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Basis of Indemnity and Sum insured for Electronic Equipment

Posted on: November 7th, 2019 by shiv No Comments

This article endeavors to clear the confusion around how the Sum Insured for Electronic Equipment should be taken and what is the basis is of claims settlement.

It is generally seen that every corporate at some point of time, has felt the need to know the methodology of arriving at the correct sum insured so that the dreaded ‘under-insurance’ factor or the Average Clause is not applied when a claim is reported. This is an oft repeated question asked almost universally in all kinds of seminars, meetings and particularly at the time of renewals.

We have discussed Sum Insured methodology under Fire Insurance in an earlier article. In this edition we shall look at Sum Insured methodology under Electronic Equipment Insurance (EEI) and All Risk Insurance.

As you know EEI is extended to electronic equipment which is stationary while All Risk Insurance is extended to portable electronic equipment. The terms and conditions of both the policies can be the same.

Basis of Sum Insured

It has been observed that a lot of confusion and misconception prevails around the Sum insured to be taken for electronic equipment. A common fallacy is to take the depreciated value of the electronic equipment as the Sum insured. Such a practice leads to an under insurance charge at the time of a claim which can sometimes result into a substantial deduction from the claimed amount. The insured generally misreads this as fraudulent behavior on part of the insurer.

The Sum Insured clause under EEI says that “It is a requirement of this insurance that the Sum Insured shall be equal to the cost of replacement of the insured property by new property of the same kind and same capacity, which shall mean its replacement cost including freight, dues and customs duties, if any and erection costs.” The same basis should be adopted for portable electronic equipment also.

We know that the rate of obsolescence in electronic equipment is high. It is also known that the replacement models are generally in same price range (unless the technology has changed substantially) although with better features. Since putting a price to such enhancement in features is a tedious and an inaccurate task, it is advised that the purchase price of the equipment should be kept as the Sum Insured in the subsequent years also unless the price has increased in which case the increased price should be taken as the Sum insured.

The sum insured of the equipment insured should also include the value of ‘System Software’ if purchased separately.

Basis of Indemnity

A similar confusion prevails around the amount that will be paid by the insurer in case of a loss. Again clarity should be obtained from the tariff which defines the basis of indemnity as:

a) In cases where damage to an insured item can be repaired the Company will pay expenses necessarily incurred to restore the damaged machine to its former state of serviceability plus the cost of dismantling and re-erection incurred for the purpose of effecting the repairs as well as ordinary freight to and from a repair-shop customs duties and dues if any, to the Page | 3 extent such expenses have been included in the Sum Insured. If the repairs are executed at a workshop owned by the Insured, the Company will pay the cost of materials and wages incurred for the purpose of the repairs plus a reasonable percentage to cover overhead charges.

No deduction shall be made for depreciation in respect of parts replaced, except those with limited life, but the value of any salvage will be taken into account. If the cost of repairs as detailed hereinabove equals or exceeds the actual value of the machinery insured immediately before the occurrence of the damage, the settlement shall be made on the basis provided for in (b) below.

Simply put, in case of partial loss the insurer will reimburse the complete amount spent by the insured to restore the equipment to the condition it was prior to the loss. However if items with a limited life span are replaced then suitable depreciation will be deducted on them.

To avoid dispute it is advised that the rate of depreciation (depreciation schedule) should be finalized with the insurer at the time of policy issuance.

b) In cases where an insured item is destroyed, the Company will pay the actual value of the item immediately before the occurrence of the loss, including costs for ordinary freight, erection and customs duties if any, provided such expenses have been included in the sum insured, such actual value to be calculated by deducting proper depreciation from the replacement value of the item. The Company will also pay any normal charges for the dismantling of the machinery destroyed, but the salvage will be taken into account.

Simply put, in case of total loss the insurer will reimburse the new replacement cost of the equipment minus suitable depreciation.

Again it is advised that the rate of depreciation (depreciation schedule) should be finalized with the insurer at the time of policy issuance to avoid disputes.

c) In cases where the Insured item is subjected to total loss and meanwhile it becomes obsolete, all costs necessary to replace the lost or damaged insured item with a follow-up model (similar type) of similar structure/ configuration (of similar quality) ie low, average or high capacity – will be reimbursed.

If the sum insured is less than the amount required to be insured as per Provision – 1 hereinabove, the Company will pay only in such proportion as the sum insured bears to the amount required to be insured. Every item if more than one shall be subject to this condition separately.

As mentioned above, it is better to err on the side of caution and take the purchase price as the Sum insured in the subsequent years also. However this should be suitably adjusted if the price of equipment has seen substantial increase in the preceding year.


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Crime Inusrance

Posted on: November 7th, 2019 by shiv No Comments

Henry Ford, the genius entrepreneur of the last century, described his idea of doing business in a simple manner. “A business that makes nothing but money is a poor business”, he said and the behemoths of the financial world, both in India and abroad, had realised this statement to be true. Instead of short term goals and quick profits, a sound corporate philosophy, internal transparency and ethical practises make a venture successful in the long run.

Henry Ford, the genius entrepreneur of the last century, described his idea of doing business in a simple manner. “A business that makes nothing but money is a poor business”, he said and the behemoths of the financial world, both in India and abroad, had realised this statement to be true. Instead of short term goals and quick profits, a sound corporate philosophy, internal transparency and ethical practises make a venture successful in the long run. All the modern day business empires have ensured this vital internal health of their companies through an exhaustive grid of checks, audits and supervision but there always have been those who have been able to slip through the cracks in the system. Corporate fraud has been an old enemy of every business house and in India where the economy has been growing rapidly in the last few years has reported a growing number of such cases not only raising anxiety in the mind of investors but also affecting the company’s reputation, confidence and its profit. In the past few years, the spate of crimes uncovered in the financial, banking and insurance sector shows some disturbing trends.

The biggest corporate fraud so far has been the one which shook Satyam Computer Services Limited,a scandal that caused loss to the investors to the tune of Rs.14,162 crore. The fraud was perpetrated by inflating the revenue of the company through false sales invoices and showing corresponding gains by forging the bank statements with the collusion of the statutory and internal auditors of the company. When the primary accused confessed to India’s biggest corporate fraud,Mahindra Satyam, formerly Satyam Computer Services, lost almost 25-30% revenue between January 7 and April 13, 2009- a shock that not many other firms would have been able to bear.

In another recent scandal saw a formermanaging director and chief operating officer of Reebok India being accused of setting up secret warehouses of stolen products in Delhi, fudging accounts and making fictitious sales causing a loss of Rs870 crore to the company. In the retail sector too, well-known companies such as the kidswear brand Lilliput and grocery chain Subhiksha have also faced serious cases of accounting fraud. Even financial powerhouses are susceptible to these crimes as seen by the case of a former relationship manager of Citigroup Wealth Management who had allegedly diverted funds to the tune of over Rs300 crore from customers and non-customers of Citibank into personal accounts and had been investing in the equities market for over a year, before he was arrested in December 2010.

Since corporates do not like to report frauds for the fear of loss of reputation the exact amount of losses that corporate India faces is not clearly discernable. However, a latest report by Ernst & Young claims that the cumulative effect of the different types of frauds in the Indian economy in the last fiscal have caused losses amounting to a staggering Rs 6,600 crore.Around 63% of the total fraud cases in FY12 were reported in the financial services sector alone, banks being the most common victim of frauds followed by insurance and mutual fund companies. Earlier this year another study by a Pune-based company Indiaforensic claim Indian insurance companies have borne a loss of over Rs30,000 crore in 2011 due to different kinds of frauds.

According to the first edition of Ernst & Young’s Fraud Indicators in India, the magnitude of frauds in the second half of FY2012 increased by 36% over the first half while the number of frauds rose by a mere 8% during the same period signalling that while the criminals may not be increasing in hordes but are certainly getting a lot smarter. In the recent Deloitte’s Banking Fraud Survey 2012, 83% respondents have indicated that fraud incidents will increase with 64% respondents indicating that the increase will be between 6-25%.

So, how do corporates deal with this menace? Since there is no way to completely eliminate frauds from the system, a robust corporate culture and institutionalised internal controls do act as a passive deterrent. Of the more active measures a company can take for insulation from the financial shockwaves of a major fraud is through the right kind of crime insurance.These insurance policies covers loss from frauds perpetuated both by employees and by third parties and are vital for the sustenance of not only major, multinational corporations but also smaller domestic businesses.

The threat of a financial fraud would be much more for a small scale, independent commercial venture but the awareness level of Indian businessmen about these policies is severely limited thereby exposing them to the serious financial ramifications of perpetrated crimes. It is vital that private businessmen and corporates alike educate themselves of these policies for their security.

A crime insurance policy protects employers from dishonest acts of employees and provides cover for direct financial loss of money, securities and property. A lifeline in case of such eventualities, the policy coverage includes theft, disappearance and destruction, and a multitude of fraudulent acts which include forgery or counterfeiting of money & securities, fraudulent alteration of payment instructions, fraudulent use of corporate credit or debit card, computer fraud and fund transfer fraud. Any action of a devious employee that earns him a benefit at the cost of monetary loss to his company is guarded against effectively by these policies. The policy also covers a very wide spectrum of people including part-time or temporary employees, students or volunteers under the insured’s supervision, trustees, fiduciaries or an administrator of any plan or project. In the modern global scenario of connected networks and threat of database hacking by anonymous cyber criminals, the policy can be customised to a great extent and can cover frauds perpetuated by not only employees but also third parties and unidentifiable employees.

However, it would also serve the employer well to understand the certain grey areas where standard crime insurance doesn’t extend its cover. The insurance would not be able to come to your rescue if the accused employee’s actions have not earned him a financial benefit and has caused only consequential loss (i.e. delay or loss of future trading) and not direct financial loss to the company. Similarly, even in the case of direct financial loss to the company, if the malicious intent of the employee is not proved and he doesn’t make a direct benefit himself, the policy cover doesn’t apply. Also, proprietary information, trade secrets and intellectual property loss are not covered under the standard crime insurance policy and any corporation desirous of guarding against these singular threats must ask their insurers to design a more customized policy to suit their needs.

Crime insurance policies are the last line of defense of any business entity against an attack from within. They lend longevity to a business by enhancing its survivability and are thus a vital component of any risk management program.


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10 Questions About Health Insurance

Posted on: November 7th, 2019 by shiv No Comments

It is the standard practice in all mediclaim policies to release the payment against the original bills only. This prevents duplicacy of payments and even frauds. However certain medical records can be returned to the claimant on request.
You Always Wanted to Ask, But Didn’t Know Whom To

1. Do we need to submit all the claim documents in original?

It is the standard practice in all mediclaim policies to release the payment against the original bills only. This prevents duplicacy of payments and even frauds. However certain medical records can be returned to the claimant on request.

2. Why pre-post hospitalization expenses are not covered for maternity?

Child birth is not a disease, illness or ailment and is therefore not covered under any standard medical insurance policy. However a maternity cover is granted in corporate policies as a value added benefit. But it is not treated at par with usual diseases treatment reimbursement parameters. Therefore insurers do not cover pre & post hospitalization expenses in the maternity cover.

3. What is the time limit for settlement of a reimbursement claim?

The standard time limit for settlement of any claim is 15 days from the date of submission of the documents to the approving authority or reply to last query raised whichever is later.

4. The insurance company deducted some amount from my reimbursement because a couple of reports
were not submitted. Can this amount be recovered by submitting the reports now?

Yes, you can submit these reports and get the reimbursement for them but if they are submitted immediately after the settlement. The insurer will not reimburse if there is a delay of more than 15 days in submitting such reports from the day of the settlement of the claim.

5. Why has the insurer not reimbursed the bills for non medical items?

They were prescribed by the doctor.

In a health insurance policy, the focus is on actual expenses made strictly towards treatment and other expenses are excluded under a written stipulation mentioned in the policy document. Expenses on non-medical items like Disposable Pads, Cotton, Baby Oil, Soap, Glucose, Foot Pad, Tissue Paper, Sanitary Paper etc. are not reimbursed by the insurers.

6. Certain tests were prescribed by the doctor before the operation. However I was not hospitalized because of favorable test reports. Why were the tests disallowed as ‘Observation & Investigation’ and not paid?

Expenses are generally made under following 3 categories:

  • OPD Expenditure
  • Tests for evaluation
  • Hospitalization

The medical policy is mainly designed to cover 24 hour hospitalization and not those covered under point 1 & 2 above. However the tests for evaluation done within 30 days prior to hospitalization and within 60 days after discharge from the hospital are paid as pre & post hospitalization part of the claim. Tests which do not lead to hospitalization are not paid. This is a universal feature of the medical policy.

7. Why has the insurer not reimbursed the bills for medical instruments? They were a part of the treatment.

To keep the premium of the policy affordable insurers do not include medical instruments like thermometers, disposable syringes, insulin pump etc. for reimbursement. Accommodation of the cost of such items will increase the cost of the policy phenomenally and will make it beyond the reach of the common man.

8. Is it possible to re-claim a rejected cashless through reimbursement?

During a cashless approval the insurance company’s (or TPA’s) doctor has to evaluate the merits of the claim within an hour and send a response to the hospital. Sometimes the doctors are not able to decide in favour of the claimant due to lack of information or clarity of information. In such cases the cashless approval is not granted. However it does not mean
a rejection of the claim. Such claims should be sent for reimbursement. When all the documents reach the insurer after hospitalization, they are able to take a well informed decision and such claims are generally paid on merits.

9. The insurer deducted some amount from the claim. The reason mentioned was ‘Limit Exhaustion’. However there was sufficient balance in my sum insured. Why was the entire amount not reimbursed?

In addition to the overall limit of Sum Insured there are sublimits in the policy under different heads like room rent, doctor’s fees, and medicines. Sub limits on sum insured are also enforced by the insurer on treatment of certain diseases like cataract, hernia etc. The insurer will not reimburse more than the sub-limited sum insured for such treatments. This is done to control the claims and also to ensure that the balance sum insured can be utilized for another treatment if required.

10. Why acknowledgement of payment on the letter pad of the hospital is not acceptable in absence of proper numbered bills or a receipt?

All financial transactions are governed by standard accounting practices which require numbered stationary in standard format. Such procedures also help the insurers in controlling frauds.


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Protection From Protectors

Posted on: November 7th, 2019 by shiv No Comments

Companies have shown strong predilection towards out sourcing of blue collared jobs. Peons, office boys, pantry staff, drivers, cleaning staff and guards etc. are now routinely being hired from specialized companies that provide such man power.

Dealing with Theft by Guards

Companies have shown strong predilection towards out sourcing of blue collared jobs. Peons, office boys, pantry staff, drivers, cleaning staff and guards etc. are now routinely being hired from specialized companies that provide such man power.

Although such outsourcing provides economical and administrative benefits, it also opens companies to new risks, which
insurance and risk managers many times fail to take into account.

A manufacturing company in Gurgaon had hired guards from a reputed security services company. One of the guards drugged his colleagues one night and allowed his partners in crime to come inside the company warehouse to steal goods worth Rs. 1 crore. Although the company had taken a burglary and theft policy, the insurer could not pay the claim as the loss had happened with the complicity of the guard employed by the company. A clause in the burglary policy specifically excludes losses due to connivance of the staff. The company tried to recover the loss from the security company that had provided the guard. After much acrimony and negotiation they could recover only 20% of the loss amount.

This is a very relevant risk that almost all organizations face today but unfortunately very few have taken steps to mitigate this risk. Most organizations take a Burglary and Theft insurance, however this policy covers losses due to burglary or theft done by any party not connected with the insured in any way. Loss of company property due to complicity of the insured’s employees either directly employed or hired from an outsourcing agency, are not paid under a Burglary and Theft policy.

If this is so then how can such a risk be mitigated? The subsequent paragraphs would provide an insight into the alternative solutions to the risks of employee dishonesty.

Risk Transfer in the Form of an Insurance Cover

Fidelity Insurance (more commonly known in India as “Fidelity Guarantee insurance”) is designed to provide cover to the employers against dishonesty of the employees. The policy covers theft of not only the money but also goods/ stock belonging to the insured. Both, an opportunistic theft or misappropriation of funds over a period of time, are covered under this policy. Thus a loss because of a security guard stealing stocks of garments from a retail store in connivance with outsiders,will not be covered under a Burglary policy. However a Fidelity Guarantee policy will cover this loss.

Certain Key Words Used in the Operative Clause of the Policy

  •  “Loss of money or goods” – The policy covers loss of money or goods.
  • “Belonging to or held in trust by the insured” – Goods and money belonging to insured ( employer) or which he is
    responsible for are covered under the policy e.g. if the employee runs away with the money or personal property of a visitor/ or a neighbour , for which the insured is not responsible , the loss will be not be covered under the policy.
  • Caused directly by fraudulent and dishonest act” – The policy covers only direct losses. Consequential financial losses are covered.
  • “In connection with his employment with his/ her employment with insured” – The policy will not cover theft by an employee outside the course of his/ her employment.

From the above discussion, it gets established that any direct losses of money and material due to the dishonesty of employees can be covered under Fidelity Guarantee Insurance. This will also include any thefts with the complicity of the employees.

Now the next question to be tackled is that guards provided by a manpower outsourcing organization like a security agency are not employees of a company. Therefore, will any thefts done by them or with their complicity be covered?

Insurers do not cover outsourced staff under Employee Fidelity Insurance. Hence it should not be implicitly assumed that all persons working on the premises of the insured would stand covered under the fidelity policy. However insurers have covered outsourced guards, peons, pantry boys etc. in the past, on payment of extra premium. Therefore the best course would be to specifically declare such staff and negotiate the terms of cover with the insurer.

In our next publication we will deal with another emerging risk, financial liability arising from theft of material or data by employees from a client.


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Why is Errors & Omissions Cover Necessary?

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

Professionals owe certain duties to their clients by virtue of the special skills, knowledge, and expertise that characterize their chosen occupations.

The need for professional liability insurance stems from these duties which may be based in tort law, contract law, or statutory law.

Tort Law: A professional has to exercise a standard of care that would be considered reasonable for people in his or her profession. However despite having best of the systems, negligence in providing the professional services can creep in.

Negligence can arise in the act of rendering professional services or advice, in which case it would be classified as an act of commission or an error.

Negligence can also result from the failure to render professional services or advice, in which case it would be classified as an omission.

To prove negligence in an E&O claim, a plaintiff must prove four things.

  • The defendant owed a legal duty to the plaintiff.
  • The defendant breached that duty.
  • The plaintiff suffered actual financial harm.
  • The financial damage was proximately caused by the breach of
    duty.

Disproving any one of the four elements creates a successful defense against a negligence claim. For example, a design firm may argue that it did not breach its duty to the client because its work was performed at a level similar to what would be expected of other professional design firms. Other common defense used by professional to fight negligence claims include following:

  • Contributory or comparative negligence: if the party bringing the claim can be shown to have contributed to his or her own damages, a decrease the size of the judgment to the plaintiff.
  • Assumption of risk: in some cases, clients may have knowingly and voluntarily taken on a risk. They cannot come back and sue for damages if the risk they assumed comes back to bite them.
  • Statues of limitations: allegations of professional liability must be brought within a specified time from when the alleged negligent action occurred. The actual time frame varies from state to state and by the type of negligence alleged.

Contract Law: when professional agree to take on a job for a client, they create a contract with legal obligations related to the performance of the service or services. If the professionals fail to uphold their end of the contract and the client suffers harm, a lawsuit can be brought seeking damages, which can be categorized as one of the following:

  • Compensatory damages: These are meant to make the plaintiff whole. In other words, the damages should equal the actual value of the plaintiff’s loss.
  • Consequential damages: These arise as a consequence of the error or omission, such as lose of profits when software malfunctions and prevents a business from accessing key data.
  • Liquidated damages: These are stipulated in the contract, specifying how much will be awarded if the contract’s terms are not met. Agreeing in advance to what damages would be paid is one way to help prevent disputes from going to court, but could raise coverage issue in an E&O policy as will be discussed later in this report.

Statutory Law: Historically, statutory law has not been a major factor in E&O liability, but that is changing. The Sarbanes-Oxley Act of 2002, for example, was passed following a number of high-profile corporate scandals and is likely to have a significant effect on the relationships that accountants, lawyers, and financial professional have with their client. Sarbanes-Oxley and other measures that have been proposed in response to the various corporate scandals of the past few years also target the role of corporate directors and officers. Some disputes are likely to arise as insurers – and, ultimately, the courts- decide whether particular cases are rightfully matters concerning E&O coverage or directors and officers (D&O) coverage.


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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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