INSURANCE - BASICS

SUSHIL VERMAIndirect Tax Strategist

Insurance company expects claims from

Fire, Lightning, Explosion, Riot & Strike and Malicious Damage, Damage by Terrorist activities, Impact Damage.

Insurance company expects claims from

Storm, Tempest, Cyclone, Flood, Inundation Rockslide, Landslide, Subsidence, Earthquake and Similar Natural Hazards.

Insurance company expects claims from

Electrical/Mechanical Breakdown, Failure of Control Systems

Insurance company expects claims from

Human Error, Negligence, Lack of Skill, Faults in Erection and Error in Handling

Insurance company expects claims from

Burglary, Theft, Pilferage.

Insurance company expects claims from

Design Defect, Consequences of Faulty Material, Workmanship other than faulty erection

Insurance company expects claims from

Loss of revenue / Payment of Penalties - due to delay in commissioning.

Insurance company expects claims from

Accident / Sinking of Vessel, non Delivery, Shortage, Damage during Transit, Loading, Unloading Or any other accidental causes

Fire losses – key reasons

Fire mostly occurred in storage areas

Fire mostly occurred in unattended areas or during unattended periods

Not much importance is paid to fire protection in storage areas

Inadequate training for fire emergencies

No attempt to learn from past mistakes

Fire losses – key reasons

Generally, insurance policies are broken down into four areas. One is the insuring agreement. The second are the definitions. The third would be exclusions, and the fourth would be conditions. Every fire policy – almost every fire policy – has four areas of coverage.

Fire losses – key reasons

The first area would be the dwelling. The second area would be other structures like a detached garage, gazebo, guest house, etc. The third area is personal property – the property that the insured would have in the home when the fire took place. The fourth would be what they call loss of use or additional living expenses and that coverage helps to pay for the insured to move out and live somewhere else for the period of time it takes to repair the structure before they can move back.

Fire losses – key reasons

However, fire insurance can be purchased as a specific peril policy or the coverage increased by a specific endorsement. It is important for the business owner to understand what is not covered under a traditional broad form policy and ways to increase coverage. It is important to review what are appropriate considerations when reducing premiums and what are not effective ways to save premiums. Insure for the Proper Valuation

Many small business owners find that if they insure for an amount less than what the business is worth, premiums are lower. This is true. However, insurers require as a condition of the policy that the business is insured for a value equal to the actual value of the business. If it is not, and a loss occurs, a penalty is applied to the settlement amount. This penalty will almost always exceed the value of any saved premium and will come at a very bad time.

•Always insure for 100% of the business value. •Have an independent evaluation of the business by an

independent appraiser each year and adjust coverage as necessary.

•Do not rely on property tax evaluations or guesses from your insurance professional.

 

Actual Cash Value Versus Replacement Cost

Most policies cover a fire loss with actual cash value or ACV instead of replacement cost. Actual cash value pays the amount of the property less depreciation. This can be devastating if your business relies upon high value equipment that has a long useful life, but would be prohibitively expensive to replace. As examples: coolers, refrigerators, tow lifts, aircraft or anything that would be prohibitively expensive to buy new. Replacement coverage pays the amount to replace the property lost at whatever the replacement cost is today. Replacement coverage carries higher premiums and can be purchased as a rider or endorsement. Consider the following when considering ACV vs. replacement coverage.

Other Points to Consider

• You will want to review your policy annually. Make sure accurate addresses are reflected on the policy and all endorsements and riders. Sometimes if you own many buildings a blanket fire policy covering all of the structures can save significant premiums. Finally, always have a fire plan in place and train your employees appropriately. Insurers often provide discounts for active fire prevention programs.

Liability Insurance

Liability insurance insures against liability legally imposed upon your business because of the negligence of the business or its employees. Put another way, it protects your business when the business is sued for negligence.

Workers Compensation

You will need to insure your employees against on-the-job injuries. Every state is different. But, most states have put into place some form of workers' compensation system. Workers' compensation is a system where the employee is not allowed, by statute, to sue their employer for on-the-job injuries; but, in return, the employer must participate in a system that provides nearly automatic payment to the employee in case of injury for medical bills and damages. There are many options for workers' compensation coverage. Some states allow an employer to opt-out of the system if the employer is self insured, some run the system through private insurers while others use state agencies.

Business Interruption

Business interruption insurance insures against loss or damage to the cash flow and profit of a business caused by the business being unable to operate because of interruption. The easiest example is to think about a critical piece of machinery being struck by lightning. The repairs to the machine may be covered by other coverage such as property or casualty insurance. But, if you can not make widgets for three months, than there is no replacement of that income without this coverage.

 

Health Insurance

To be competitive, most businesses need to offer their workers health insurance. This insurance offers a health coverage benefit to your employees (and you).

Life and Disability Insurance

Life and disability insurance protects the business against the death or disability of key employees. For example, one partner carries a life insurance policy naming the partnership as a beneficiary. If that partner dies, and the business has planned properly, the proceeds of the policy can be used by the business to buy out the share of the decedent's partnership interest from the estate. The insured location can be owned, leased or rented.

  

THE INSURANCE ACT, 1938 

  A contract of Insurance comes into being when a

person seeking insurance protection enters into a contract with the insurer to indemnify him against loss of property by or incidental to fire and or lightening, explosion, etc. This is primarily a contract and hence as is governed by the general law of contract. However, it has certain special features as insurance transactions, such as utmost faith, insurable interest, indemnity, subrogation and contribution, etc. these principles are common in all insurance contracts and are governed by special principles of law.

FOR EXAMPLE FIRE INSURANCE.

Fire insurance is a contract whereby the person, seeking insurance protection, enters into a contract with the insurer to indemnify him against loss of property by or incidental to fire or lightning, explosion etc. This policy is designed to insure one's property and other items from loss occurring due to complete or partial damage by fire.

In its strict sense, a fire insurance contract is one: 1. Whose principle object is insurance against loss or damage occasioned

by fire. 2. The extent of insurer's liability being limited by the sum assured and

not necessarily by the extent of loss or damage sustained by the insured: and

3. The insurer having no interest in the safety or destruction of the

insured property apart from the liability undertaken under the contract

LAW GOVERNING FIRE INSURANCE

There is no statutory enactment governing fire insurance, as in the case of marine insurance which is regulated by the Indian Marine Insurance Act, 1963. the Indian Insurance Act, 1938 mainly dealt with regulation of insurance business as such and not with any general or special principles of the law relating fire of other insurance contracts. So also the General Insurance Business (Nationalization) Act, 1872. in the absence of any legislative enactment on the subject , the courts in India have in dealing with the topic of fire insurance have relied so far on judicial decisions of Courts and opinions of English Jurists.

INSURABLE INTEREST

A person who is so interested in a property as to have benefit from its existence and prejudice by its destruction is said to have insurable interest in that property. Such a person can insure the property against fire.

The interest in the property must exist both at the inception

as well as at the time of loss. If it does not exist at the commencement of the contract it cannot be the subject-matter of the insurance and if it does not exist at the time of the loss, he suffers no loss and needs no indemnity. Thus, where he sells the insured property and it is damaged by fire thereafter, he suffers no loss.

RISKS COVERED UNDER FIRE INSURANCE POLICY

Though the following are risks which seem to have covered Fire Insurance Policy but are not totally covered under the Policy. Some of contentious areas are as follows:

FIRE: Destruction or damage to the property insured by its own fermentation, natural heating or spontaneous combustion or its undergoing any heating or drying process cannot be treated as damage due to fire. For e.g., paints or chemicals in a factory undergoing heat treatment and consequently damaged by fire is not covered. Further, burning of property insured by order of any Public Authority is excluded from the scope of cover.

LIGHTNING : Lightning may result in fire damage or other types of damage, such as a roof broken by a falling chimney struck by lightning or cracks in a building due to a lightning strike. Both fire and other types of damages caused by lightning are covered by the policy.

AIRCRAFT DAMAGE: The loss or damage to property (by fire or otherwise) directly caused by aircraft and other aerial devices and/ or articles dropped there from is covered. However, destruction or damage resulting from pressure waves caused by aircraft traveling at supersonic speed is excluded from the scope of the policy.

RIOTS, STRIKES, MALICIOUS AND TERRORISM DAMAGES: The act of any person taking part along with others in any disturbance of public peace (other than war, invasion, mutiny, civil commotion etc.) is construed to be a riot, strike or a terrorist activity. Unlawful action would not be covered under the policy.

STORM, CYCLONE, TYPHOON, TEMPEST, HURRICANE, TORNADO, FLOOD and INUNDATION: Storm, Cyclone, Typhoon, Tempest, Tornado and Hurricane are all various types of violent natural disturbances that are accompanied by thunder or strong winds or heavy rainfall. Flood or Inundation occurs when the water rises to an abnormal level. Flood or inundation should not only be understood in the common sense of the terms, i.e., flood in river or lakes, but also accumulation of water due to choked drains would be deemed to be flood.

IMPACT DAMAGE: Impact by any Rail/ Road vehicle or animal by direct contact with the insured property is covered. However, such vehicles or animals should not belong to or owned by the insured or any occupier of the premises or their employees while acting in the course of their employment.

SUBSIDENCE AND LANDSLIDE INCULUDING ROCKSIDE: Destruction or damage caused by Subsidence of part of the site on which the property stands or Landslide/ Rockslide is covered. While Subsidence means sinking of land or building to a lower level, Landslide means sliding down of land usually on a hill.

However, normal cracking, settlement or bedding down of new structures; settlement or movement of made up ground; coastal or river erosion; defective design or workmanship or use of defective materials; and demolition, construction, structural alterations or repair of any property or ground-works or excavations, are not covered.

BURSTING AND/OR OVERFLOWING OF WATER TANKS, APPARATUS AND PIPES: Loss or damage to property by water or otherwise on account of bursting or accidental overflowing of water tanks, apparatus and pipes is covered.

MISSILE TESTING OPERATIONS: Destruction or damage, due to impact or otherwise from trajectory/ projectiles in connection with missile testing operations by the Insured or anyone else, is covered.

LEAKAGE FROM AUTOMATIC SPRINKLER INSTALLATIONS: Damage, caused by water accidentally discharged or leaked out from automatic sprinkler installations in the insured's premises, is covered. However, such destruction or damage caused by repairs or alterations to the buildings or premises; repairs removal or extension of the sprinkler installation; and defects in construction known to the insured, are not covered.

BUSH FIRE: This covers damage caused by burning, whether accidental or otherwise, of bush and jungles and the clearing of lands by fire, but excludes destruction or damage, caused by Forest Fire.

RISKS NOT COVERED BY FIRE INSURANCE POLICY Claims not maintainable/ covered under this policy are as follows: o Theft during or after the occurrence of any insured risks o War or nuclear perils o Electrical breakdowns o Ordered burning by a public authority o Subterranean fire o Loss or damage to bullion, precious stones, curios (value more than Rs.10000), plans,

drawings, money, securities, cheque books, computer records except if they are categorically included.

o Loss or damage to property moved to a different location (except machinery and

equipment for cleaning, repairs or renovation for more than 60 days).

WHO MAY INSURE AGAINST FIRE?

Only those who have insurable interest in a property can take fire insurance thereon. The following are among the class of persons who have been held to possess insurable interest in, property and can insure such property:

1. Owners of property, whether sole, or joint owner, or partner in the firm owning the property. It is not necessary that they should possession also. Thus a lesser and a lessee can both insure it jointly or severely.

2. The vender and purchaser have both rights to insure. The vendor's interest continues until the conveyance is completed and even thereafter, if he has an unpaid vendor's lien over it.

3. The mortgagor and mortgagee have both distinct interests in the mortgaged property and can insure, per Lord Esher M.R."The mortgagee does not claim his interest through the mortgagor , but by virtue of the mortgage which has given him an interest distinct from that of the mortgagor"

WHO MAY INSURE AGAINST FIRE?

4. Trustees are legal owners and beneficiaries the beneficial owners of trust property and each can insure it.

5. Bailees such as carriers, pawnbrokers or warehouse men are responsible for there safety of the property entrusted to them and so can insure it.

Actual Cash Value Versus Replacement Cost

Your business may be underinsured if it cannot replace critical facilities and equipment at the depreciated value.

Electronics such as computers frequently decline in real replacement cost such that actual cash value may be a better option.

Property valuations are frequent causes of conflict between insurers and insured. You can avoid valuation problems by carrying replacement coverage.

Certain Property Needs Separate Coverage

Cash, valuable papers, certain types of inventory, some electronics, jewelry, and other items will require separate coverage or will be excluded from coverage. These are generally items that are impossible for the insurer to confirm and are prone to fraud.

Business Interruption Insurance

Fire insurance does not cover "downtime" for your business nor does it cover temporary relocation. Your business needs business interruption insurance to insure against the loss of revenue accompanying a fire and any potential relocation costs. Business interruption is a separate policy and should be considered if your business will be destroyed by being closed.

PERSON NOT ENTITLED TO INSURE

One who has no insurable interest in a property cannot insure it. For example:

1. An unsecured creditor cannot insure his debtor's property, because his right is only against the debtor personally. He can, however, insure the debtor's life.

A shareholder in a company cannot insure the property of the company as he has no insurable interest in any asset of the company even if he is the sole shareholder. As was the case of Macaura v. Northen Assurance Co.[4] Macaura. Because neither as a simple creditor nor as a shareholder had he any insurable interest in it.

CONCEPT OF UTMOST FAITH

As all contracts of insurance are contracts of utmost good faith, the proposer for fire insurance is also under a positive duty to make a full disclosure of all material facts and not to make any misrepresentations or misdescreptions thereof during the negotiations for obtaining the policy. This duty of utmost good faith applies equally to the insurer and the insured. There must be complete good faith on the part of the assured. This duty to observe utmost good faith is ensured b requiring the proposer to declare that the statements in the proposal form are true, that they shall be the basis of the contract and that any incorrect or false statement therein shall avoid the policy. The insurer can then rely on them to assess the risk and to fix appropriate premium and accept the risk or decline it.

DOCTRINE OF PROXIMATE CAUSE

Where more perils than one act simultaneously or successively, it will be difficult to assess the relative effect of each peril or pick out one of these as the actual cause of the loss. In such cases, the doctrine of proximate cause helps to determine the actual cause of the loss.

Proximate cause was defined in Pawsey v. Scottish Union and National Ins. Co.as "the active, effective cause that sets in motion a train of events which brings about a result without the intervention of any force started and working actively from a new and independent source." It is dominant and effective cause even though it is not the nearest in time. It is therefore necessary when a loss occurs to investigate and ascertain what is the proximate cause of the loss in order to determine whether the insurer is liable for the loss.

PROXIMATE CAUSE OF DAMAGE

A fire policy covers risks where damage is caused by way of fire. The fire may be caused by lightening, by explosion or implosion. It may be result of riot, strike or on account of any, malicious act. However these factors must ultimately lead to a fire and the fire must be the proximate cause of damage. Therefore, a loss caused by theft of property by militants would not be covered by the fire policy. The view that the loss was covered under the malicious act clause and therefore the insurer was liable to meet the claim is untenable, because unless and until fire is the proximate cause of damage, no claim under a fire policy would be maintainable.[

PROCEDURE FOR TAKING A FIRE INSURANCE POLICY

Selection of the Insurance Company:

There are many companies that offer fire insurance against unforeseen events. The individual or the company must take care in the selection of an insurance company. The judgment should rest on factors like goodwill, and long term standing in the market. The insurance companies can either be approached directly or through agents, some of them who are appointed by the company itself.

2. Submission of the Proposal Form:

The individual or the business owner must submit a completed prescribed proposal form with the necessary details to the insurance company for proper consideration and subsequent approval. The information in the Proposal Form should be given in good faith and must be accompanied by documents that verify the actual worth of the property or goods that are to be insured. Most of the companies have their own personalized Proposal Forms wherein the exact information has to be provided.

PROCEDURE FOR TAKING A FIRE INSURANCE POLICY

3. Survey of the Property/ Consideration: Once the duly filled Proposal Form is submitted to the insurance company, it makes

an "on the spot" survey of the property or the goods that are the subject matter of the insurance. This is usually done by the investigators, or the surveyors, who are appointed by the company and they need to report back to them after a thorough research and survey. This is imperative to assess the risk involved and calculate the rate of premium.

4. Acceptance of the Proposal: Once the detailed and comprehensive report is submitted to the insurance

company by the surveyors and related officers, the former makes a thorough perusal of the Proposal Form and the report. If the company is satisfied that their is no lacuna or foul play or fraud involved, it formally "accepts" the Proposal Form and directs the insured to pay the first premium to the company. It is to be noted that the insurance policy commences after the payment and the acceptance of the premium by the insured and the company, respectively. The Insurance Company issues a Cover Note after the acceptance of the first premium.

PROCEDURE ON RECEIPT OF NOTICE OF LOSS

On receipt of the notice of loss, the insurer requires the insured to furnish details pertaining to the loss in a claim from relating to the following information-

1. Circumstances and cause of the fire;

2. Occupancy and situation of the premises in which the fire occurred;

3. Insured's interest in the insured property; that is capacity in which the insured claims and whether any others are interested in the property;

4. Other insurances on the property;

5. Value of each item of the property at the time of loss together with proofs thereof , and value of the salvage ,if any; and

6. Amount claimed

Loss…continued… Furnishing such information relating to the claim

is also a condition precedent to the liability of the insurer. The above information will enable the insurer to verify whether-

(1) The policy is in force;

(2) The peril causing the loss is an insured peril;

Loss….. (3) The property damaged or lost is the insured property.

Rules for calculation of value of property

The value of the insured property is-

1) Its value at the time of loss, and

2) At the place of loss, and

3) Its real or intrinsic value without any regard for its sentimental vale. Loss of prospective profit or other consequential loss is not to be taken into account.

INSURED'S DUTY ON OUTBREAK OF FIRE, IMPLIED DUTY

On the outbreak of a fire the insured is under an implied duty to observe good faith towards the insurers and the in pursuance of it the insured must do his best to avert or minimize the loss. For this purpose he must (1) take all reasonable measures to put out the fire or prevent its spread, and (2) assist the fire brigade and others in their attempts to do so at any rate not come in their way.

With this object the insured property may be removed to a place of safety. Any loss or damage the insured property may sustain in the course of attempts to combat the fire or during its removal to a place of safety etc., will be deemed to be loss proximately caused by the fire.

If the insured fails in his duty willfully and thereby increases the burden

of the insurer, the insured will be deprived of his right to revive any indemnity under the policy.[

INSURER'S RIGHTS ON THE OUTBREAK OF FIRE

(A) Implied Rights Corresponding to the insured's duties the insurers have rights by the law, in view of

the liability they have undertaken to indemnify the insured. Thus the insurers have a right to-

o Take reasonable measures to extinguish the fire and to minimize the loss to

property, and o For that purpose, to enter upon and take possession of the property. The insurers will be liable to make good all the damage the property may sustain

during the steps taken to put out the fire and as long as it in their possession, because all that is considered the natural and direct consequence of the fire; it has therefore been held in the case of Ahmedbhoy Habibhoy v. Bombay Fire Marine Ins. Co [8] that the extent of the damage flowing from the insured peril must be assessed when the insurer gives back and not as at the time when the peril ceased.

INSURER'S RIGHTS ON THE OUTBREAK OF FIRE

(B) Loss caused by steps taken to avert the risk Damage sustained due to action taken to avoid an insured risk was not a consequence

of that risk and was not recoverable unless the insured risk had begun to operate. In the case of Liverpool and London and Globe Insurance Co. Ltd v. Canadian General Electric Co. Ltd., [9] the Canadian Supreme Court held that "the loss was caused by the fire fighters' mistaken belief that their action was necessary to avert an explosion , and the loss was not recoverable under the insurance policy, which covered only damage caused by fire explosion., and the loss was not recoverable under the insurance policy, which covered only damage caused by fire or explosion."

(C) Express rights

- in order to protect their rights well insurers have prescribed for better rights expressly in this condition according to which on the happening of any destruction or damage the insurer and every person authorized by the insurer may enter, take or keep possession of the building or premises where the damage has happened or require it to be delivered to them and deal with it for all reasonable purposes like examining, arranging, removing or sell or dispose off the same for the account of whom it may concern.