Optima Insurance Brokers Pvt. Ltd.

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.

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.

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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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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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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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.

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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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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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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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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