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Mitigating The Risks Associated With Standstill Period Under Projects

Posted on: November 9th, 2020 by hema kashyap No Comments

It is not uncommon to find an ongoing construction project being interrupted. The reasons for the interruptions could be manifold and many a times are beyond the control of the Principal or the owner of the project. It is critical for every stakeholder to understand the risk exposures which might continue to haunt them, irrespective of
whether the project is running or not.

SOME OF THE CAUSES OF INTERRUPTIONS ARE

  • Dynamic risks like the changing economic environment which might make the project unviable or might require some changes in the nature of the project
  • Temporary liquidity problems
  • Disputes between the principal and the contractor over contract conditions / payment to contractors etc
  • Investors not able to fulfil their obligations
  • Delay on account of late delivery or shortage of construction materials/ project machinery resulting in interruptions.

THE EFFECTS ARE

  • The Principal abandons the project
  • The Contractor goes away without completing the project and the Principal has to look for another vendor to complete the unfinished job.
  • Both the Principal and contractor mutually decide that the project needs a temporary suspension.
  • The Investor decides to stop financing the project

Each of the above would leave an unfinished / partially constructed structure / works, which could be a building(s) of hospital, school, office, factory, residence or roads /bridges / flyovers / any other civil works or power plants / manufacturing risks.

HOW WILL THE UNDERWRITERS VIEW THE SITUATION ?

Contractor’s All Risk as well as the Erection All Risk policy under the General Exclusion excludes any liability, loss or damage arising out of or aggravated by (directly orindirectly) cessation of work total or partial. This means that the policy ceases to cover any loss which might have arisen due to the cessation of work / work stoppage.

In addition to this a condition of the policies also stipulates that any material change in the risk needs to be intimated to the insurers by the insured. No material alteration shall be made or admitted by the insured whereby the risk is increased unless the continuance of the insurance is confirmed in writing by the Insurer.

Stoppage of work / standstill period can be seen as a material alteration which increases the risk. Thus as per the terms and conditions of the project insurance policies, the coverage gets restricted if there is a cessation of work and the continuation of the policy also depends on the underwriters. Any Advance Loss of Profit cover ( ALOP ) if taken as an extension to the project policies also ceases to exist, if there is partial or total stoppage of work.

PERIL RISK
Water The exposure to the water is maximum in civil constructions involving basements, particularly where the basement constructions are partially completed. Even in case of partially constructed buildings where the basements are completed, if the standstill period starts during monsoon, the structure may remain under water for a long time and the water pressure may cause the sheet pile wall to get deformed. This might eventually lead to collapse
Fire The risk of fire peril affecting the partially constructed buildings would be the highest when the superstructure is under construction (particularly towards the end of the construction, when interior works have started). The scaffoldings, shuttering, combustible

materials like wood, varnishes, paints increase the fire load to a great extent ( as compared to piling stage or when the basements are under construction)

Theft, Burglary, Malicious Acts A silent risk may not be as well guarded as it would have been before abandonment. It would be extremely prone to the malicious acts of human beings.The stealing/ breaking of windows and doors, cutting of cables/ pipes/ electric wires have high probability of occurrence.
Third Party Liability Not only is the building under question at risk, but the surroundings too. Weakening of the partially completed structure due to flood / storm etc. posess serious threat to the surrounding buildings. Settlement damages, collapse of the under construction structure, strong winds blowing away parts of the unguarded building, glass panes breaking and falling on passerbys are some of the threats.
Storm, Cyclone, Strong Winds Breakage of glass, blowing of not too strong roof (due to partial completion) is possible primarily during the construction of the superstructure.

 

Principal / Owner of the partially constructed assets is certainly exposed to many risks during the standstill period for which his existing insurance policy may not assist. The risks require mitigation and possibly after the suitable loss prevention steps are in place the insurers may view the risk favorably and provide cover.

 

HAZARD POSSIBLE RISK MITIGATION STEPS
Water Damages • Sufficient pumping facilities should be available for dewatering purpose. In case of water entering the premises, pumps should be able to remove the water

• Provision of an outward slope and embankments/ barriers to prevent water entering the premise and maintain a higher level as compared to the adjoining road

• Adequate drainage facility within the premises

Fire Damages • Removal of flammable and combustible substances along with the combustible wastes

• Adequate fire fighting facilities (as per norm) throughout the premises need to be installed, inspected periodically and monitored.

• Sufficient water storage exclusively for fire fighting

• Contact with nearest fire brigade

• Safety nets installed around semi completed superstructures protects the installations against strong wind force

Theft, Burglary, Malicious Acts • Fencing all around, round the clock exclusive security, patrolling of the site at regular intervals, adequate lighting during night

• Curtain wall and safety net around the semi completed building

Third Party Liability • Safety net around the building prevents falling objects injuring passer by

• Entry to the premises should be restricted, so that unauthorized visitors do not enter and get exposed to falling objects

INSURANCE COVERAGE

There is a provision of “Work Stoppage” extension under the guidelines for project insurance called “Cessation of works”. However the same is entirely at the discretion of the underwriters and for a maximum period of 3 months. The underwriters after satisfying themselves on the minimum safety provisions available on site can agree to
at . This would be possible after a proper risk survey. The mitigating steps as mentioned above, if implemented can lead to favourable response from the insurers.

Alternatively, the underwriters might also agree to restrict the cover to NAMED PERILS as against the all risk coverage available under CAR and EAR policies after incorporating suitable deductibles and pricing the risk appropriately. Certain factors which the underwriters might consider before accepting and pricing the risk would be as under:

  • Status of completion of the basements and number of basements
  • Percentage of completion, whether interior work is in progress, quantum of combustible substances at site etc.
  • Whether the start of the standstill period is close to onset of monsoon In case of completed basements, whether any storage is being done therein Fire fighting installations and availability of water for fire fighting
  • Availability of round the clock security, drainage facility, level of the premises as against adjoining road, availability of pumping facilities at site.
  • Surroundings and exposure to third party damages
  • Wind storm exposure and precautions taken
  • Estimated value of the completed portions

 


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Changes In Health Insurance Policies – Part 2

Posted on: October 2nd, 2020 by hema kashyap No Comments

The IRDAI has modified guidelines on proportionate deductions under health insurance policies that will take effect from October with the goal to reduce out-of-pocket expenses for policyholders.

According to the IRDAI, as a part of product design, insurers are to propose proportionate deductions of the associated medical expenses when a policyholder chooses a higher hospital room category than the category that is eligible as per terms and conditions of the policy.

The following expenses will not be part of the ‘associate medical expenses’:

• Cost of pharmaceuticals
• Cost of implants and medical devices
• Cost of diagnostics

The insurers will have to ensure that proportionate deductions are not applied in respect of the hospitals which do not follow differential billing by room category nor for those expenses in respect of which
differential billing is not adopted based on room category.

In addition, insurers are not permitted to apply proportionate deductions to ‘ICU charges’ because there
are no different categories of ICU.

The insurance regulator has also asked the insurer to standardise exclusions — listing diseases or medical
conditions that are not covered under a policy.

The new conditions have to be incorporated in the new policies filed by insurers on or after 1 October and
for existing products which are due for renewal from 1 April 2021.


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Changes In Health Insurance Policies

Posted on: September 25th, 2020 by hema kashyap No Comments

From October health insurance policies in India will change in accordance with the guidelines and specifications issued by IRDAI. The changes will be applicable on all existing and new health insurance policies. Here is the list of expected changes:

COVER FOR NEW AILMENTS

Now the health insurance policies will cover:

• Illnesses contracted due to hazardous activity.
• Treatment of mental illness, behaviour and neurodevelopment disorders
• Age-related degeneration and internal congenital diseases
• Artificial life maintenance
• Puberty and menopause-related disorder.

NO REJECTION OF CLAIM AFTER 8 YEARS

If a health insurance policy has completed eight years, i.e., the policyholder has renewed the policy for eight years continuously, a claim cannot be rejected except for proven fraud and permanent exclusions.

NEW DEFINITION OF PRE EXISTING DISEASE (PED)

  1. Any disease/s or ailment/s that has been diagnosed by a physician 48 months before issuance of the
    health cover will be classified under PED.
  2. Any disease/s or ailment/s for which any type of medical advice or treatment was recommended by a
    qualified doctor 48 months before issuance of the policy will be qualified under PED.
  3. Any condition whose symptoms or signs have resulted within three months of the issuance of the policy
    will also be classified under
  4. Pre-existing Diseases.

All health conditions and illnesses suffered after the issuance of policy will be covered under health insurance. Some of the major diseases include Alzheimer, Parkinson, AIDS/HIV and morbid obesity.

PAYING HEALTH INSURANCE PREMIUMS IN EMIS

The regulator has allowed the payment of health insurance premiums in instalments.
The premium mode (frequency) can bemonthly, quarterly or half-yearly.


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Quick Guide To Basis Of Sum Insured And Claim Settlement

Posted on: August 29th, 2020 by hema kashyap No Comments

Cambridge Dictionary defines Sum Insured as “a maximum amount that an insurance company will pay to someone who makes a claim”.
This definition is at the heart of many on-going conflicts and debates in the Insurance world. As simple as it sounds from an Insurer’s perspective, it is an enigma for most buyers of insurance products. Buyers’ confusion is often compounded by ‘newer bitter discoveries’ at the point of truth; Claims. The objective of this primer is to be a simple ready reckoner of popular insurance policies for both, insurance professionals selling commercial lines products and buyers.

Some commonly used terms in context of sum insured are:

Market Value / Depreciated Value: Market value is the value of an asset as currently priced in the marketplace i.e. at which it can be sold or bought on ‘as it is’ basis. It would closely represent the present-day new cost of similar item / structure less the depreciation due to age / usage. This is, in most cases, different from the accounting Book value or the Original Purchase price.

Reinstatement Value: It represents the current ‘new for old’ replacement value of the asset. It represents the price of a new same or similar asset. Often it is included by incorporating “Reinstatement Value Clause” in the policy.

Average Clause / Under-Insurance: if the sum insured of a property at the time of loss or damage is less than its Market Value or Reinstatement Value (as per the policy conditions ), claim payment by the insurance company will be reduced in the same proportion.

POLICY TYPE BASIS OF SUM INSURED BASIS OF CLAIM SETTLEMENT
 

1. Standard Fire & Special Perils (SFSP)

 

2. Burglary & Theft

 

Option I

Reinstatement Value (RV) for all fixed assets and Market value (MV) for stocks. Reinstatement Value clause to be specifically mentioned.

Option II

Market value for all fixed assets and stocks. In the absence of Reinstatement Value specifically, policy is default treated as on Market value.

Option I

Claim settlement on RV basis for all fixed assets after actual reinstatement of assets and MV for stocks. Insured can opt to take MV settlement for fixed assets with no reinstatement.

Option II

Claim settlement on Market Value for all fixed assets and stocks.

 

3. Industrial All Risk / Asset All Risk / Property All Risk

 

Reinstatement Value (RV) for all fixed assets and Market value (MV) for stocks. (Some Insurers may agree for MV only for very old fixed assets, in which case, the claim settlement will also be on MV basis). Claim settlement on RV basis for all fixed assets after actual reinstatement of assets within 12 months (or an extended period, if allowed by the Insurer) and MV for stocks. Insured’s option to seek MV settlement for fixed assets with no reinstatement.
For all policies above, average clause applies in all claim situations. Upto 15% Under-Insurance relaxation, under material damage section, can be mutually agreed in IAR / AAR / PAR policies.
 

4. Marine Cargo / Transit

 

Predetermined valuation arrived at and hence these policies are on ‘Agreed Value’ basis between the Insurer and Insured. Claim settlement on Agreed
 

5. Boiler and Pressure Plant CPM Electronic Equipment Machinery Insurance

 

Reinstatement Value (RV) for all such equipment. (Some Insurers may agree for MV only for very old fixed assets / 2nd hand machines, in which case, the claim settlement will also be on MV basis). Partial loss settlement on RV basis with no depreciation except limited life items. Total loss settlement on MV basis. Partial loss MV settlement with no reinstatement exists. Average clause applicable.
 

6. Project Insurance

 

Completely erected value of the project including design fees, supplies, erection costs, freight, all taxes and duties. Any used equipment / machinery can be covered on MV basis or Refurbishment valuation report basis. Loss settlement on Reinstatement Value basis. For Used equipment / machinery on MV or Agreed Value Average clause is applicable.
 

7. Business Interruption (Fire / Machinery)

 

Advance Loss of Profit –

Annual Gross Profit and multiple of the same if the Indemnity period is more than 12 months. For Gross Profit, please refer to the specific definitions under the policy wording. Limited Premium refund provision exists. Loss settlement on reduction in Gross Profit during the interruption period corresponding to the Indemnity period. Average clause is applicable. As the sum insured is adjustable based on actual, a buffer is always advisable.
 

8. Liability Policies

 

(CGL, D & O, PI, Cyber, Crime etc.)

Limit of liability (LOL) to be selected by Insured basis of their own exposure analysis / specific contract values. Any One Accident (AOA) & Any One Year (AOY) basis loss settlement
 

9. Employee (WC) compensation policy

 

Sum Insured based Earnings of the covered employees which include wages, salaries, over time, board / lodging, any other perquisites Claim settlement basis the award of judicial authority / body created for labour claims adjudication. Some Insurers’ may apply under insurance on claims if Earnings are understated.

 

Understanding the average clause/ under-insurance clause:

  • A new machine was purchased in 2010 for INR 10 lakhs. This is the Original Purchase Cost
  • A used 2010 model can be bought for INR 6 lakhs in 2020. This is the Market Value of the machine
  • The same new machine costs INR 20 lakhs in 2020. This then is the Reinstatement Value
  • The machine has been depreciated @ 5% per annum, using Straight Line Depreciation method, in the books of the owner. Thus, the Book Value of the machine is INR 5 lakhs.
  • If the Sum Insured of INR 5 lakhs is taken under the Fire Insurance policy, on Reinstatement Value basis, the insurer will apply 75% under-insurance and pay only 25% of each claim (INR 5 lakhs / INR 20 lakhs)
  • If the Reinstatement Value Clause is not attached to the policy, the claim will be assessed with 16.66% under-insurance (INR 5 lakhs / INR 6 lakhs) after application of depreciation.

This Primer provides advice on broad principles only and is not intended to be an exhaustive review of your potential loss exposures. There may be many areas where further specialist advice is required. In such cases, please feel free to contact us.


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Public Liability Insurance – Act Only

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

Public Liability Insurance Act 1991 provides compensation to victims of an accident which occurs as a result of handling of any hazardous substance. The Act applies to all owners associated with the production or handling of any hazardous chemicals.

Public Liability Insurance (Act Only) covers the risk of compensation to be paid under the Act.

It is important to understand who is the “Owner” as the Act directly makes them responsible for providing the accident relief. As per the Act the “Owner” means any person who owns, or has control over handling any hazardous substance at the time of accident and includes;

(i) in the case of firm, any of its partners;
(ii) in the case or a company, any of its directors, managers, secretaries or other officers who is directly in charge of & is responsible to the company for the conduct of the business of the company

As per the Act:

1.The Liability of the Owner, per accident,is equal to Paid Up Capital of the firm or company with maximum liability up to Rs. 5 Cr.
2.The Liability of the Owner, per year, is upto a maximum of Rs. 15 Cr.
3.In case of a claim by any Third Party, the claimant is not required to prove any negligence or fault of the owner.
4.Apart from death the Act also imposes penalty for “Injury” which includes permanent total or permanent partial disability or sickness resulting out of an accident.
5.The claim award and settling authority is the District Collector.

 

Some of the industries which have to take Public Liability Insurance (Act Only) are:

1.Chemicals & fertilisers
2.Pharmaceuticals
3.Industries using bulk LPG in tanks like Engineering workshops, food manufacturing, textiles
4.Distilleries
5.Thermal Power plants
6.Refineries of various types
7.LPG Plants
8.Petroleum based industries
9.Industrial gas manufacturers and storage facilities
10.Logistics, storage & distributors handling any of the substances above
11.Glass & Ceramics mfg industries
12.Basic metals like Steel, Aluminium, Copper mfg
13.Cement mfg
14.Foundaries
15.Coal handling & using plants

 

Does your business fall with the PLI (Act) ? Please contact us if you would like to know more.


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Cyber Crime and Insurance

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

Digitalization is exposing organizations to cybercrime. The scale of cyber crime is increasing manifold daily. It is estimated that 500 cybercrimes take place every minute and INR 7 crore is lost by organization every minute.

Cybercrime has emerged as the top risk for organizations.

Common types of Cybercrime Faced By Organizations

  • Cyber-Extortion – Organized crime gangs gain access to target’s computer or website and steals the sensitive information and data to extort money.
  • Email Spam and phishing – Criminals imitate a legit site or send messages or email impersonating a legit business to get the personal and financial details of the target.
  • Ransomware – Ransomware is a virus that infects the system of the target with malicious software. It can be used to steal the data or lock their system until a ransom is paid to the perpetrators.

Cybercrime Creates two kinds of losses for organization

  • Loss of its own revenue or data, damage to its system, networks and the subsequent costs incurred to restore the systems.
  • Compensation demanded by third parties like customers, government etc. for the data breach or losses suffered by them due to a cybercrime perpetrated on an organization.

First Party Cyber Risk Exposures

  • Theft of money and digital assets: Direct monetary losses from electronic theft of funds/money from the organization by hacking or other types of cybercrime.
  • Loss or damage to digital assets: Loss or damage to data or software programs, resulting in costs incurred through restoring, updating, recreating or replacing these assets to the same condition they were in prior to the loss or damage.
  • Business interruption from network downtime: Interruption, degradation in service, or failure of the network, resulting in loss of income, increased cost of operation and/or costs incurred by mitigating and investigating the loss.
  • Cyber extortion: Attempts to extort money by threatening to damage or restrict the network, release data obtained from the network, and/or communicate with the customer base under false pretenses to obtain personal information.
  • Reputational Damage and Harm : : Legal, postage, and advertising expenses where there is a legal or regulatory requirement to notify of a security or privacy breach, including PR media assistance

Third Party Cyber Risk Exposures

  • Security and privacy breaches: Investigations and civil damages associated with security breaches, transmissions of malicious code, or breaches of third-party or employee privacy rights or confidentiality, including failures by outsourced service providers.
  • Defense Costs: The fees and other expenses incurred to defend against claim by a third party.
  • Investigation of privacy breach: Forensics investigations, defense costs, regulatory penalties and fines (may not be insurable in certain geographies) resulting from an investigation or enforcement action by a regulator as a result of security and privacy liability.
  • Customer notification/Public Relations expenses: Legal, postage, and advertising expenses where there is a legal or regulatory requirement to notify individuals of a security or privacy breach, including credit monitoring program costs and PR media assistance.
  • Multi-media liability: Investigations, defense costs and civil damages arising from defamation, breach of privacy, negligence in publication of any content in electronic or print media, as well as infringement of the intellectual property of a third-party.
  • Loss of third-party data: Liability for damage to, or corruption/loss of, third-party data or information, including payment of compensation to customers for denial of access, failure of software, data errors and system security failure.
  • Impaired Access Liability: Claims by the customers due to failure to access the organization’s system because of temporary suspension of systems by the organization during cyber threat.
  • Third-party contractual indemnification: Financial obligations to third-parties due to a security or data breach incident.

How can cyber insurance help?

A well-structured cyber liability policy can help the organizations in withstanding the financial losses due to such cybercrimes. The policy can cover and pay for both First Party and Third-Party Losses.

Cosmos Bank lost Rs.94 crores on 11th August’18 and 13th August’18 to a malware attack on its ATM server. The bank’s Visa and Rupay debit cards were cloned and used to fraudulently withdraw through various ATMs located across 28 countries.

In the above scenario, cyber insurance policy can pay for

  • INR 94 crores that were siphoned off.
  • Cost of cleaning the malware and reinstating the software.
  • Losses because of business interruption due to network downtime.
  • Cost associated with the forensic investigation ordered by the regulator.
  • Cost of informing the customers and public relation expenses to manage the reputation.

As Stephanne Nappo, the Global Chief Information Security Officer at Société Générale International Banking says “It takes 20 years to build a reputation and few seconds of cyber-incident to ruin it.”

Cyber Insurance helps to manage this risk.


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Product Liability Insurance-Understanding the Fine Print

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

This intersection between policy deductibles and the number of claims or occurrences results in a significant impact on insurance coverage, and on how, whether and when insurance money will be available from the insurer. Most policies have a deductible, which can be written on a “per claim” or “per occurrence” basis. A “per claim” deductible means that the deductible applies separately to each individual that brings a claim against the company, and is usually very disadvantageous for the insured. For example, assume that a product injures 10,000 people, and that each person’s injury claim amounts to $30,000. If the policy at issue has a per occurrence deductible of $50,000, each claim would fall within the deductible, and the insured would have no coverage. As a result, the insureds should seek a “per occurrence” deductible, assuming that all similar claims arising out of a single product will be deemed one occurrence. However it is possible that the court may not treat multiple claims as a single occurrence. Hence a per occurrence deductible essentially becomes the same as a per claim deductible.

The typical “batch clause,” however, may not provide sufficient protection, because the policy deductible applies to each “batch,” and this can easily lead to litigation over what constitutes a “batch.” For example, an insurer is likely to argue that each day’s production is a separate “batch” to which a separate deductible applies. Batch clauses are designed to group losses arising from related incidents into a single claim covered by one policy period and one policy limit, for which the insured pays one deductible. But batch clause language varies from one policy to the next. One policy might limit a batch to products that “can be distinguished by the specific date of production or by a batch number, lot number or control number.” Another might more broadly define a batch as claims arising from “two or more person, that are attributable directly, indirectly or allegedly to the same event, defect, hazard, condition, cause, decision or advice in the design, formulation, manufacturing, distribution, sale, use, testing, handling, repair, replacement, maintenance or disposal of your product.”

Maximizing coverage under batch clauses depends on the facts particular to each circumstance particularly the number and type of claims at issue and the language in each applicable insuring agreement. It is therefore critical to read the proverbial “small print” of a batch clause in a product liability policy to know what language is incorporated. This will significantly impact the coverage available, may dictate how an insured provides notice of a claim, and could determine how to maximize coverage. Therefore insurance professionals should carefully craft a policy’s batch clause..


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Know the difference: Burglary Vs Theft

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

Burglary:

Burglary is defined in the policy as:

1. Theft of property from the premises described in the schedule of the policy following upon felonious entry of the said premises by violent and forcible means, or

2. Theft by a person in the premises who subsequently breaks out by violent and forcible means, provided there shall be visible marks made upon the premises at the place of such entry or exit by tools, explosives, electricity or chemicals.

3. The use of force and violence need not be against property only – it can also be against the person of an individual.

To illustrate:

1. Three people enter a godown of rice. They threaten and assault the guard at the gate and force him to open the godown and then run away with bags of rice. This is a case of forcible entry by violent means and hence will be termed as burglary.

2. Two people sneak into a factory of garments at night, break the windows and enter the premise. They steal the garments and equipments. This is case of forcible entry by breaking windows and hence will be termed as burglary.

3. Two people try to enter the office by breaking the lock and run away with laptops and other office equipments. This again is a case of forcible entry as entry to premise was done by breaking the lock and hence will be termed as burglary.

4. A group of people approaches an unguarded warehouse with an intention to steal. They find the door unlocked, walk in, pick up bundles of cloth and walk away. This will not be covered as burglary under the policy.

Theft:

The Indian Penal Code in Section 378 defines as follows “whoever intending to take dishonestly any movable property out of the possession of any person without the consent of that person or any person having for that purpose authority, moves that property in order to such taking is said commit theft.”

To illustrate:

1. Two workers enter the godown of rice where some construction was going and one truck with two people entered the godown on the pretense of delivering the construction material. One of them got down at the gate and started talking to the guard and entered the guardhouse. He picked up the keys and then later opened the premise with those keys and stole the bags of rice and ran away in the same truck. This is case of theft as no forcible means were used to enter the godown. Also, in this case exclusion of key clause will apply and claim will be rejected. Key clause excludes losses following from use of keys to the insured premise unless the keys have been obtained by means of violence or threat.

2. A person entered the godown of electronics through an open space meant for exhaust and stole few types of equipment. The stock was covered only for burglary and no extension of theft coverage was opted by the insured. Hence, the claim was repudiated since the entry was not through forcible or violent means.

3. A solar power plant was being installed in a factory and some people entered the premise by jumping over the boundary wall and took away cables and other accessories. This again is a case of theft and claim can be rejected if theft extension was not taken in the burglary policy.

Both Burglary and Theft are different terms and the insurance companies treat them as different covers. Often customers assume that both the terms entail same coverage which is not the case. Hence one should carefully read the policy document to understand the coverages.


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Avoiding Unintended Gaps in Directors & Officers and Professional Indemnity Insurance

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

The following hypothetical claim scenario illustrates a potential risk faced by many companies:  A consumer services company maintains a comprehensive insurance program that includes both directors and officers (D&O) liability insurance and professional, or errors and omissions (E&O), liability insurance.  Six months after renewing its policies, the company is served with a costly class action lawsuit.  The plaintiffs allege they suffered monetary loss when they purchased the company’s products based upon the company’s allegedly misleading product descriptions.  The plaintiffs seek damages, injunctive relief and attorneys’ fees for the company’s alleged violation of state unfair business practices and consumer protection statutes. Because the suit alleges wrongful acts potentially covered under both lines of insurance, the company tenders it to both the D&O and the E&O insurers.  But the D&O insurer contends the claim is barred by the policy’s exclusion for undefined “professional services,” while the E&O insurer contends that the alleged wrongful acts do not constitute “professional services” as defined narrowly by the insuring agreement of the E&O policy. The company thus faces a difficult class action suit and disputes with two insurers over defense and indemnification for the claim.  However, this potential coverage gap could have been avoided by taking certain precautionary steps during policy negotiation and placement to ensure the policies interacted as intended.

Background

Briefly, D&O insurance protects directors and officers against a wide range of claims alleging wrongful acts in carrying out their duties, and reimburses the insured company for its costs of indemnifying the individuals against such claims.  Further, D&O insurance typically protects an insured public company against certain securities liability claims asserted directly against the company, and protects an insured private company against an even wider universe of claims.  With limited exceptions, D&O policies are not intended to insure professional liability exposures, and many (particularly those issued to public companies) exclude claims arising out of the rendering of, or failure to render, professional services. Insurers believe generally that professional liability exposure should be underwritten and covered by a separate E&O policy.  E&O insurance protects companies or individuals that offer professional services against liabilities for alleged errors or omissions in performing those services.  Policy terms can vary, including central features such as the insuring agreement and the “professional services” definition.  Typically, E&O insurance does not apply to the management and oversight activities of officers and directors, as their roles on behalf of the organization are not considered professional services to third parties. D&O policy exclusions often do not define the term “professional services,” while E&O policies do so in virtually every instance, typically including a list of insured services that may be tailored to the insured’s specific business, or at least its industry segment.  This lack of a precise “fit” between the policies can generate uncertainty and disputes: Does a gap exist where contrary to the insured’s expectations the claim is not covered by either the D&O or the E&O policy?  Or do the policy forms overlap such that coverage arguably exists under both policies?  Overlapping coverage for a single claim, while theoretically positive for the insured (and certainly so when the loss exceeds the limit of either policy), can give rise to time-consuming and costly allocation disputes that undercut the benefit of “double” insurance.

The reason behind these tragic incidents is a very basic feature of the central locking system.The system locks and unlocks the car doors and windows at the push of a button. Similarly the driver can lock all doors and windows through a set of buttons at his fingertips.An accident will most definitely result in a major fire and since the fire’s heat will affect the car cables and electronics first, the chances of a central locking system malfunctioning in a CNG kitted car increases. The ultimate result of being trapped in a burning metal box with no means of escape can only be death, as is so tragically brought to notice by the details of the accidents discussed earlier.

Steps to Consider During Policy Negotiation and Placement

Although it is impossible to foresee every claim, companies can take steps during policy negotiation and placement to eliminate unintended gaps and overlaps between their D&O and E&O policies. If possible, the wording of each policy should be reviewed together.  In particular, the insured should seek an E&O policy definition of “professional services” that is broad enough to include every service the company performs for others.  At the same time, the insured should request a clearly defined “professional services” exclusion in the D&O policy (if one is required by the insurer) that bars only those matters encompassed by the E&O policy’s insuring agreement.  Where “professional services” in the D&O policy exclusion either is undefined or defined more broadly than in the E&O policy’s insuring agreement, a claim potentially could fall into a gap between the two policies.

Other language in the relevant D&O exclusion and E&O insuring agreement should be scrutinized to ensure it fulfills the parties’ intent.  For example, if the provision employs phrases such as “arising out of” or “relating to” the insured’s rendering or failure to render professional services, a court is likely to interpret this provision broadly.  Different language may be interpreted more restrictively, such as “caused by,” “due to” or, most simply, “for.”  An insured purchasing E&O insurance would favor the broader description, while a prospective purchaser of D&O insurance would benefit from the simpler, more restrictive preamble.

TProfessional services exclusions can be limited further to fulfill the parties’ intent.  Commonly available terms include clarifications that only professional services “performed for others for a fee” are excluded, and the insured’s “supervision” of professionals is not itself an excluded professional service.  Of course, the desired language may not always be available from a particular market, but insureds should determine their alternatives. Beyond terms relating expressly to “professional services,” insureds should review the policies’ “other insurance” provisions to determine how they will interact if there is overlapping coverage.  If the parties intend one policy to have priority, special policy language likely must be added by endorsement.  Absent this addition, the “other insurance” provisions may be “mutually repugnant,” meaning each states the policy is excess over any other applicable insurance.  How these conflicting terms are resolved is a matter of state law, which should be understood before the policy terms are finalized.

Purchasing D&O and E&O primary policies from the same insurer may reduce the risk of being caught between two seemingly contradictory coverage positions.  The practical reality is when the same insurer is writing both policies, negotiating language that ensures a good fit between the policies will be easier and the insured will be less likely to face an actual or purported coverage gap.  It will still be necessary to identify the responsive policy in the event of a claim, but that function also should be easier when the same primary insurer is on both sides of the divide. In summary, there can be coverage gaps between D&O and E&O policies, or overlap between these two coverage lines.  Consult your insurance advisors during policy negotiation and placement to ensure these coverages interact as intended.


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How does Liability arise for Food Products?

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

Something is there that should not be – Foreign Objects in Food Products

A small stone in her ready-to-eat food packet or a worm in her cake harms a consumer. When situations like this occur, the issue of who is liable for injuries caused by foreign objects in food arises. Central to resolving this issue is the consumer expectations test. This test asks, “What objects might a consumer reasonably expect to find in the food?” The standard used by most courts today is what a consumer should foresee as possibly being present in her food item and therefore guard against. Foreseeability of harm mandates a food vendor to remove such harmful objects (whether foreign or naturally occurring) as a consumer would not normally anticipate and guard against. Therefore, manufacturers of food products that are processed or sold as “ready to eat” must take greater precautions in eliminating foreign objects that may cause harm to the consumer. .

Food-borne Illness

Cases involving food-borne illness turn on the specific facts of the case. Generally, liability is more likely for processed or cooked food products than it is for those sold raw. .

Miscellaneous Reasons

  • Liability cases are put for issues like:
  • Wrong labeling
  • Failure to warn
  • Faulty packaging
  • Failure to disclose

What Does the Policy Cover?

This policy covers all sums, inclusive of defense costs, which the insured becomes legally liable to pay as damages as a consequence of death/ bodily injury or disease to any customer arising out of any defect in the product manufactured, distributed, sold or handled by the insured and specifically mentioned in the policy after such product has left the insured’s premises.

Limit of Liability

The total liability of the insurer has two limits: Per Claim Limit called AOA limit (Any One Accident) and Per Annum Limit called AOY Limit (Any One Year) . Limits can chosen by the insured and are in the ratio of 1:1, 1:2, 1:3 or 1:4

Main Exclusions

  • Product Recall
  • Deliberate, willful or international non-compliance of any statutory provision.
  • Loss of goodwill, loss of market.
  • Fines, penalties, punitive/exemplary damages.
  • War and War like situations.
  • Any loss occurring prior to the Retroactive Date mentioned in the policy.

Optional Extensions

Vendors Legal Liability – The policy can be extended to include the liability of vendors. Technical Collaborator Liability – The liability arising out of any agreement of Technical Collaboration can be covered as an extension.


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