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Archive for the ‘Insights-Property’ Category

Portable Electronic Equipment Insurance

Posted on: December 22nd, 2020 by hema kashyap No Comments

Electronic Equipment like Laptops, Cameras, Scanners, Hand – held Devices, Mobile phones, Audio / Visual equipment, Portable Medical and Biomedical Equipment etc. are vulnerable to more risks, associated with their portability, as compared to fixed assets.
The above Insurance on All Risks basis provides covers against these exposures. Being exclusion based cover, the policy covers all the possible risks other than the exclusions. But on a broad basis, provides indemnity against risks such as:

  1. Fire, Lightening, Explosion / Implosion, Aircraft damage, Riot, Strike, Malicious damage, Storm, Cyclone , Typhoon, Tempest, Hurricane, Tornado, Flood, & Inundation and the like perils.
  2. Earthquake (Fire and shock), Landslide, Subsidence, Tsunami
  3. Burglary, Housebreaking including Theft
  4. Accidental external damage
  5. Assets when in transit as accompanied baggage of Insured or his employees

Cover optional extensions

  1. Electrical / Mechanical /Electronic breakdown
  2. Terrorism cover
  3. Worldwide territory

This policy is also known in market parlance as LAR (Laptop All Risk) or All Risk for Portable equipment or All Risk. It is mainly available as a package cover with Fire and occasionally as a standalone cover.

 

Basis of Indemnity

The Portable Electronic Equipment Insurance Policy indemnifies the Insured by way of repair, replacement or payment in respect of physical loss or damage to Insured property from any cause other than those specifically excluded under the policy usually on market value basis. However the Sum Insured should be on new replacement value basis.

General exclusions such as;

• War or war like operations, nuclear reaction, radiation or radioactive contamination
• Willful act or willful negligence of the Insured or his representative
• Wear and tear or gradual deterioration due to atmospheric conditions
• Manufacturer or supplier ‘s legal or contractual liability
• Maintenance costs
• Consequential loss or liability of any kind or description
• Aesthetic defects, such as scratches on painted polished or enameled surfaces and / or
any existing defects at the time of commencement of insurance cover
• Stated deductible under the policy


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Right Sum Insured in Fire Policies

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

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.


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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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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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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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Optima’s core group has more than 100 man-years of experience in insurance. Our experience has trained us in reading the fine print of insurance policies, understanding it and applying it for the benefit of our clients.

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