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Consequential Loss Insurance – II

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

Carrying our mission forward to present the above Loss of Profit insurance (as it is normally called) in the simplest form, we give you a fair idea of some of the important terms being frequently used in this insurance.

Property Damage Proviso

This provides that there should be a property insurance policy in force and also the property damage insurer have paid or at least admitted liability for the said property damage. The reasons for the introduction of this provision are not far to seek. Firstly, it is not difficult to understand that instead of incorporating the terms or warranties related to Property damage insurance in consequential loss policy; it is much better to have this proviso for fulfillment of the same terms and conditions. Secondly, it is more convenient to have one investigation done for the cause of damage rather than have two separate ones which may lead to

complexities and last but not the least, it is significant for consequential loss insurers to know monies would be available from property damage insurers to enable the insured to speedily reinstate the property thus minimizing the interruption of business.

Adjustment Clause

This makes the consequential loss policy calculate the real indemnity in the truest sense. This also silences the critics of insurance policies that insurers are not rising to the occasion for industry and trade. It is done by incorporating the following wordings. The wordings are explained at length with suitable example.

(1) The trend of the business

In case the business in question was showing a rising turnover just prior to the fire, the insured should be duly compensated for that trend. Vice-Versa, in case the trend was declining, the true indemnity theory should account for that as well. While calculating the rate of gross profit, it would be therefore essential to accordingly make adjustments. An illustration to this effect would clarify the situation:

It would be therefore be seen that in an upward trend there is an under insurance and in a down ward trend, there is an over insurance. Therefore, care should be taken in selecting and evaluating the sum insured depending upon the correct trend as far as possible.

(2) Variations and Special Circumstances

If no definite trend is available from the books of accounts or some positive trend which has recently happened, then there workings enable the insurer to accordingly adjust for such a trend.

For example, if a firm has just completed installation of additional improved machinery, and it can be shown that, but for the fire, substantially increased turnover would have resulted, and that stocks of raw materials would have been available, and that sale of increased quantity of finished goods could have been achieved then, on the assumption of an adequate insurance to cover the greatly enhanced gross profit anticipated, the company will indemnity the insured accordingly, by operating the adjustment clause to allow for the variation from pre fire trading.

We now give below the steps that are prescribed for calculating the amount payable for a loss in the under mentioned chronological sequence:

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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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Consequential Loss Insurance (Fire) or Loss of Profit Insurance

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

As in the past in our knowledge series, we shall endeavor to present the above insurance in the simplest possible way with a view to elicit interest and also to exemplify its importance.

As in the past in our knowledge series, we shall endeavor to present the above insurance in the simplest possible way with a view to elicit interest and also to exemplify its importance.

When a fire occurs at premises used for the purpose of conducting a business, whether industrial, mercantile or Professional, the owner of the business will usually be insured against damage to his property by fire etc and will in due course be able to recover his material loss. With the proceeds of his claim he can, in time, replace his lost or damaged property and resume his business but, until this can be done, the profits which he was previously earning will have ceased, wholly or in part.

In addition, there will almost certainly be fixed expenses arising from the business e.q. salaries, rent, municipal taxes, which be will have to continue to meet, even if his profits have entirely vanished.

Faced with the situation, he may find means to reduce or even eliminate the loss of his profits but this will call for expenditure perhaps substantial – which he may not have the funds to meet. It is to meet this situation that loss of profits insurance have been devised and subject to a suitable type of policy and an adequate sum insured, it affords an insured complete protection against the reduction or cessation of profits following a fire and place him in the same position as though the damage had not occurred.

In these circumstances, a loss of profit insurance should appeal to any businessman as an essential complement to Fire Insurance.

We shall proceed ahead to give a brief idea of important definitions and ingredients which needs to be understood before obtaining a policy:

a) Net Profit:

The net trading profit resulting from the business of the insured at the premises. This does not include all capital receipts and accretion. Provisioning for all fixed charges shall be made including depreciation but shall not include taxation chargeable on profits.

b) Standing Charges:

These are the fixed expenses whi ch wi l l never theless continue to accrue to the insured despite the cessation of business e.q. Rent, Municipal taxes, fixed interest on capital, Advertising etc

c) Indemnity Period:

The period commences when the damage by fire occurs, and ends when the business ceases to be affected there by, subject to the maximum period specified in the policy.

d) Turnover:

The money paid or payable to the insured for goods sold & delivered and for services rendered in course of the business at the premises.

e) Rate of Gross Profit:

The Gross Profit explained above divided by turnover during the financial year immediately before the date of the damage.

f) Annual Turnover:

The turnover during the twelve months immediately before the date of the damage.

g) Standard Turn Over:

The turn over during that period in the twelve months immediately before the date of the loss which corresponds with the Indemnity period. This st mean that if a fire occurs on 1 January and the business is affected during the following three months, January to March, then in ascertaining the shortage in turn over, the figures for those months are compared with January to March in the preceeding year. This is fairness personified especially in case of seasonal trades.

Measure of Indemnity:

With the aid of the above stated definition, it would now be possible to state in simple terms how the insured would be compensated in the event of a loss. The amount payable shall be under two heads, which are described as below:

(I) Reduction In Turn Over:

It shall be he sum produced by applying the rate of gross profit to the amount by which the turn over during the indemnity period shall, in consequence of the damage, fall short of the Standard Turnover.

(II) Increase In Cost of waking:

It shall comprise the additional expend it urenecessarily and reasonably incurred for the sole purpose of diminishing the reduction in turnover but the amount shall not exceed the sum produced by applying the rate of gross profit to the amount of reduction there by avoided. We shall go ahead by giving you a very simple accounting applicability of this policy and make you clearly understand how it fully compensates an insured. By this example, you will able to appreciate that all the aspects are duly taken care of by insurers.

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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

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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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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