money and/or destroying his credit score.
  • An e-­‐commerce site contracts with an outside vendor to conduct all credit transactions. A hacker who compromises the network of the vendor has effectively compromised the e-­‐tailer as well, since it is ultimately responsible for customer data.
  • Click jacking occurs when a perpetrator sabotages the e-­‐tailer’s software code so its website re-­‐directs the customer to other websites offering anything from competing products to pornography. The result for the retailer is lost sales and potentially critical brand damage. Additionally, customers could incur computer viruses and other damage.
  • Hackers infect thousands of computers and then manipulate them to all simultaneously contact an e-­‐commerce website. This causes a massive slowdown or shutdown at the e-­‐tailer, and is sometimes followed by extortion. It always results in lost sales and business interruption.
  • In the course of attacking a network database, a perpetrator infects an e-­‐commerce website with a virus that subsequently infects the computers of thousands of customers. The customers bring a class action suit against the e-­‐tailer for not preventing the spread of the virus.

Managing Cyber Risks

Cyber attacks are not an illusion or passing problem: Just as e-­‐commerce is widespread today, so is cyber crime. It has become a risk of doing business, and all companies make some decision involving that risk.

In the cyber world, the danger of loss can be reduced through firewalls, data encryption, and other IT security techniques. But, as with all business risks, losses can still occur despite the best risk management. In cyber crime, there is an “arms race” between perpetrators of crime and preventers of systems breaches, and criminals win all too often.

It can be an intimidating field to enter, as botnets and other cyber fraud mechanisms continually evolve, becoming harder to detect. Some of the most well known retailers and e-­‐tailers – including Sony (maker of the PlayStation), Sony Ericsson, and Target Stores – have experienced major systems breaches that compromised personal identification data.

Now technology insurance can minimize or eliminate such risks.

What Technology Insurance Can Cover

Cyber insurance can pay for:

  • Inadvertent exposure of information governed by website privacy promises or confidentiality agreements.
  • Interruption of business function caused by malware and viruses, denial of service attacks, and other causes.
  • Data restoration costs when systems are compromised or data is rendered unusable.
  • Cyber extortion and public relations crisis management.
  • Errors and omissions in the operation of an e-­‐commerce website.
  • Lawsuits from customers for breaches, even if the loss occurs on a third-­‐party vendor’s network.
  • Stolen or lost data on paper files


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Monsoon Advisory

Posted on: November 6th, 2019 by shiv No Comments

Last so many years India as well as other parts of the world have been plagued by the vagaries of flood and high tides, which brought along with mass destruction and loss of property. While the right insurance cover does bring some financial relief to the owners, insurance does not cover losses like loss of market share, loss of reputation, rebuilding the position one occupied prior to the catastrophe struck etc. Hence their no alternative to taking some basic precautions to avoid such losses.

The following paragraphs mention some simple steps which can help any organisation mitigate the possibilities of damages due to flood:

  • Warehouses have felt the maximum impact of flood in the recent years. The following measures can go a long way to reduce the impact, if not avoid the losses :
    • Many of the warehouses are hired and to avoid high rentals warehouses located in low lying areas are preferred. This should be avoided to the extent possible.
    • If occupying a warehouse in low lying area is unavoidable, the owner of the goods should ensure the following ….
      • Avoid basement storage …preferably the storage should be done in the first or higher floors .
      • If the storage has to be done on the ground floor, the goods need to be kept on a platform/ pellet / metal racks which have good clearance from the floor .
      • The goods (particularly the ones hygroscopic in nature or prone to water damage) need to be provided with an extra water proof packing in addition to the manufacturers recommended ones .
      • The entry to the warehouse should be having a slope towards the outside and under no circumstance the level should be lower or of same level as the adjacent road.
      • Completely avoid storage in open or even under sheds which are open from sides. Construction materials like cement should always be kept inside at construction sites , particularly during the monsoons
  • The above & the following standard operating procedures can be adopted for not only warehouses but also for other occupancies :
    • Higher plinth level of the factory/ warehouse as compared to the adjacent locations , so that water accumulating in the surroundings do not find its way inside .
    • The drainage system should be checked and maintained on regular basis.
    • It always helps to have pump and sump facilities to help draining out water if they enter the premises.
    • The manufacturing units should be ideally located some distance away from the boundary wall.
    • Regular follow up with authorities to improve / repair the drainage facilities of the area,
    • While storing keep a clear space of two feet from the walls ( particularly the external walls ) to avoid damages to stocks due to seepage of water through the walls ( happens when the adjoining road is inundated )
    • Monitor closely to avoid chocking of drains due to waste materials entering and clogging the same.

The above measures may not necessarily any damages due to flood , but can go a long way to minimise the impact .


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Professional Indemnity Insurance for Civil Contractors

Posted on: November 6th, 2019 by shiv No Comments

The exposures faced by contractors have become more complicated as a result of changes in project delivery systems over the past 20 years. This has forced construction executives to examine professional liability coverage—a complex and often misunderstood type of coverage.

While a Public Liability policy covers physical activities that result in bodily injury and physical damage, professional liability claims often come from issues relating to faulty design, cost overruns or a delay in completing the project due to professional negligence.

In construction litigation, professional negligence is usually defined as failure to perform duties according to the rules or standard of care or practice that would have been expected of another professional performing a similar task in the same region or location.

“Professional” Defined

A professional is defined as someone who possesses specialized skills and experience and a higher level of competence resulting from acquired learning. A crane operator may have specialized skills and experience, but operating a crane would not be considered a professional service. It would be considered “means and methods.” Similarly, if a contractor uses detailed design for the temporary foundation of the crane and performs studies of the load bearing or handling capacity of the crane, these activities are considered means and methods. On the other hand, an engineering firm could potentially incur professional liability if the firm designs the supporting structures for the crane or offers opinions about the crane’s operating capacity but do not actually operate the crane as they would be acting within the capacity of a “professional.”

Professional Liability Coverage for Contractors

A professional liability policy broadly covers design claims. To the extent the construction manager acted negligently, they incur professional liability. Construction companies can take the following kinds of insurance coverage for financial protection.

Defensive Coverage

Professional liability policies are defensive in nature. Contractors should purchase protective indemnity coverage if they enter a design-­‐build contract and provide design and construction services while subcontracting the design portion of the work.

Protective Indemnity

If the design firm is at fault and their professional liability insurance is not adequate, protective indemnity coverage will pay the contractor for such a loss in excess of the designer’s availability insurances. Such insurance is essential in design/build as it may be the only recourse available to help the contractor defray the costs of fixing the project. Since protective indemnity only pays for established losses, it typically takes some time to vet out its value.

Mitigation

Mitigating damage is a more proactive insurance coverage for a project, especially for design claims discovered during the course of the construction or warranty period. The coverage looks at the significant project design problems early on. If the problems require immediate attention, the coverage brings all parties to the table without litigation, while potentially providing immediate funds to remedy the design problems.

The issue of fault can be resolved later after the project meets the owner’s satisfaction. Once full design liability has been established through mediation or litigation, the contractor and his or her insurer jointly look to recover mitigation of damage advance payments that have been made from the negligent third-­‐party designer.

A contractor who subcontracts design or provides design-­‐build or construction management services should purchase a professional liability policy. The Public Liability policy does not cover the risks involved in these contracts.

In some cases, design liability is inadvertently assumed on an indirect basis (e.g., fire protection, life safety/lighting, signage, roofing, mechanical, electrical, curtain walls, etc.) when the contractor subcontracts the activity to a non-­‐professional entity. This entity may also subcontract design services. Claims have arisen when a critical part of the job had a design-­‐build component that resulted in a professional liability loss despite the fact that the contract for work was a general construction lump sum agreement.


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