Module - II

Principles and
Practice of
General
Insurance
Banking, Financial Services and Insurance Committee

The Institute of Chartered Accountants of India
New Delhi
This Publication has been prepared for use by the members of the Institute. The views expressed
herein do not necessarily represent the views of the Council of the Institute.
© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
All rights reserved. No part of this publication may be reproduced, stored in retrieval system or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, or otherwise,
without permission, in writing, from the publisher.
Month and Year of Publication

First Edition : October, 2003
Second Edition : February, 2005
Third Edition : July, 2005
Fourth Edition : October, 2008
Fifth Edition : February, 2020
E-mail : insurance@icai.in
Website : www.icai.org
Price : Rs. 600
ISBN : 978-81-8441-119-5
Published by : The Publication Department on behalf of the Institute of Chartered

Accountants of India, ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi - 110 002.
Printed at :
This book is also a Study Material for Paper-2 of the DIRM Course of the Institute of Chartered
Accountants of India.
FOREWORD
The Insurance sector has emerged as one of the fastest developing sectors in India. Its
sphere has enlarged to the extent that requires expert and specific domain knowledge to
protect and promote the economic interests of all the stakeholders. For Chartered
Accountants, the importance of updation of knowledge is of quintessential importance.
Multi-pronged strategies are being adopted by the Institute of Chartered Accountants of
India (ICAI) to facilitate the members and students to acquire technical and practical
knowledge in the field of insurance. The ICAI through its Banking, Financial Services and
Insurance Committee (BFSIC) conducts Diploma in Insurance and Risk Management
(DIRM) Course to equip professionals with expertise and competence in insurance and
pension sectors.
It is heartening to note that the Banking, Financial Services and Insurance Committee of
ICAI has taken the initiative to revise the Study Material of DIRM Course as a measure to
provide the latest possible technical inputs to the members who are pursuing the Course.
The material has been designed to provide an in-depth and comprehensive theoretical
knowledge as well as practical aspects, in a very practical and simplified manner.
I appreciate the efforts put in by CA. Dhiraj Kumar Khandelwal, Chairman, CA. Charanjot
Singh Nanda, Vice Chairman and other members of the Banking, Financial Services and
Insurance Committee of ICAI in bringing this revised Course material. I hope that the
members at large will make use of this material to the maximum possible extent for their
knowledge enrichment and in the overall interest of all stakeholders.
CA. Prafulla P. Chhajed

President, ICAI
PREFACE
Insurance, worldwide, is one of the most potent financial sectors. As per the published
data, the global direct insurance premiums surpassed the USD 5 trillion mark reaching
USD 5193 billion (6.1% of global GDP) in 2018 and it is expected to grow by 12-15 per
cent annually for the next three to five years. This growth means more scope and a larger
role for Chartered Accountants in the development and success of the industry.
It is our sincere belief that to enable the members of the Institute to play an appreciable
level of role in the insurance and pension sectors, they need to be provided with a general
framework for thinking about the effects of risk and a broad knowledge of risk
management and insurance. They need to be aware of the many public policy issues
related to risk, including legal liability and economic security issues apart from strong
conceptual foundation for understanding institutional details.
I wish to take the pleasant privilege of presenting before the members of the Institute the
revised study materials for Post Qualification Course on Diploma in Insurance and Risk
Management (DIRM). The study materials have been brought out in such a way that not
only members of the Institute pursuing the DIRM Course but also other stakeholders
would find it useful to acquire strong technical foundation in the areas of insurance and
risk management.
I wish to express my gratitude to CA. Prafulla P. Chhajed, President and CA. Atul Kumar
Gupta, Vice President, ICAI for their constant motivation to enable the Committee to move
forward on its various endeavours. I wish to place on record my sincere thanks to the
members and special invites of the Committee for their guidance and involvement in
bringing out this publication. We are grateful to Dr. V. Jayalakshmi, Associate Professor,
Siva Sivani Institute of Management, Hyderabad for writing this publication.
It is my sincere hope that the members of the Institute would find the contents of the book
professionally enriching. With humility I invite your constructive comments to further
improve the contents of the book.
CA. Charanjot Singh Nanda CA. Dhiraj Khandelwal
Vice Chairman, BFSIC Chairman, BFSIC
Date: 5th February 2020
CONTENTS
Foreword
Preface
CHAPTER-1 Introduction to Insurance, Basic Principles of

General Insurance & Contract Design 1
CHAPTER-2 Fire Insurance 62
CHAPTER-3 Marine Insurance 122
CHAPTER-4 Motor Insurance 185
CHAPTER-5 Engineering Insurance 306
CHAPTER-6 Health Insurance 365
CHAPTER-7 Miscellaneous Insurance 417
CHAPTER-8 Liability Insurance 510
CHAPTER-9 Underwriting Concepts, Insurance Contract

Conditions & Warranties 551
CHAPTER-10 General Insurance Rate Making 597
CHAPTER-11 General Insurance Claims 624
CHAPTER-12 Laws Governing General Insurance

Business in India, Investment and
Accounting 653
CHAPTER – 1
INTRODUCTION TO INSURANCE, BASIC
PRINCIPLES OF GENERAL INSURANCE &
CONTRACT DESIGN
OUTLINE OF THE CHAPTER
1. History of Insurance
1.1 Ancient Insurance Practices through the ages
1.2 Modern Commercial Insurance
1.3 History of Insurance in India
1.4 Non-Life Insurance Industry – Current Scenario
2. Risk Management & Insurance
2.1 Concept of Risk, hazard and perils
2.2 Types of Risks
2.3 Hazard
3. Introduction to General Insurance
3.1 Insurance as a Transfer System
3.2 Insurance as a Business
3.3 Insurance as a Contract
4. Fundamental Principles Governing General Insurance Contracts
4.1 Principle of Utmost Good Faith
PRINCIPLES AND PRACTICE OF GENERAL INSURANCE
4.2 Principle of Insurable Interest

4.3 Principle of Indemnity
4.4 Principle of Subrogation
4.5 Principle of Contribution
4.6 Principle of Proximate Cause
5. Classification of General Insurance
6. Marketing and Selling of Insurance
7. Summary
8. Questions
 LEARNING OBJECTIVES
After completion of the Chapter the student should be able to
• Explain the history and development of insurance over the ages.
• Understand the mechanism of general insurance as a risk transfer system, a
business and a contract.
• Describe the application of the provisions of the Indian Contract Act to general
insurance contracts.
• Examine the fundamental principles governing general insurance contracts.
• Explain the difference between marketing and selling of insurance.
1. History of Insurance
Human beings live in a world of uncertainty. All of us hear of cars, buses, trains colliding;
floods destroying entire communities; earthquakes that result in grief and tremendous
disastrous losses; young people dying suddenly in accidents etc. Why do these events make
us anxious and afraid? The reason is simple. Firstly they are unpredictable; if we can
anticipate and predict an event, we can prepare for it. Secondly, such unpredictable and
untoward events often cause economic loss and grief.
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INTRODUCTION TO INSURANCE, BASIC PRINCIPLES OF GENERAL INSURANCE & …
A society can come to the aid of individuals who are affected by such events, by having a
system of sharing and mutual support. The concept of insurance took birth thousands of years
ago. Yet, the business of insurance, as we know it today, dates back to about three centuries.
Insurance has been known to exist in some form or other since 3000 BC. Various civilizations,
over the years, have practiced the concept of pooling and in-between among themselves, all
the losses suffered by some members of the community. Let us take a look intently at some of
the situations in which this concept was applied.
1.1 Ancient Insurance Practices through the Ages

(a) The Babylonian traders had agreements where they would pay additional sums to
lenders, as a price for writing off the loans, in case a shipment was lost or stolen. These
were called “bottomry loans / bonds”. Under these agreements, the loan taken against
the security of the ship or its goods had to be repaid only if and when the ship arrived
safely after the voyage, at its destination. Similar practices were prevalent among the
traders from Baruch, Tuticorin and Surat sailing in Indian ships to Sri Lanka, Egypt and
Greece.
(b) The Greeks had started benevolent societies in the late 7th century AD, to take care of
the funeral – and families – of members who died. The Friendly societies of England
were
(c) The inhabitants of Rhodes adopted a practice whereby, if some goods were lost due to
jettisoning (means throwing away some of the cargo to reduce weight of the ship and
restore balance) during distress, the owners of goods (even those who lost nothing)
would bear the losses in proportion.
d) Chinese traders in ancient days would keep their goods in different boats or ships sailing
over the treacherous rivers. They assumed that if one of the boats suffered such a fate,
the loss of goods would be only partial and not total. The loss could be distributed and
mitigated thereby .
1.2 Modern Commercial Insurance

The earliest kind of risks to be addressed through the concept of insurance was losses due to
misadventure at sea – what we call marine risk. Marine insurance was thus the forerunner to
other kinds of insurance. “The Great Fire of London” in 1666, in which more than 13000
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houses were lost, gave a boost to insurance and the first fire insurance company, called the
Fire Office, was started in 1680.The origin of engineering insurance dates back to the early
part of Industrial Revolution in the U.K. when steam boilers were introduced (1840-1850). The
occurrence of frequent explosions involving serious loss of life and damage to property was
alarming and in 1854 the Manchester Steam Users Association was formed with the object of
prevention of steam boiler explosions. Manchester Steam Users Association was not an
insurance company. It was concerned with inspection and loss prevention service – like Loss
Prevention Association (L.P.A.) is doing in India at present. Coupled with the twin objectives
namely Inspection & Insurance – the first Engineering Insurance Co. named “The Steam Boiler
Assurance Company” was formed in 1858 in U.K. In India Engineering Insurance commenced
with Machinery Insurance in 1953.
The origin of Motor Insurance lies in U.K. The First Motorcar was introduced in England in
1894. The first Motor Policy was introduced in England in 1895 to cover Third Party Liability.
Comprehensive policy covering own damage was introduced in 1899. Compulsory third party
insurance was introduced through the Road Traffic Acts 1930 and 1934.
Marine insurance is the oldest form of insurance and plays a very important role both in
internal and international market. It is closely connected with important commercial activities
like banking and shipping. Marine insurance can be traced to London market which is the
actual place of origin of Marine Insurance. The policies were simplified and streamlined in the
London market and all the marine policies not only in India but elsewhere in the world have
been adopted from London market.
Lloyds for Marine Insurance: The origin of insurance business as in vogue today, could be
traced to the Lloyd’s Coffee House in London during 1779. Traders, who used to gather there,
would agree to share the losses to their goods being carried by ships, due to perils of the sea.
Such losses used to occur because of maritime perils, such as pirates who robbed on the high
seas or bad sea weather spoiling the goods or sinking of the ship due to perils of the sea.
1.3 History of Insurance in India

Modern insurance in India began in early 1800 or thereabouts, with agencies of foreign
insurers starting marine insurance business. The first life insurance company to be set up was
an English company, the Oriental Life insurance Co. Ltd. and the first non-life insurer to be
established in India was the Triton Insurance Co. Ltd. The first Indian insurance company was
the Bombay Mutual Assurance Society Ltd., formed in 1870 in Bombay, now Mumbai. Many
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other Indian companies were set up subsequently as a result of the Swadeshi movement at
the turn of the century.
In 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to
regulate the insurance business. The Life Insurance Companies Act, 1912 made it compulsory
that premium-rate tables and periodical valuation of companies be certified by an actuary.
However, the disparity and discrimination between Indian and foreign companies continued.
The oldest insurance company in India which still exists is National Insurance Company Ltd.,
which was founded in 1906. It is still in business.
1.4 Non-Life Insurance Industry – Current Scenario

The insurance sector was opened up to reforms with the enactment of the Insurance
Regulatory and Development Authority Act, 1999. Since then, the sector has been a witness to
a number of significant developments and reforms ever since the Indian insurance Regulator
started working with effect from 01-04-2000. The reforms have not only increased the reach
and penetration of insurance but have also facilitated and contributed to the growth of the
Indian Economy, in other ways. The insurance industry in the country has provided for the
crucial financial intermediary services, transferring funds from the insured to capital
investment, critical for continued economic expansion of India. The industry generates long-
term funds for infrastructure development.
In the year 2017-18 the sector ‘financial, real estate and professional services’ has shown a
growth rate of 6.6 percent in 2017-18 as against previous year’s growth rate of 6.0 percent
(2016-17) which definitely indicates a very positive sign. Major component of this industry is
the real estate and professional services which has a share of 72.0 percent. No doubt in this
current era the insurance industry is playing a significant role in India's continued economic
transformation.
The Amendments to the Insurance Act, 1938 in the year 2015 have further provided impetus
for the second phase of reforms, which have resulted in the Foreign Direct Investment (FDI)
limits being increased to 49 percent, and has opened up the market for global reinsurance
players to set up re-insurance branch offices in India. IRDAI has laid down the regulatory
framework for the ‘Other forms of Capital’. As a result, insurance companies can raise funds
through the issuance of Preference Share Capital and Subordinated Debt.
At the end February, 2019, there are 63 insurance companies operating in India of which 24
are in the life insurance business and 34 are in non-life insurance business. In addition GIC is
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the National reinsurer, while ITI Reinsurance Limited is a Private Reinsurance Company and
there are, 8 foreign reinsurers branches including Lloyd’s India. Life Insurance Corporation
(LIC) is the sole public sector company. Apart from that, among the non-life insurers there are
six public sector insurers. In addition to these, there is national re-insurer, namely, General
Insurance Corporation of India (GIC Re). Other stakeholders in Indian Insurance market
include agents (individual and corporate), brokers, surveyors and third party administrators
servicing health insurance claims.
Out of 34 non-life insurance companies, six private sector insurers are registered to underwrite
policies exclusively in health, personal accident and travel insurance segments. They are Star
Health and Allied Insurance Company Ltd, Apollo Munich Health Insurance Company Ltd, Max
Bupa Health Insurance Company Ltd, Religare Health Insurance Company Ltd and Cigna TTK
Health Insurance Company Ltd. There are two more specialised insurers belonging to public
sector, namely, Export Credit Guarantee Corporation of India for Credit Insurance and
Agriculture Insurance Company Ltd for crop insurance. Of these 64 companies presently in
operation, eight are in the public sector, two are specialised insurers, namely ECGC and AIC,
one in the life insurance namely LIC, four in non-life insurance and one in reinsurance. [Figure:
1.1]
Figure: 1.1 : General Insurance Market Structure
Source: IRDAI Annual Report, 2018
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Proposed Merger of Public Sector General Insurance Companies

The Government of India announced the merger of three PSU general insurers in 2018 which
would be completed by 2020. The merger of National Insurance Company, United India
Insurance Company and Oriental India Insurance Company was first announced in the Budget
2018-19 and the government intended to complete the process in current fiscal itself. As on
March 31, 2017, the three companies together had more than 200 insurance products with a
total premium of Rs 41,461 crore and a market share of around 35 per cent. Their combined
net worth is Rs 9,243 crore with total employee strength of around 44,000 spread over 6,000
offices. Initial estimates suggest that the combined entity formed after the merger will be the
largest non-life insurance company in India, valued at Rs 1.2-1.5 lakh crore. A consultant has
been shortlisted to advise on the proposed merger. The consultant, appointed on the basis of
the bid floated last year in June, is expected to advise on organisational restructuring,
rationalisation of human resources, management of operational issues, regulatory and
compliance issues. In 2017, New India Assurance Company and General Insurance
Corporation of India were listed on bourses.
As the operations of the industry players have stabilized and strengthened, and supported by
the positive market sentiments, a couple of insurers in the private sector, have issued shares
and the shares are listed on the stock markets. These efforts are aimed at unlocking the value
of the equity held by the shareholders in the respective companies. Simultaneously, the IRDAI,
appreciating the industry concerns on issues which could have acted as road blocks to this
smooth transition to listing of equity of insurance companies on the stock exchanges has been
proactive and made necessary regulatory amendments.
In an effort to achieve inert growth, some of the industry players have also evinced interest in
increasing their market share through mergers and acquisition. Thus, the insurance industry is
today poised for major developments which could well transform the contour of the Indian
Insurance Industry over the next decade. In an effort to achieve inert growth, some of the
industry players have also evinced interest in increasing their market share through mergers
and acquisition. Thus, the insurance industry is today poised for major developments which
could well transform the contour of the Indian Insurance Industry over the next decade.
2. Risk Management & Insurance

Insurance is one of the most popular mechanism to secure against risks. Therefore, for
understanding insurance, one needs to essentially understand the concepts and linkages
between risk, peril, hazard and insurance.
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2.1 Concept of Risk, Perils and Hazards

The word ‘Risk’ is the first to be discussed in any discussion on Risk Management in
Insurance Parlance to deal with Pure Risks (which may only give rise to loss / no loss situation
– but no way to cover any gain, thereby excluding the Speculative Risks). Risk is having
different meanings in different contexts as given below:
1. To any common man it is “Exposure to Danger” – as our parents always say don’t mix
with the unemployed local youth (who resorted to vandalism) since they may harm us.
2. Whenever we go for marketing any insurance product we always harp on “Uncertainty
about a loss” (i.e. any financial loss) – that means we always focus on the fortuitous
nature of the subject matter we cover – the loss may or may not happen although there
is always the possibility of a loss (but the loss should not be certain to happen).
3. It is a fundamental fact or feature of life that all Material Possessions are always
exposed to the peril of damage/ loss). In insurance market we cover ‘Direct Physical
Loss & indirect Losses like Liability & Loss of Profit of any Organization/ Individuals’.
4. Risk may also denote the property which is exposed to loss / damage and has intrinsic
value.
5. But the risk against any public policy or statutory law may not be covered.
6. In the context of property damage ‘RISK’ is related only to the physical hazard and not
the ‘moral hazard’... In General Insurance market, we also cover the risk related to
‘HUMAN NATURE (for both individual and collective arising from economic and social
conditions).
In 1901 Henry Marsh, one of the founders of Marsh & McLennan wrote a letter to a
prospective client: “Your problem is not insurance, it is risk”. In Insurance, as well as in Risk
Management parlance the definition of the word ‘RISK’ could be –
• Associated with any material possession of anybody and is related to the insured object
( like a house, factory, ship or car) under the General Insurance policies;
• Perils ( fire, storm, or collision)
• Set of hazardous conditions (for example -the use or storage of flammable materials).
• Uncertainty about a loss – the moment loss is sure and certain – it may be termed as
moral hazard – say a person having detected a heart problem and suggested for
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angioplasty approaches a known official of insurance company for Medical cover (i.e.
Mediclaim Policy) and when the person is allowed to avail insurance cover then it is not
case of underwriting a risk but to be accepted as a moral hazard.
The characteristics of an insurable risk could be given as under:
1. In short risk is a phenomenon closely associated with uncertain events.The term ‘Pure’
risk is used to designate those situations that involve the chance of loss or no loss. Only
Pure risks are insurable and hence are subjected to Risk Management process.
‘Speculative’ risk in contrast describes a situation where there is a possibility of gain.
They are outside the purview of Insurance and also are not a subject matter of
traditional risk management and must be of a fortuitous nature. To be insurable it must
be a pure risk.
2. Loss caused by the risk must not be intangible in nature (i.e. to ensure the possibility
that the loss is always measured in terms of money).
3. Must not be ‘illegal’ in nature – like:
(a) Intentional self/ bodily injury/suicide;
(b) Gross negligence;
(c) Misconduct/ Malpractice.
2.2 Types of Risks

Other types of risk as defined and used in Risk Management considerations are given below:
1. PERSONAL RISKS - The following four are the basic pure risks an individual has to
face and under the purview of personal risks:
1. Premature death
2. Dependent old age
3. Sickness or disability and
4. Unemployment.
2. PROPERTY RISKS – DIRECT / CONSEQUENTIAL LOSSES. These risks, which are
not individual in nature, can also be called pure risks
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(i) The loss of the property

(ii) Loss of use of the property and
(iii) Additional expenses occasioned by the loss of the property.
3. LIABILITY RISKS – The basic peril in the liability risk is the unintentional injury of other
persons or damages to their property through negligence or carelessness.
4. Risks arising from failure of others - Risk exist due to failure of another person to meet
an obligation.
5. Dynamic risks arise from the changes that take place in every society-e.g. economic,
social, technological, environmental, political etc.
6. Static risks are those that would exist in the absence of such changes like burning of a
house – whoever is in political power or whatever may be the economic condition of the
country –the incident is always a loss producing issue for the owner of the house –
anyway.
7. Fundamental Risks affect the whole society or a major part thereof- e.g.natural
catastrophes
8. Particular risks affect mainly the individual or firm and arise from factors over which
he/she may exert some control.
Again risk may be divided into Subjective Risk (which is uncertainty based on a person’s
mental condition or state of mind) and Objective Risk (which is relative variation of actual loss
from expected loss). Objective Risk varies inversely with the square root of the number of
cases under any observation. Now assume that 1000 houses are insured. The expected
number of houses that will burn is 100, so objective risk is 10 in 1 or 10 percent. Now let us
assume that 1 million houses are insured and the expected number of houses that will burn is
10,000, so objective risk is 100 in 1 or 1 percent. Thus relationship can be explained as the
square root of houses (where the number is increased from 1000 in the first example to 1
million in the second the objective risk declines).
There are two other important concepts in Risk Management parlance – 1) Peril & 2) Hazard.
A peril is a cause of loss e.g. Fire, Burglary, Theft etc. (i.e. the force which leads to loss). As
per the policy condition there may be three types of perils like:
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1. Insured perils – which are covered under the basic policy – say, fire, riot, strike, flood,
inundation, etc. as covered in basic Fire Policy.
2. Extended Perils – which are covered with a little bit of extra premium along with the
basic cover. In Fire Insurance these are known as Add-on Covers but in other line of
business – say, Engineering or Motor Policies these extended perils are known as
extensions of the basic cover.
3. Perils not covered at all – those may be either the uninsured perils or the excluded
perils (as excluded specifically by inserting the printed conditions) specifically stipulated
in the policy copy itself.
Again as per the ‘origin’, the perils may be divided into three types as given below:
1. Acts of God Perils – Those are natural catastrophe or calamity –like flood, inundation,
storm, earthquake, landslide, rock slide, etc.
2. Process related Perils – These are the perils associated with the starting of the
operation of any plant / machine or any instrument being put to work – say whenever
we put into operation any machine say a generator or transformer for electricity supply it
may be subjected to breakdown, overloading or short-circuit, etc. – all such perils are
known as operational perils.
3. Human related perils – These are absolutely related to Human being. Some of the
perils are absolutely organized by anti-social elements- like theft, burglary, dacoity,
riot/strike & malicious damage. Terrorism damage covered by insurers are the results of
disruptive activities of terrorists .
2.3 Hazard
A Hazard is a pre-set condition – that may create or increase the chance of loss arising from a
given peril or under a given condition.
PHYSICAL HAZARD –It is any hazard arising from the Material, Structural or Operational
failures of the risk itself apart from the persons owning or managing it.
MORAL HAZARD –It is arising out of the fraudulent activities of either the insured or the
insurers. It involves any tendency for the presence of insurance to increase the probability of
loss or its amount. An extreme example would be an individual who burnt his own property to
collect the insurance claim. Insurance may affect behaviour in that less effort is taken to avoid
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the loss, or the costs of the loss are exaggerated. More instances may be incurred by an
insured person than by the same individual without insurance. All are examples of Moral
hazards. Losses become larger for the insurer due to the existence of Moral hazard. Moral
hazard minimization is possible only through the following methods (which are not available in
Traditional Risk Management process applicable in Insurance but these are part of Enterprise
Risk Management processes applicable for any organisation):
1. Loss experience rating.
2. Partial risk sharing.
3. Credits for loss control.
4. Claims investigation.
5. Criminal prosecution.
MORALE HAZARDS –It relates the condition or situation as existing in the society. It is very
prominent and widely prevalent in Health Insurance- say, a person has three daughters named
Ganga, Jomuna, Swaraswati and he has taken medical / health insurance cover under his
Mediclaims policy only for his first two daughters and unluckily the third daughter Swaraswati
suffered an accidental injury – so the person will admit his third daughter in the name of Ganga
or Jomuna – i.e. he will go for this kind of morale hazard. Again whenever a patient is taken to
a hospital – the first thing the hospital authority will ask is the details about a Medical/
Mediclaim policy held by the person to be treated under that authority. If the sum insured in the
policy is Rs. 5 Lacs, he will be immediately admitted to ICU but if the sum insured is found by
the hospital authority to be Rs. 50, 000/- the patient may be treated at the corridor of the
hospital.
INCEPTION HAZARDS – That which gives rise to the loss – which starts or originates the loss
incidenst like the perils of fire, explosion or collapse, etc. arising out of the following –
INCEPTION HAZARDS Proximate cause / Peril Operated
LOOSE WIRING Fire
SMOKING Fire
FRICTION Fire
OVERHEATING Fire / Explosion
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HOT SURFACES Fire

WELDING Fire
SPARKS (ELECTRICAL / MECHANICAL) Fire
CHEMICAL ACTION Fire / Explosion
STATIC ELECTRICITY Fire
LIGHTNING Fire / Collapse
BURNER FLAMES (BOILER / OVEN / DRIER) Fire
CONTRIBUTORY HAZARDS – Those which contribute to spread the loss like burning of
abuilding may take a disastrous situation if the fire subsequently spreads to the
neighbouring building / house due to –
1. Poor construction of buildings (inferior material/wood/timber/plastic skylights/ glass
facades);
2. False ceiling/internal partitions/wooden lining;
3. Located in a difficult terrain/crowded place;
4. High density fire load (Solvents/ Chemicals);
5. Ducts for air conditioning, dust, vapour;
6. Bad housekeeping, dry grass, congested layout;
7. Unattended area;
8. Absence of safety devices – like fire fighting equipments;
9. No fencing, no security arrangements, no lighting;
10. No proper waste disposal method;
11. No work permit system;
12. Possibility of riot, strike or vandalism, etc.
SPECIAL HAZARDS – Those which give rise to hazardous situations –some are given as
below:
1. Bulk storages (coal in open, solvent tanks, LPG tanks);
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2. Complex chemical processes ( Refinery/ Fertiliser/ Solvent Extraction Units);

3. Spray painting operations;
4. Pulverising operations;
5. Material susceptible to Spontaneous combustions;
6. Pollution and contamination risks, etc.
POLITICAL HAZARDS – Those which arise mainly from political risk i.e. connected to political
acts like the following::
1. Terrorism;
2. War;
3. Rebellion, Mutiny;
4. Military coupe;
5. Confistication;
6. Abandonment/ Government ban, etc.
NATURAL HAZARDS – The risks i.e. subject matter of insurance if exposed to the following
natural calamities like:
1. Flood, Storm, Cyclone, Hurricane, Inundation
2. Earthquake, Volcanic eruptions
3. Snow/ Frost/ Ice storms
4. Landslides/ Rock slides
5. Subsidence
6. Forest fire/ Bush fire, etc.
Losses covered in insurance (as well as in Risk Management Processes) are given below:
• PROPERTY DAMAGE
1. Buildings
2. Plant & Machinery
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3. Furniture /Fixtures/Fittings
4. Stock in process/open/ godown/ in transit
5. Electrical installations/equipments/ancillaries
6. Motor vehicles, etc.
• LIABILITY
1. Public liability as per the statutory law (PLI Act, Third party liability, etc.).
2. Product liability as per common law, contractual liabilities (as per various contractual
obligations towards the customers, principals, other sub-contractors, etc. in terms of the
Consumer Protection Act).
3. Professional liability arising in the course of doing professional jobs.
4. Legal liabilities of the employers towards their employees.
5. Legal liability arising out of accidental falls, breakdown & other malfunction of Lift used
for elevating the people or materials against the owner of the lift / building (where it is
installed).
6. Commercial Global Liabilities of the Logistic Companies (engaged for the transit of
various items).
7. Liabilities for Clinical Trials for the various medicines (manufactured by drug
manufacturers) before introduction of that drug in the market for public use.
8. Any other kind of legal liabilities which may be faced by any individuals, entities etc.
• HUMAN-LIFE
1. Loss of life while engaged in professional duty,
2. Accidental death,
3. Bodily injury,
4. Collision with vehicle, etc.
Risk pooling is done by applying mathematical principles that make insurance possible.
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3. Introduction to General Insurance

Insurance contract involves a contractual agreement in which the insurer agrees to provide
financial protection against specified risks for a price or consideration known as the premium.
Insurance is a contract between insurer (insurance company which issues the policy) and
insured (the entity who seeks to participate in the insurance scheme). Insurance is a process
by which the funds pooled by the insurer is used to compensate the few who might suffer the
losses caused by a peril.
Every individual, family and business organization needs insurance, for inherent risk
exposures to which they are exposed. Insurance seeks to redress the assured from the
financial consequences of the loss exposures in the event of the uncertain event happening,
resulting in a loss of his assets, or properties or even income earnings. General Insurance in
particular may be considered as a mechanism for protection of Economic Value of Assets, as
every asset lasts only for certain period-life time but due to accident or unfortunate external
event, an asset may not last for the expected life time. The Event or Accident which may
cause loss is called a peril. If the peril is insured under any policy issued by an insurer, the loss
is payable to the insured.
Thus, Insurance is sharing of the losses of a few who are unfortunate to suffer such losses,
amongst those exposed to similar uncertain events / situations and the losses –
1. May be physical (e.g. car, building);
2. May be non-physical (e.g. goodwill, name);
3. May be personal (e.g. loss of eyes, limbs, any part of the body).
Thus, we can summarize that Insurance is actually a combination of three elements
• A transfer system
• A business
• A contract
3.1 Insurance as a Transfer System

As a transfer system, insurance enables a person, family or business to transfer the costs of
losses to an insurance company. In turn the company pays for the insured losses and
distributes the costs of losses among all insureds. Thus, the key elements of insurance as a
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transfer system refers to the transferring of risks from the insured to the insurance company
which is financially sound and has the capacity and willingness to take risks. The person
transfers the consequences of a loss to the company, thereby exchanging the possibility of a
large loss for the certainty of a much smaller periodic payment (premium). For transferring a
cost of loss it is not necessary for a loss to occur or exist. A mere possibility of a loss
constitutes a loss exposure that can be insured or transferred.
A Loss exposure can give rise to three types of losses, namely:
• Property loss (including net income loss),
• Liability loss, and
• Human and personnel loss.
On the other hand, sharing of risks implies the pooling of premiums paid by the insureds into a
fund out of which the losses are paid as and when they occur.
Thus, the role of insurance is to protect insured’s assets from the financial consequences of
loss. But, not all risks are insurable. Insurance covers only pure risks.
3.2 Insurance as a Business

As a business, insurance primarily attempts to meet its costs and expenses from the premium
that it earns and also make a reasonable margin of profit for its own sustainability. As a
business organization, it provides jobs to millions of people in life and non-life insurance
companies, agencies, brokerage firms. The various operations of these companies include
marketing, underwriting, claims handling, ratemaking and information processing. As a
business concern, it also needs to satisfy the regulators, insureds and others of its financial
stability. Therefore, to protect the consumers, the regulator monitors the rates, policy forms,
solvency margins, and also investigate complaints and consumers’ grievances. In addition to
payment of losses, the business of insurance offers several benefits to individuals and families
and to the society as a whole such as:
• Payments for the costs of covered losses
• Reduction of the insured’s financial uncertainty
• Efficient use of resources
• Support for credit
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• Satisfaction of legal requirements

• Satisfaction of business requirements
• Source of investment funds for infrastructure development
• Reduction of social burden
However, the benefit of insurance is not cost free. There are some direct costs as well as
indirect costs which are incurred, such as the premiums paid, operating costs of the insurers,
opportunity costs, increased losses, and costs of law suits.
3.3 Insurance as a Contract

A Contract is a legally binding agreement that creates rights and duties for those who are
parties to it. As a contract, an insurance policy is a legally enforceable contract. The contract is
between the insurance company and the insured. Through insurance policies, the insured
transfers the costs of losses to insurance company. In return for the premiums paid by the
insured, the insurers promise to pay for the losses covered under the policy.
The policy contains all the terms and conditions for its enforceability, and the benefits payable
by the insurer. The breach of these conditions by either party will result in the invalidation of
the contract. Thus, through the coverage provided by insurance policies, the individuals,
families and businesses are enabled to protect their assets, and minimize the adverse financial
effects of losses. Hence, an insurance contract needs to be interpreted and carefully designed
so that, all fortuitous losses are covered and insured against.
Definition of ‘Contract’
An agreement enforceable by law is called a contract. It creates certain rights and obligations
for parties agreeing to it. A valid contract is one, which the court enforces.
A contract of insurance is an agreement whereby one party, called the insurer, undertakes, in
return for an agreed consideration, called the premium, to pay the other party, namely the
insured, a sum of money or its equivalent in kind, upon the occurrence of a specified event
resulting in loss to him. The policy is a document which is an evidence of the contract of
insurance.
Requirements of an insurance contract
Insurance contracts are also governed by the provisions of the Indian Contract Act,1872. In
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general, there are five requirements that are common to all valid contracts. To be legally
enforceable, an insurance contract must meet these requirements:
1. Offer and acceptance
2. Consideration
3. Capacity
4. Legal purpose
5. Free consent
1. There must be valid offer and acceptance: The first requirement of a binding insurance
contract is that there must be an offer and an acceptance of its terms. In most cases, the
applicant for insurance makes this offer, and the company accepts or rejects the offer. An
agent merely solicits or invites the prospective insured to make an offer. A legal offer by an
applicant for insurance must be supported by a tender of the premium and it should always be
prior to commencement of the ‘coverage’. The agent usually gives the insured a conditional
receipt that provides that acceptance takes place when the insurability of the applicant has
been determined by the Insurer. In property and liability insurance, the offer and acceptance
can be oral or written. Issuance of a policy may take some time after acceptance due
administrative procedures. Therefore the insurers may in that case issue a Cover Note for a
stipulated period which is also a valid evidence of the contract. Example, in a marine insurance
contract, an oral offer is considered as valid as the details of the shipment may not be known
fully at the time of taking an insurance policy. In all other contracts, only a written offer is valid.
2. Promises must be supported by the exchange of Consideration: A consideration is the
value given to each contracting party. The insured’s consideration is made up of the monetary
amount paid in premiums, plus an agreement to abide by the conditions of the insurance
contract. The insurer’s consideration is its promise to indemnify upon the occurrence of loss
due to certain perils, to defend the insured in legal actions, or to perform other activities such
as inspection or collection services, or loss prevention and safety services, or as the contract
may specify. The amount of premium is not the criteria, but a contract of insurance without
payment of premium is void.
3. Parties must have legal capacity to contract: This requirement of a valid insurance
contract is that each party to a contract must be legally competent. This means the parties
must have legal capacity to enter into binding contract.
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Parties who have no legal capacity to contract include:

• Insane persons (persons of unsound mind) who cannot understand the nature
(obligations and liabilities) of the agreement
• Intoxicated persons
• Corporations acting outside the scope of their charters, bylaws, or articles of
incorporation, or authority
• Minors
Note: Minors normally are not legally competent to enter into binding insurance contracts; but
most States have enacted laws that permit minors, such as a teenager aged 15 years, to enter
into valid life or health insurance contract. On the other hand, the capacity of an insurer to
enter into contracts of insurance depends upon its constitution.
4. Agreement must be for legal purpose: For insurance policies, this requirement means
that the contract must neither violate the requirements of insurable interest nor protect or
encourage illegal ventures. In other words, an insurance policy that encourages or promotes
something illegal and immoral is contrary to public interest and cannot be enforced. In other
words, it means that the subject –matter of insurance in the proposal form and also the
consideration should be legal. If there is any contract to defraud the insurer than based on the
principles of indemnity, the contract is void.
Example:
A street pusher of heroin and other illegal drugs cannot purchase property insurance policy
that would cover seizure of the drugs by the police.
5. Free Consent: Parties entering into the insurance contract should do so by their free and
genuine consent. In other words, the consent shall be deemed to be free if it is not caused by
(1) Coercion, (2) Undue influence, (3) Fraud, (4) Misrepresentation or (5) Mistake. The person
must sign a declaration to this effect, explaining the subject matter of the proposal to the
proposer. The insurer must also fully disclose all details to the proposer.
4. Fundamental Principles Governing General Insurance

Contracts
The business of insurance seeks to protect the economic value of assets or life of the person.
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Through a contract of insurance the insurer agrees to make good any loss on the insured’s
property or loss of life (as the case may be) that may occur in course of time in consideration
for a small premium to be paid by the insured.
Insurance principle deals with and contemplates -
1. A sufficiently large number of homogenous [similar] exposure units;
2. Loss produced by the risk must be definite and measurable;
3. Loss must be fortuitous or accidental;
4. Sharing of losses of the few by many;
5. Economic feasibility;
6. Public policy.
Apart from the above essentials of a valid contract, general insurance contracts are subject to
the following six additional principles:
• Principle of Utmost good faith
• Principle of Insurable interest
• Principle of Indemnity
• Principle of Subrogation
• Principle of Contribution
• Principle of Proximate cause
These distinctive features are based on the basic principles of law and are applicable to all
types of insurance contracts. These principles provide guidelines based upon which insurance
agreements are undertaken.
A proper understanding of these principles is therefore necessary for a clear interpretation of
insurance contracts and helps in proper termination of contracts, settlement of claims,
enforcement of rules and smooth settlement /resolution of disputes.
4.1 Principle of Utmost Good Faith

Definition
A positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being
proposed, whether requested or not.
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This principle of insurance stems from the doctrine of “Uberrimae Fidei” or Utmost Good Faith
which is essential for a valid insurance contract. It implies that in a contract of insurance, the
concerned contracting parties must rely on each other’s honesty.
Normally the doctrine of “Caveat Emptor” governs the formation of commercial contracts which
means ‘let the buyer beware’. The buyer is responsible for examining the good or service and
their features and functions. It is not binding upon the parties to disclose the information, which
is not asked for.
But in case of insurance, the products sold are intangible. Here the required facts relate to the
proposer, those that are very personal and known only to him. The law imposes a greater duty
on the parties to an insurance contract than those involved in commercial contracts. They
need to have utmost good faith in each other, which implies full and correct disclosure of all
material facts by both the parties to the contract of insurance.
The term “material fact” refers to every fact or information, which has a bearing on the
decisions with respect to the determination of the severity of risk involved and the amount of
premium. The disclosure of material facts determines the terms of coverage of the policy. Any
concealment of material facts may lead to negative repercussions on the insurance company’s
normal business and functioning.
Non-disclosure of any fact may be unintentional on the part of the insured. Even so such a
contract is rendered voidable at the insurer’s option and it can refuse any compensation.
Any concealment of material facts is considered intentional. In this case also the policy is
considered void. The intentional non-disclosure amounts to fraud and un-intentional disclosure
amounts to voidable contract.
For example, disclosures in life insurance pertain to age, income, health, residence, family
details, occupation and plan of insurance. Similarly, in case of property or general insurance,
the material facts pertain to the details of the property (car) such as year of make, usage,
model, seating capacity etc. Particularly in case of marine insurance, the insurance company
may not always be in a position to inspect the ship at the port physically and it relies solely on
the facts disclosed by the insured. In Fire insurance material facts include details about
inflammable materials, nature and its use, fire detection etc. Hence, it is imperative on the part
of the insured to disclose all the facts voluntarily.
Utmost good faith principle imposes a duty of disclosure on both the insurance agent and the
company officials . Any laxity in this point may tilt the judgment in favour of the insured in case
of a dispute.
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However, the following facts need not be disclosed:

• Circumstances which reduce the risk (such as fire or burglary alarms set)
• Facts which are known or should reasonably be known to the insurer in his ordinary
course of business
• Facts which are waived by the insurer
• Facts of public knowledge
• Facts of law
• Facts covered by policy conditions.
• Facts which are superfluous to be disclosed by reason of a condition or warranty.
Duty of disclosure applies to the Proposer as well as the Insurer. Duty of disclosure operates
at-
• Inception – until the date of cover is confirmed by the insurers
• Renewal – upto the renewal date
• Alterations – until the insurers confirm cover in respect of the alterations.
The principle of utmost good faith is supported by three legal doctrines:
(i) Representation is the statement made by the applicant of insurance. An insurance
contract is voidable at the insurer’s option if the representation is (i) material and factual
and (ii) relied upon by the insurer. For example, if a mediclaim policy is issued on the
proposal form showing no high blood pressure or no past records of disorder in
circulatory system, the insurer may deny payment of mediclaim if high blood pressure is
found to be pre-existing.
(ii) Concealment is an intentional failure of the applicant to reveal a material fact to the
insurer. Concealment is silence when obligated to speak or a failure to disclose material
information. The test of materiality is a negative answer to the question: “Would the
insurer have written the same policy at the same price if it had known the truth?”
(iii) Warranty is a statement that something has happened or exists (affirmative warranty),
or that something will happen (promissory warranty). Another distinction sometimes
arises between written warranties (express warranties) and commonly understood
warranties (implied warranties).
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Breach of duty of Utmost Good Faith

Breach of duty of Utmost good faith arises under one or both of the following:
(a) Misrepresentation which may be either innocent or fraudulent with reference to false
facts, material to the acceptance or assessment of the risk.
(b) Non-disclosure which may be either innocent or fraudulent gives grounds for avoidance
by the second party where a fact is within the knowledge of the first party and not known
to the second party.
To avoid liability on grounds of non-disclosure, the onus is on the insurer to prove that
1. The undisclosed facts were material
2. The facts were within the actual or presumed knowledge of the insured.
3. The facts were not communicated to the insurer.
Upon discovering the non-disclosure, the insurer must exercise the right to repudiate the
contract within a reasonable time.
Case law on Utmost Good Faith
1. Roselodgevs, Castle (1966)
A company which had not disclosed the conviction of its sales manager for smuggling goods in
the proposal form, though there was no specific question in this regard in the proposal, could
not succeed in recovering amount in the burglary claim for diamond robbery.
2. Lambert v. Co-operative Insurance Society (1975)
The insured had not disclosed that her husband had been convicted of a crime of dishonesty
in 1971 at the time of renewal of the insurance in 1972, though no question was asked about
the previous conviction. A claim was made for lost or stolen property in 1972. The insurers
repudiated the claim on the ground that the conviction had not been disclosed. It was held that
the insured was under a duty to disclose the original conviction and the subsequent
convicitons when renewing the policy and that was material fact that would influence the mind
of a prudent insurer.
3. Bond v. Commercial Union Assurance Co.
Bond completed a proposal form for Motor Insurance. Later, an accident happened when his
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car was driven by his son. The claim under this policy failed when the insurer pleaded that
Bond had failed to disclose all material facts. Although all the questions in the proposal form
has been fully answered, he should have informed that his young son, who was likely to drive,
had previous convictions.
4.2 Principle of Insurable Interest

Insurable interest is -
1. An essential ingredient of every insurance contract;
2. Considered as the legal pre-requisite for insurance.
Definition
The legal right to insure arising out of a financial relationship recognized under the law,
between the insured and the subject matter of insurance.
Insurable interest distinguishes contracts of insurance from gambling in order to define the
legitimate area of insurance business.
Insurable interest is required for all types of insurance and its absence renders the contract
void and hence unenforceable.
The existence of insurable interest is an essential ingredient of any insurance contract. It is an
important and fundamental principle of insurance. Insurable interest simply means “right to
insure”. The policyholder must have a pecuniary or monetary interest in the property, which he
has insured. The subject matter of insurance can be any type of property or any event that
may result in a loss of a legal right or creation of a legal liability.
The essentials of insurable interest include:
• There must be some property, right, interest, liability or potential liability capable of being
insured.
• It is this property, right etc., which must be the subject matter of insurance.
The insured must stand in a relationship with the subject matter of insurance whereby he
benefits from its safety, well being or freedom from liability and would be prejudiced by its loss,
damage or existence of liability.
The relationship between the insured and the subject matter of insurance must be recognized
at law. For example, the subject matter of insurance under a fire policy can be a building,
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stocks, machinery; under a liability policy it can be a person’s legal liability for injury or
damage; a ship in a marine policy etc. Any damage to the property must result in financial loss
to the policyholder. Only then insurable interest is said to exist.
The insured should have insurable interest in the subject matter of insurance at the following
points of time:
1. In Life insurance at the time of taking the policy
2. In Fire Engineering, Motor & Miscellaneous insurance, both at the time of taking policy
as well as at the time of loss.
3. In Marine insurance at the time of loss and an assured need not have an insurable
interest at the time of effecting the marine insurance.
Insurance contracts without insurable interests have no sanction of the law as they amount to
speculation. The owner of a property has absolute insurable interest. When a person insurers
his property, what is insured therein is his interest in that property. Thus, by this principle,
insurable interest exists in other parties also such as lessor, lessee, financers etc., but their
interest is limited only to the extent of their financial commitment. The leading Roman – Dutch
case on Insurable interest is Little John v. Norwich Union Fire Insurance Society 1905 TH 374,
where it was held that if the insured can show that he stands to lose something of an
appreciable commercial value by the destruction of the thing insured then his interest will be
an insurable one. The Court went further to state that as a general rule, insurable interest
should exist at the time of taking the policy and at the time when loss is incurred.
There are a number of ways in which insurable interest will arise or be limited:
(a) By Common Law: Under common law insurable interest is automatically created by
‘ownership’ rights. Similarly, the common law of ‘duty of care’ that one owes to the other
may give rise to a liability which is also insurable.
For E.g. the owner of a tractor who depends on it for his agricultural operation stands to
lose financially if the tractor meets with an accident, as his business will come to a
standstill. Thus the owner has an insurable interest in the asset, i.e., his tractor. Hence
the tractor forms the subject matter when insurance is purchased on it.
(b) By Contract: Sometimes insurable interest is also created by contractual obligations. For
example, a lease agreement between a landlord and a tenant may make a tenant
responsible for the maintenance or repair of the building. This contract places the tenant
in a legally recognized relationship to the building which gives him insurable interest.
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(c) By Statute: Sometimes an Act of Parliament may create insurable interest either by
granting a benefit or by imposing a duty.
Application of insurable interest
There are three main categories of application of Insurable interest as mentioned hereunder:
 Life
Every individual has unlimited insurable interest in his or her own life. In life insurance context,
insurable interest is deemed to exist in the case of certain relationships based on sentiment.
(e.g. Husband & wife, parent & child) Insurable interest is also deemed to exist when the
members of a family are in business together. Under such circumstances, it is not the family
ties which create insurable interest but it is the extent of financial involvement that creates
insurable interest. The business partners can insure each other’s lives because they stand to
loose in the event of the death of any of them.
 Property
Insurable interest normally arises out of ownership where the insured is the owner of the
subject matter of insurance, such as a car or a house. Sometimes, there are some other
financial relationships that give rise to insurable interest although they do not involve full
ownership. Thus, apart from ownership of property, potential legal liability and contractual right
can also support an insurable interest for purchasing an insurance policy. Following are
examples on the application of this principle:
• Part of joint ventures or Partnership contracts – wherein the joint owner is treated as
trustee for the other owner[s].
• Mortgagees and Mortgagors – the insurable interest under a mortgage sale arises to the
purchaser (mortgagor) from the ownership of an asset and to the financial institution
(mortgagee) as a creditor, it is limited to the extent of the loan.
For example, in case of purchase of a vehicle under a hire purchase agreement, the
finance company has the insurable interest in the vehicle until all the installments are
paid, according to the provisions of a clause called Agreed Bank Clause, which protects
the interest of the financer. A bank that gives home loan or loan to businessmen has an
insurable interest in the house building or the business property and takes insurance
policy on such property.
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• Executors and Trustees – insurable interest arises out of the legal responsibility vested
in them for the property kept in their charge. A businessman has an insurable interest in
booking debts and may take a credit policy.
• Bailees – who are responsible to take reasonable care of the goods which are in their
custody, have insurable interest. For example: Motor traders and garage owners, have
insurable interest as bailees in respect of loss or damage to customers’ cars, which are
in their custody for repairs etc. A Motor Traders’ insurance covers this liability.
• Agents – where a principal has insurable interest, his agent can effect insurance on his
behalf. For example, a contractor or a sub-contractor who is responsible for loss arising
out of accident due to faulty workmanship, faulty materials and other errors has an
insurable interest in the project he is executing under the contract. Thus a Contractor’s
All Risk (CAR) policy can be taken by the principal or contractor or sub-contractor.
• Employer and Employee – An employer has an insurable interest in the life of his
employees and he can take the Employers Liability Insurance policy (or Workmen
Compensation (W.C) Insurance Policy) or Personal Accident Policy (which is a benefit
policy having worldwide cover covering bodily injury, death and disablement arising out
of any accident by external, violent and visible means during the course of employment).
He can also take GPA or JPA policy for his employees. But an individual or a firm
cannot take any GPA or JPA policy for the public at large, when they do not have any
insurable interest.
 Liability
The concept of liability insurance is very different from property and life assurance. In this
insurance, it is not possible to predetermine the extent of the insurable interest because there
is no way of knowing how often one may incur liability and in such a case, what would be the
monetary value of such liability. In other words it is implied that insurable interest in liability
insurance is without monetary limit, but in practice it is possible to make a realistic judgment as
to the maximum liability that may be incurred. Hence it can be said that a person has insurable
interest to the extent of any potential liability which may be incurred by way of damages and
other costs (limited by sum insured which is the max. expected liability).
Another important aspect in the application of the principle of insurable interest is the time of
its application. While in life insurance, insurable interest needs to be present at the inception of
the contract or policy, there is no requirement at the time of a claim under the policy. On the
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contrary, insurable interest in the subject matter of insurance must be present at the time of
loss in a marine insurance contract, and it means in other words, that there need be no
insurable interest when the insurance is effected.
In all other insurance policies, insurable interest must be present both at the time of inception
of the contract and as well as at the time of loss.
Insurer’s insurable interest
Like the insured, the insurance companies also derive an insurable interest having assumed
liability under the policies which they issue. In other words, they may insure with another
insurer a part or all of the risk they have assumed. This is usually done under a contract of
Reinsurance.
Thus, in property and liability insurance, the insurable interest must exist at the time of loss. If
an insurable interest does not exist at the time of loss, a financial loss would not occur. Hence
the principle of indemnity would be violated, if payment is made to anybody without there being
any damage to his insurable interest in the property by the occurrence of insured peril.
4.3 Principle of Indemnity

The dictionary meaning of ‘indemnity’ is ‘the protection or security against damage or loss or
security against legal responsibility’. A contract of general insurance is a contract of indemnity.
All contracts of insurance except life, personal accident, and health insurance are contracts of
indemnity.
The principle of indemnity means making good the losses suffered by an unfortunate person.
But in any life insurance or Personal Accident Insurance Contract, it is impossible to assess
the value of human life of an individual and so the principle of indemnity cannot be applied in
both these cases.
Indemnity may be referred to as a mechanism by which insurers provide financial
compensation in an attempt to place the insured in the same pecuniary position after the loss
as enjoyed just before it. The literal meaning of the term “Indemnity” is making good the loss.
On the happening of the insured event for which the insurance policy is taken the insured
should be replenished the amount of loss by the concerned insurer.
This principle sets the rule according to which insurance companies undertake to compensate
the insured upon fulfillment of all the stipulations that are agreed upon in the insurance
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contract. The insurer charges a small amount as premium for undertaking the liability to cover
the risk and in return promises to pay the value of the insurance policy or the amount of loss
whichever is lower.
The principle of Indemnity ensures that the insurer is liable to pay only to the extent of actual
loss and not anything more than that. In other words it implies that the insured should not
derive any unwarranted/undue benefit from a loss.
Normally the principle of indemnity applies to property and liability insurance contracts and it
promises that the insured be restored to the same financial position that existed prior to the
occurrence of loss(neither less nor more ).
Whenever the insurance company indemnifies the insurer for the full value of the insurance
policy (when the asset is completely damaged) the insurer takes possession of the damaged
asset to realize the salvage value.
Importance of the principle of indemnity
1. The principle of indemnity is important in the sense that it ensures that the insured does
not derive any undue benefit from the loss.
Example:
Mr. Kumar had insured his car for Rs. 5 lakhs. The car met with an accident and was
damaged. The loss suffered was valued at Rs.1 lakh. As per the principle of indemnity the
compensation to be paid will be based on the amount of loss, i.e. Rs. 1 lakh. In case the
compensation exceeds Rs. 1 lakh, Mr. Kumar stands to gain from the loss.
2. The principle of indemnity also aims to control the moral hazard. It is possible that the
insured may try to secure the maximum amount through dubious and unfair means. For
example he may:
 Deliberately inflict loss upon the property to seek compensation
 Resort to exaggerating the loss
 Make false claims, etc.
Such claims when accepted confer undue benefits on the insured. The insured may try to
inflate the value of the property and over insure it to seek profit. If the compensation to be paid
by the insurer is limited to the market value of the loss or less, it would put a check on the
avenue for undue gains for the insured. Thus the principle of Indemnity helps to eliminate this
possibility. This is demonstrated in the following example:
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Example:
Mr. Ajay owns a restaurant, which he had bought three years ago for Rs. 2 lakhs. He bought
fire insurance policy worth Rs. 1.6 lakhs (which is the written down value of his insured
property). His restaurant caught fire and the amount of loss suffered was worth Rs. 90000.
The amount of compensation to be paid by the insurance company will be as under:
= Rs. (sum insured/value of insured asset) * actual loss
= Rs. (1.6 lakhs/2 lakhs) * 90000
= Rs. 72000
Give proper signs of multiplication and division in the above example
Indemnity in practice
Even though the property is fully covered, all covered losses are not actually paid in full since it
would contravene the he principle of indemnity.
As per certain provisions in force the amount of compensation paid can be less than the loss
suffered. Such circumstances are:
(i) Actual Cash Value (ACV)
The actual amount of payment to be made by the insurer for the loss is based on ACV of the
property, which is insured. Usually ACV is determined using the following three methods:
1. Replacement cost less depreciation
In this method ACV is the written down value of the property after taking into account the
depreciation and inflation in the value of the property over a period of time.
Thus actual cash value = (replacement cost - depreciation)
Example :
Suppose a Machinery is purchased by A five years ago at a cost of Rs. 10 lakhs.
The cumulative depreciation on the machine for the five years (@ 10% Straight Line
Method)
= Rs. 5 lakhs
Replacement cost = Rs. 10 lakhs
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Hence ACV = Rs. (10 - 5) lakhs

= Rs. 5 lakhs
2. Fair Market Value (FMV)
FMV, which is the price that would normally be determined in a free market during a
transaction entered into by a willing buyer and a willing seller, can be taken as ACV
where replacement cost cannot be determined.
The concept of fair market value can be better understood by the following illustration. X
owns an independent house property purchased ten years ago for Rs. 15 lakhs. The
Municipal authorities are developing a cremation ground on the uninhabited land near
the property of Mr. X. Hence the market value of property has come down for the
property due to lack of market interest in the property and the only prospective buyer is
willing to pay Rs. 8 lakhs for the property.
In case of any loss to the property the fair market value will be considered to be Rs. 8
lakhs by the insurance authorities.
3. Broad Evidence Rule
In this method ACV is determined scientifically applying techniques such as replacement
cost less depreciation, FMV, discounting income streams derived from the property,
taking the value of similar property, etc.
Here the method of judgment and application of common sense is resorted to by the
experts to arrive at an agreeable value.
(ii) Other Insurance
In case the insured has taken up two policies for the same property, the compensation will be
paid proportionately according to ACV by both the insurers. Thus the insured cannot benefit by
resorting to multiple policies for the same property.
Example:
A stevedoring company owns an ocean steamer valued at Rs. 32 crores. The steamer has
been insured with three different insurance companies A, B and C. The amount underwritten
by A is Rs. 6 crores, by B is Rs 10 crores and by C is Rs. 16 crores. Thus the total sum
insured amounts to Rs. 32 crores. The steamer meets with an accident and the loss is valued
at Rs. 4 crores.
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Hence the liability of each individual insurer will be

= (Amount underwritten by the insurer x amount of loss)/total sum insured
So the liability of insurer A
= Rs. (4 x 6)/32
= Rs. 75 lakhs
The liability of insurer B
= Rs. (4 x 10) / 32
= Rs. 1.25 crore.
The liability of insurer C
= Rs. (4 x 16) / 32
= Rs. 2 crores.
How indemnity is provided
Most of the general insurance policies contain the following stipulations:
“The company may at its option indemnify the insured by payment of the amount of the loss or
damage or by repair, reinstatement or replacement.”
In other words, indemnity is made in the following ways:
• Cash payment – for the amount payable under the policy
• Repair – most extensively used method of providing indemnity (motor claims)
Replacement – commonly used in glass insurance
• Reinstatement or replacement by new item– used in restoring or rebuilding or replacing
machinery or reinstatement of building under engineering insurance policies
Factors limiting the payment of indemnity
The maximum amount recoverable under any policy is limited by the sum insured [or the limit
of indemnity]. The actual amount payable to the insured is governed by a number of
considerations:
• Average – This is applicable where an insured deliberately or otherwise under insures
his property. Application of this principle would make the insured his, own insurer to the
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extent of underinsurance [i.e. the difference between the value of the property and the
sum insured].
• Excess –It is the amount of each and every claim which is not covered by the policy.
Excesses may be voluntary or compulsory. Most common in private car policies, where
accidental damages could be insured for 80% or 90%.
• Limits – Refers to the limit on the amount to be paid for certain events, as mentioned by
the wording in the policy. E.g. value of pictures, works of art restricted to 5% of the total
sum insured in household policies.
• Deductibles – Refers to very large excesses. Claims exceeding the deductible amounts
become payable by the insurer.
Exceptions to the Principle of Indemnity
Exception to the rule with respect to life insurance (In non-life insurance this covers Personal
Accident Insurance and certain types of Health Insurance such as ‘Critical Illness’, ‘Hospital
Cash’, etc., where the agreed amount is paid as claims without the policy holder having to
establish the actual spending.
The contract of life insurance is not a contract of indemnity, but it is in the nature of assurance.
This is so because life cannot be indemnified, instead if a person dies, then under the contract
of life insurance, the sum insured will be paid to the insured. The life of a person is different
from a material or property. The principle of valuing material property like replacement cost
less depreciation and discounted cash flows cannot be applied to determine the monetary
value of the life of a person.
The value of life is broadly determined by certain qualitative factors and is subject to one’s
opinion. The most important factor here is the earning capacity of the person and the insurable
value is the value of the policy taken by the person.
A life insurance policy is not subject to the principle of indemnity but is a valued policy wherein
the agreed upon amount in full is paid to the beneficiary in case of loss of life.
Other important exceptions:
• Valued Policy ( for antiques, arts, paintings, etc.)
• Valued policy Laws (as applicable to Marine cargo insurance)
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• Replacement cost or reinstatement policies in Fire & Engineering insurance

• Insured’s Declared Value (IDV) in case of Motor Insurance
Example:
In a valued (marine) policy, if there is damage/ loss to the cargo, the claim is limited to the
value expressed in the policy cover irrespective of the actual value of the cargo lost or
damaged. The settlement of loss will be subject to (a) Sum Insured (b) Average and (c)
Excess / Deductibles.
All these exceptions are based on the recognition that the payment of the actual cash value
can still result in a substantial loss to the insured. To avoid disputes in this regard at the time of
claim settlement, all these aspects are to be considered with appropriate terms and conditions
and amount of premium at the time of underwriting and issuance of the policy.
4.4 Principle of Subrogation

Subrogation means the restitution or transfer of the rights of an assured in favour of the insurer
against the third party for any damages caused by him, in place of the assured after the
insurer has indemnified him for the loss.
The principle of subrogation is invoked when a third party is responsible for the loss.
The principle of subrogation is applicable to fire and marine insurance policies. It is to be noted
that on the happening of the event for which the asset has been insured and after the damage
has been caused the insured can sue the party who has caused the damage to claim
compensation for the loss. Alternatively the insured can seek compensation from the
insurance company.
In case the insured opts for the latter course he loses the right to sue the party, who has
caused the damage and seek further compensation from him. In accordance with the principle
of subrogation the insurance company acquires the right of the insured to sue the third party to
compensate for his negligence and loss inflicted upon when it indemnifies the insured the
losses suffered by him. Therefore, if the assured recovers the full extent of the loss from the
insurance company, then the insurance company gets the rights and remedies of the assured,
and can proceed against the third party for the recovery of compensation. In case, the insured
also receives the compensation from the third party in respect of the same loss, then he must
pay that amount to the insurance company.
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Examples
1. Mr. X was on his way to office in his car when it was hit from behind by a Lorry, and the
lorry driver was drunk. Here X can claim compensation from the insurance company.
The insurer in turn can sue the lorry owner Y for the damages.
Here X will have no right of action against Y if he receives compensation for the loss
from the insurer.
2. Mr. A insures his house with an insurance company. The house is burnt by fire and A
recovers the loss from the insurance company. A subsequently brings an action against
his neighbour, who was responsible for the fire and recovers damages from the
neighbour. Here, the insurance company is entitled to the amount, which A has received
from his neighbour. So A must pay the amount to the insurance company.
3. The insurer of an importer of electrical goods receives a claim in respect of a faulty
toaster. The insurer pays the claim but takes over the insured’s rights to claim back
against the manufacturer. The insurance company can proceed with this claim in the
insured’s name.
Thus, it can be seen that subrogation rights apply only where there is a legal liability under the
policy, i.e. where policy cover existed and the claims are paid. However, the policy conditions
customarily provide for such subrogation rights before the claim payment. Recovery from the
third party can be made only if the claim is paid.
It is to be noted that the principle of subrogation is a corollary of the principle of indemnity and
is applicable when the damage has been caused due to the negligence or high handedness of
another party. The Principle of indemnity seeks to make good the financial loss suffered by the
insured by the insurer.
Thus after having been compensated for the loss the insured is restored to the same financial
position as he was before the incident.
In case he is allowed to sue the damaging party again he stands to make a profit from the loss,
which is inconsistent with the principle of indemnity.
In the case of Castellain v. Preston, Preston the owner of a house property entered into a
transaction under which he contracted to sell his house. The property was insured against fire.
Before the transfer of title of the property to the buyer, the house was partly damaged by fire.
The insurer indemnified Preston for the loss.
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After that the sale was completed and the buyer paid the full price that was agreed upon to
Preston. Ultimately the insurer came to know about this and filed a suit against Preston on the
ground that since he received the full price he doesn’t stand to incur any financial loss from the
mishap. So there is no valid reason for him to receive payment from the insurer. The court
accepted the insurer’s stand and ordered Preston to return the amount indemnified by the
insurer.
Importance of the principle of subrogation
The principle of subrogation serves to achieve the following objectives:
1. It prevents the insured from profiting from the damage, i.e., obtaining compensation
twice for the same loss.
2. It enforces the rule of law that the guilty is brought to book and made to pay for the loss.
3. It helps the insurer to partially or fully recover the amount paid for the loss.
4. It helps to lower the insurance rates. With reimbursement from the concerned third
party, the insurance company’s losses are substantially scaled down, the benefit of
which in turn is passed on to the final policyholder by way of reduction in premium.
Whenever the insurance company indemnifies the insured to the extent of the full value of the
insurance policy (when the asset is completely damaged) the insurer takes possession of the
damaged asset to realize the salvage value.
It has to be noted that if the value of compensation recovered by the insurance company from
the responsible third party is more than the amount indemnified to the insured, the insurer has
to return the excess amount to the insured (after deducting the expenses incurred in
recovering the money such as legal charges, etc.).
In a case where the insured himself takes action against the negligent party the insurer is not
liable to pay any compensation.
If the insured chooses to relieve the negligent party from his liability for the loss that may
happen when the concerned person is a close relation of the insured, the insurer is not liable
for compensation as his right to sue the negligent party is lost.
Applicability of the doctrine of subrogation
Necessarily the principle of subrogation applies to general insurance (other than insurance on
human) only. It has no relevance with respect to life insurance or health insurance since the
principle of indemnity on which it rests upon applies exclusively to general insurance.
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There can be no subrogation on anyone’s life. In case of loss of life the insurance company
has to pay the assured amount to the beneficiary of the insured. Here the insurer has no right
of action against the third party for financial claims even if the loss of life was caused by him.
Limitations of the doctrine of subrogation
1. This doctrine is not applicable to life insurance policies and therefore the insurer has no
right of action against third parties responsible for the death.
2. The doctrine becomes operative only after the insured has been indemnified. There is
no relation between the indemnity provided for and the exercise of subrogation. The
insurer may not be able to recover exactly the same amount by exercising the right of
subrogation against the third party.
3. Subrogation cannot be exercised where the assured is not in a position to take action
against the damaging party.
Example
Mr. Bhagat had insured his personal computer. It was damaged by his teenage son Jagat who
smashed it with a cricket ball in a fit of rage. In this case Mr. Bhagat does not want to subject
his son to any action. Hence the insurer is not obliged to make payment for the loss.
4.5 Principle of Contribution

Definition
The Federation of the Insurance Institute of Bombay has defined the principle of contribution
as the right of an insurer who has paid for a loss under a policy to recover a proportionate
amount from the other insures who are liable for the loss. Thus, Contribution is the right of an
insurer to call upon others similarly, but not necessarily equally liable to the same insured to
share the cost of an indemnity payment. This principle of contribution enables the total claim to
be shared in a fair way.
The doctrine of contribution operates as a corollary of the doctrine of Indemnity and hence is
applicable to general insurance.
The principle of contribution should be property worded in the contract. The general wording is:
If at the time of any loss, damage or liability arising under this policy there shall be any other
insurance, whether effected by the insured or any other person covering the same property or
liability or any part thereof, the company shall not be liable for more than its rateable portion of
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such loss or damage

Thus, as per the doctrine of contribution, the indemnity provided for the loss occurring on the
asset, which is insured with several insurers has to be proportionately shared among them
according to the rateable proportion of the loss. The amount of total compensation or
indemnity provided to the insured by all the insurers should not exceed the amount of loss.
Case Law
In this regard, the decisions in Gale v. Motor Union Assurance Co. Ltd. (1928), Loyst v.
General and Life Assurance Corp. Ltd. deserve special mention, where both the insurance
companies have been exonerated from liability with unique application of the doctrine of
contribution and policy condition simultaneously.
Sometimes the value of the asset may be very high and the amount of risk involved will be
higher and that particular asset if insured by the company would form a significant portion of
the total risk. This in turn increases the business (operation) risk of the insurance company.
Usually insurance companies try to concentrate on a higher number of policies of lower value
for diversification benefits. Diversification serves to reduce the overall risk level of an insurance
company.
Rather than avoiding business arising from high value assets insurers follow the practice of
underwriting high value assets partially. Thus a single insurer takes up a part of the total value
of the asset and the asset is insured by a group of two or more insurance companies.
This practice has further implications particularly in case of settlement of claims relating to
such contracts. The question as to how much of the compensation is to be borne by each
Insurer has to be addressed. It is here that the doctrine of Contribution is applied to resolve
such complications.
The insured has the choice to recover from any insurer on a priority basis. After recovering the
share of loss from the first insurer the insured can approach other insurers as per the doctrine
of contribution.
In case one insurer indemnifies the insured in full the concerned insurance company can claim
the share of compensation from other insurance companies.
Requisites to invoke the doctrine of contribution
1. The insured asset/Person (subject matter of insurance) (in case of hospitalization
insurance) must be common to all the policies
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2. The risk insured(event) against must be common to all the policies

3. The insured owner of the asset must be the same person
4. All the policies must be in force during the occurrence of loss
Examples
1. Where there are two insurers covering the asset equally, in case of loss each has to
contribute half of the compensation.
2. ‘A’ insured his house against fire with X for Rs.50000 and with ‘Y’ for Rs. 75000. Fire
broke out in the building and a loss of Rs.40000 occurs. ‘A’ may file a suit against both
the insurers or against one only.
The liability of each insurer is determined by applying the following formula:
The sum insured with an insurer
× Loss
The total sum insured with all insurers
50,000 × 40,000
Liability of X = = Rs. 16,000
1,25,000
75,000 × 40,000
Liability of Y = = Rs. 24,000
1,25,000
It has to be noted that a life insurance is a contingent contract, and as such the principle of
contribution will not apply to life policies. If the same life has been insured more than once, all
the amounts will become payable in full.
The following conditions must be satisfied for the applicability of the principle of contribution:
1. The same subject matter is insured with more than one insurer
2. The policies must cover the same peril.
3. The assured must be the same person in all the polices.
4. All the policies must be in force at the time of loss.
5. Each insurer has to pay to the insured his share of loss only.
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4.6 Principle of Proximate Cause

Proximate cause is a key principle of insurance and is concerned with how the loss or damage
actually occurred and whether it is indeed as a result of an insured peril and is payable under
the affected policy issued by the concerned insurer.
Definition
Cause Proxima is necessary for a valid contract of insurance. It has been defined as the active
efficient 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 not the latest, but the direct, dominant, operative and efficient cause that must be regarded
as proximate.
When an insurance policy is bought it is issued with respect to some peril, which may result in
loss to the policyholder. No policy covers all types of risks. The insurance company is liable to
indemnify only against the insured perils.
The term “Proximate cause “literally means the nearest cause or direct cause. In insurance
parlance it relates to the immediate cause of the mishap, which resulted in the loss.
In general insurance there are numerous policies relating to vehicle insurance, property
insurance, fire insurance, burglary insurance, etc. Each policy offers protection from the risks
that are mentioned in the policy.
If a person has bought fire insurance for his house, the protection will be from the loss caused
by fire, which may have resulted from the sources mentioned in the policy. In case the fire
occurs from any source other than that mentioned in the policy the insurer is not liable to
compensate the insured.
1. For example if the person is insured to be protected against fire occurring due to electric
short circuit and the fire occurs due to leakage of LPG cylinder then the insurance
company is not liable to pay for the losses. In this case only if the fire were caused by
short circuit would the loss be covered.
2. Sugar was insured against the danger of sea water. Rats made a hole which caused the
sea water to damage the goods. Though rats were originally responsible for this
damage, the immediate cause of damage (proximate cause of damage) was sea water,
a peril insured against. Hence, the insured was held entitled to damages.
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3. A cargo of oranges was insured against loss due to collision. The ship actually collided
resulting in delay and mishandling of cargo and made the oranges unfit for human
consumption. The Master of the Rolls held that the damages to oranges was not directly
due to the collision, but due to delay and mishandling. As these causes were not
insured, the insured could not recover the loss.
4. A policyholder sustained an accident while hunting. He was unable to walk after the
accident, and as a result of lying on wet ground before being picked up, he contracted
pneumonia and subsequently died. There was an unbroken chain of causes between
the accident and the death, and the proximate cause of the death, therefore, was the
accident and not pneumonia.
5. During a war period, a bomb was dropped on a factory, which caused fire to the factory.
The proximate cause of loss in this case is enemy action and not fire.
6. Firemen remove undamaged stock from a burning building to avoid its involvement in
the fire. It is stacked in the open yard and subsequently damaged by rain. Was the
proximate cause of the damage the fire or rain? If the rain damage had occurred before
the insured had an opportunity to protect it, then the proximate cause of the damage
would be fire. However, if the stock were left unprotected for an unreasonably long
period, the rain would be a new and independent cause of damage.
7. In Etherington v. Lancashire and Yorkshire Accidental Insurance Co.(1999) case, a man
fell from a horse and sustained injuries that prevented him from moving. As a result, he
contracted pneumonia due to lying in the wet and died.
The proximate cause of his death was held to be the fall and not pneumonia.
Similarly, if furniture is thrown out of a burning house to arrest the spread of the fire and it is
damaged in the process, the proximate cause of the damage would be the fire.
All the details related to proximate cause have to be clearly mentioned at the time of entering
into the contract. Sometimes the causes not covered by the policy have to be expressly
mentioned and though it is impossible to mention the whole range of causes that are to be
avoided they are usually assumed by implication. The replenishment of compensation
proceeds strictly depend upon the causes agreed upon.
Determination of proximate cause
Where the mishap occurs as a single event the determination of Proximate Cause is simple
and that particular event can be attributed for the loss. Where the loss occurs as a chain of
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events in succession with one event triggering the other, it may be difficult to determine the
exact cause of the damage. In such an eventuality the parties have to carefully examine and
find out the correct reason for the loss, the extent to which the loss has been caused by the
proximate cause and the amount of compensation to be paid based upon it. It may happen
that the actual peril, which has caused the loss in turn, is caused by another peril.
It has to be noted that while determining ‘proximate cause’ the sequence of events according
to their time of occurrence is irrelevant. The deciding factor is the correct cause of loss.
Many court judgments act as precedents in arriving at decisions while making settlements.
They have been enumerated in the following paragraphs.
I. The insurer is liable:
• When the peril is a single event and it is insured.
• Where the insured peril (the event for which the policy has been taken for
protection) occurs first and it is followed by an excluded peril (the event which has
not been covered by the policy, i.e., which is not insured). Here the insurer has to
pay for the loss, which had occurred up to the happening of the excluded peril
only if the two perils can be distinguished from each other.
• Where the excluded peril causes the insured peril and the events occur in a
broken sequence the insurer has to pay for the loss caused by the insured peril.
• Where both the perils are occurring concurrently and both the events are
independent of each other.
II. The insurer is not liable:
• Where the excluded peril is the cause of the insured peril and they act
consecutively.
• Where the insured peril is followed by the excepted peril and both cannot be
distinguished from each other.
• Where both the perils are occurring concurrently.
Examples
1. In the case of Tootal Broadhurst Lee & Co v. London & Lancashire Fire Insurance Co.
the fire was caused by an earthquake. Here earthquake was not part of the covered risk
and hence the insurer was not liable as the loss was proximate to an excepted peril.
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2. In a case where fire causes an explosion (an excepted peril), the insurer will be liable for
fire damage up to the time of explosion.
3. In the case of Marsden v. City and Country Assurance Co., Marsden had insured his
plate glass from any risk except fire. Eventually a fire occurred in the neighbouring
premises and in the commotion that followed some miscreants broke into the premises
by smashing the insured plate glass to commit theft. As per the verdict the proximate
cause of the loss was mob ambush and not the fire. Hence the insurer was liable for the
loss.
5. Classification of General Insurance

The most common and basic types of insurance (property, liability, life and health) are
generally divided into two broad categories:
1. Property/Liability insurance
2. Life/Health insurance
1. Property/Liability insurance
Property & Casualty insurance provides coverage for property and net income loss exposures.
It protects an insured’s assets by paying to repair, or replace property that is damaged, lost, or
destroyed or by replacing the net income lost and extra expenses incurred as a result of
property loss.
Liability insurance covers the liability loss exposures. It provides for payments on behalf of the
insured for injury to others or damage to others’ property for which the insured is legally liable.
The property and liability insurance industry or general insurance industry is also called as the
property – casualty insurance industry; casualty insurance encompasses a wide range of
insurance protection, including protection against auto, health, workers’ compensation, and
liability risks.
A common practice in property and liability insurance is to classify the industry based on the
type of consumer buying the insurance product.
Personal lines insurance is insurance designed to serve the personal risk needs of individuals
and families. (personal motor insurance, homeowners insurance)
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Commercial lines insurance is insurance tailored to fit the needs of commercial organizations.
Commercial liability insurance, workers’ compensation, commercial auto insurance, and
commercial property insurance are some examples.
2. Life/Health insurance
Life and health insurance covers financial consequence of human (personal) loss exposures.
Life insurance replaces the income-earning potential lost through death and also helps to pay
for expenses related to insured’s death. Health insurance provides additional income security
by paying for medical expenses. Disability income popular in most of the Western countries,
replaces an insured’s income if the insured is unable to work because of injury or illness.
Classification of Insurance on the basis of subject matter of insurance
(i) Insurance of property: Fire, burglary, motor vehicles, machinery, plate glass, aircraft.
In this insurance, property which has intrinsic value of its own, is insured against loss or
damage by various perils such as fire, burglary, accidents etc.
(ii) Insurance of liability: Legal liability to third parties, legal liability to employees etc.
Insurance provides protection against financial loss caused by incurring legal liability,
through negligence or by reason of statutory law.( Workmen’s Compensation Act).
(iii) Insurance of the person: Personal accident, and sickness insurance. This insurance
provides for payment of fixed benefits in the event of death or disablement of the insured
due to an accident or disablement due to illness.
(iv) Insurance of pecuniary losses: Loss of profits policies like Fidelity guarantees.
This insurance provides protection against certain consequential losses that result from
material damage. A fidelity guarantee policy pays for financial losses suffered by the
insured due to acts of dishonesty of his employees.
Some policies are a combination of property insurance and liability insurance. For example,
the comprehensive motor policy provides cover for accidental damage to the vehicle as well as
legal liabilities for third party injury and property damage. A fire policy on building may include
insurance on loss of rent thus making it a combination of property insurance and pecuniary
loss insurance.
General insurance as seen earlier helps in the mitigation of property and liability losses.
General insurance policies are classified into the following categories.
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(a) Fire Insurance

(b) Marine Insurance
3. Miscellaneous Insurance
Miscellaneous insurance comprehensively covers the following insurances
— Motor insurance
— Health insurance
— Burglary insurance
— Cattle insurance
— Plate & Glass Insurance
— Liability insurance
— Other insurance policies includes some interesting types of coverages such as
— Weather – related insurance
— Change of law insurance
— Wedding insurance
All the above insurance policies are discussed in detail in the subsequent Chapters.
6. Marketing and Selling of Insurance

Marketing and selling in common parlance is used as synonyms. However there iṣ significant
difference as follows:
Marketing process
(1) Means by which the insurance company seeks to identify, serve, satisfy, and retain or
keep the customer;
(2) End purpose and focus of marketing activities is customer.
Selling process
Sale is the act of giving a product or service in return for money and the selling process.
(1) Is not involved in Insurance;
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(2) In insurance, unlike other products, one is not selling any tangible product but only a
promise [in the form of an insurance policy] to pay in the event of a fortuitous /
contingent event causing financial loss.
Marketing activities in Insurance involves -
1. Understanding and segmenting customers;
2. Targeting and positioning – Implementing the marketing plan.
The difference between marketing and traditional selling is explained as follows:
Traditional Selling Marketing
1. Spotlight is on products and services 1. Spotlight on finding the gap between
rather than the customer’s needs, customers need, want / desire & what is
desires & concerns made available to them today
2. A firm using a sales orientation focuses 2. A firm with a marketing orientation tries to
primarily on some how pushing its create and deliver products and services
already existing products & services, that are appropriate and ideal, from the
using aggressive promotion techniques customer’s stand point. It is a way to
to attain the highest sales possible engage customers gainfully and build a
beneficial relationship
3. Selling is essentially a strategy of push 3. Marketing is a strategy of pull
SUMMARY
• Human beings live in a world of uncertainty. All of us hear of cars, buses, trains colliding;
floods destroying entire communities; earthquakes that result in grief and tremendous
disastrous losses.
• Insurance has been known to exist in some form or other since 3000 BC to protect
humans against losses. Various civilizations, over the years, have practiced the concept
of pooling and in-between among themselves, all the losses suffered by some members
of the community.
• Modern insurance in India began in early 1800 or there abouts, with agencies of foreign
insurers starting marine insurance business.
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• The insurance sector was opened up to reforms with the enactment of the Insurance
Regulatory and Development Authority Act, 1999.
• Insurance is one of the most popular mechanism to secure against risks. Therefore, for
understanding insurance, one needs to essentially understand the concepts and
linkages between risk, peril, hazard and insurance.
• Insurance contract involves a contractual agreement in which the insurer agrees to
provide financial protection against specified risks for a price or consideration known as
the premium.
• Insurance is actually a combination of three elements namely a transfer system, a
business and a contract
• A general insurance contract is subject to the following six principles namely:
— Principle of Utmost good faith
— Principle of Insurable interest
— Principle of Indemnity
— Principle of Subrogation
— Principle of Contribution
— Principle of Proximate cause
— The most common and basic types of insurance (property, liability, life and health)
are generally divided into two broad categories: Property/Liability insurance and
Life/Health insurance.
• Marketing and selling of insurance involves the process where in an insurance company
seeks to identify, serve, satisfy, and retain or keep the customer while in a Selling
process is the act of giving a product or service in return for money.
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REVISION QUESTIONS
SECTION – A
Multiple Choice Questions
1. Insurance is best described as
(a) A Contract (b) A Business
(c) A Transfer System (d) Either (a) or (b)
(e) All the above
Ans: (e)
2. According to the Marine Insurance Act 1963, a contract of marine insurance is
valid-
(a) Only when it is in writing
(b) Only when it is verbal
(c) Only if it fulfils the essentials of a valid contract
(d) It can be an oral agreement or a written contract
Ans: (d)
3. In which of the following the principle of indemnity is applicable?
(a) All types of insurances (b) Non-life insurance only
(c) Life insurance only (d) Either (b) or (c) above
(e) None of the above
Ans: (b)
4. According to the Marine Insurance Act 1963, a contract of marine insurance is
valid
(a) Only when it is in writing
(b) Only when it is verbal
(c) Only if it fulfils the essentials of a valid contract
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(d) It can be an oral agreement or a written contract

Ans: (d)
5. Which of the following is an exception to the rule of indemnity:
(a) Actual cash value property insurance (b) Life insurance
(c) Replacement cost insurance (d) Valued insurance policies
Ans: (d)
6. Subrogation in insurance means :
(a) Losses must be reported in time to the insurance company
(b) Losses must be considered legally binding
(c) The insured must pay premiums before losses can be paid
(d) One party is being substituted for another in terms of legal rights
Ans: (d)
7. Insurers use _________________ to modify a standardized policy to fit an
insured’s unique coverage needs.
(a) Definitions (b) Exclusions
(b) Conditions (d) Endorsements
Ans: (c)
8. An insurable loss is
(a) An event that has not been predicted
(b) An exposure that cannot be measured easily before the event has occurred
(c) An unexpected reduction of economic value
(d) Being without something that one has previously possessed
Ans: (b)
9. The definition of peril is
(a) An event or condition that increases the chance of loss
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(b) The uncertainty concerning loss

(c) Cause of loss
(d) A measure of accuracy with which a loss can be predicted
Ans: (c)
10. A moral hazard is
(a) A loss of faith in the insurance company because it has denied claims
(b) Illustrated by the loss of a wallet to a thief
(c) An act by an insured that increases the losses paid by his insurer
(d) The potential for the insurance company to increase premiums after a loss
Ans: (c)
11. In property-liability insurance, which of these is not considered as personal lines
insurance?
(a) Workers’ compensation (b) Home owners insurance
(b) Auto insurance (d) All personal lines
Ans: (a)
12. Which of the following is not a component in the calculation of insurance
premiums?
(a) Estimated loss claims (b) Investment income
(c) Loading expense (d) All the above
Ans: (b)
13. Which of the following is a cost incurred by society through the operation of the
insurance mechanism?
(a) Insured loss costs (b) Loading loss claims
(c) All the above (d) (b) and (c)
Ans: (d)
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SECTION – B
Short & Essay Questions
1. Discuss the applicability of the Indian Contract Act, 1872 to an insurance contract.
2. Discuss the consequences that follow non-disclosure of material facts in a contract.
3. Explain how the principle of insurable interest adds legal validity to an insurance
contract. Cite the instances of general insurance contracts where insurable interest has
to be proved.
4. Why is the principle of indemnity not applicable to life insurance contracts? Explain how
the principle of indemnity controls moral hazard and undue benefit to the insured in a
general insurance contract.
5. Discuss the subrogation rights of an insurer.
6. What are the principles behind the doctrine of contribution? Explain the mechanism
behind contribution through ratable proportion of the loss.
7. What is the difference between Selling and Marketing?
Questions with Answers
1. Explain why an insurance contract is considered as a contract of utmost good
faith and not of caveat emptor?
Ans. An insurance contract is based on the principle of utmost good faith. The principle of
utmost good faith is supported by three important legal doctrines: representations,
concealment [intentional failure of the applicant for insurance to reveal a material fact to
the insurer] and breach of warranty [promise made by the insured in the contract]. Each
party [insured and insurer] to the contract is entitled to rely on good faith upon the
representations of the other. The rule of caveat emptor [let the buyer beware] does not
generally apply. The Insurer believes in the representations of the Insured.
Representations of insured are statements of his or her age, weight, height occupation,
state of health, family and personal history. And from the insurer’s side, it is intricate and
highly technical. Here both the parties are under an obligation not to attempt to deceive
or withhold material information from the other. The insurance contract is voidable at the
insurer’s option if the representation is material, [if the insurer knows the true facts, the
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policy would not have been issued or would have been issued on different terms] false,
reliance [the insurer relies on the misrepresentation in issuing the policy at a specified
premium] and innocent or unintentional misrepresentation.
2. Explain the principle of indemnity. And what are the exceptions to this principle of
indemnity?
Ans. Indemnity is one of the important legal principles in Insurance. The principle of Indemnity
states that the insurer agrees to pay no more than the actual amount of the loss, which
means the insured should not profit from a loss. And this principle has two fundamental
purposes:
1. To prevent the insured from profiting from a loss; and
2. To reduce moral hazard. This indemnity is different for different types of insurance.
In property insurance, the basic method for indemnifying the insured is based on the
actual cash value of the damaged property at the time of loss and this cash value can be
determined through three major methods such as (a) replacement cost less
depreciation, (b) fair market value, and (c) broad evidence rule.
In liability insurance, the insurer pays upto the policy limit.
In life insurance, the amount paid when the insured dies is the face value of the policy.
Life insurance is not a contract of indemnity. In business income insurance, the amount
is paid on the loss of profits and continuing expenses when the business is shut down
because of loss from a covered peril.
Exceptions: The major exceptions to the principle of indemnity are 1.valued policy [pays
the face amount e.g. Payment for the loss of antiques]; 2.valued policy laws [differ from
State to Sate]; 3. Replacement cost insurance [no deduction for depreciation]; 4. Life
insurance [ a valued policy ].
3. What problems might arise if life policies were contracts of `indemnity and
property and liability policies were valued contracts?
Ans. The principle of indemnity states that the insurer agrees to pay no more than the actual
amount of the loss. In the case of life policies the amount is paid when the insured dies.
The actual amount of loss of human life value is capitalized through the face value of its
policy. It is only a valued contract and it cannot be a contract of indemnity. If it is a
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contract of indemnity, the principle of paying actual amount of the loss cannot be
operated.
4. What is insurable interest? Why is an insurable interest required in every insurance
contract?
Ans. It is an important legal principle. It states that the insured must be in a position to lose
financially if a loss occurs, or to incur some other kind of harm if the loss takes place. To
prevent gambling, to reduce moral hazard and to measure the amount of the insured ís
loss [in property insurance] all insurance contracts must be supported by an insurable
interest. There is a difference between an insurable interest in property and liability
insurance and life insurance.
In property and liability insurance
(a) Ownership of property can support an insurable interest because he loses
financially if his property is damaged.
(b) Potential legal liability also can support an insurable interest in the property of the
customer because these firms are legally liable for damage to the customer’s
goods caused by their negligence.
(c) Secured creditors also have an insurable interest in the property pledged to them.
(d) A contractual right also can support an insurable interest.
(e) In property insurance, the insurable interest must exist at the time of the loss.
In life insurance there is no question of insurable interest if the life insurance is
purchased on one’s own life. If the life insurance policy is purchased on the life of
another person, this person should have an insurable interest on that person’s life.
Close ties of blood or marriage or a pecuniary interest will satisfy the insurable interest
requirement in life insurance. And this requirement must be met only at the inception of
the policy and not at the time of death. Life insurance is not a contract of indemnity but is
a valued policy that pays a stated sum upon the insured’s death.
5. Explain the principle of subrogation. Why is subrogation used?
Ans. The principle of subrogation strongly supports the principle of indemnity. According to
George E Rejda, subrogation means substitution of the insurer in place of the insured
for the purpose of claiming indemnity from a third person for a loss covered by
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insurance. Eg. In an accident insurance the insured victim gives legal rights to the
insurer to collect damages from the negligent third party instead of collecting himself
directly from the third party. The main purposes of subrogation are (a) to prevent the
insured from collecting twice for the same loss, (b) to hold the negligent person
responsible for the loss and (c) to hold down insurance rates.
Insurer must pay before he resorts to subrogation.
The insured cannot impair the insurer’s subrogation rights.
The insurer can waive its subrogation rights in the contract either before or after the
loss.
Subrogation does not apply to life insurance and to most individual health insurance
contracts because life insurance is not a contract of indemnity and subrogation relates
to only contracts of indemnity.
Finally, insurer cannot subrogate against its own insured because it defeats the basic
purpose of purchasing insurance.
6. What are the differences between subrogation and contribution?
Ans. The principle of subrogation strongly supports the principle of indemnity. According to
George E Rejda, subrogation means substitution of the insurer in place of the insured
for the purpose of claiming indemnity from a third person for a loss covered by
insurance. Subrogation and Contribution are corollaries to the principle of indemnity.
Both these arise only in property insurance. Contribution arises with the liberty of double
insurance which means the assured can insure the same property with more than one
insurer and that too with over insurance. The conditions to satisfy this right of
contribution are all the insurance must relate to the same subject matter; they should
cover the same interest of the same insured; they should cover same peril, and all of
them should be in force at the time of loss. When all these conditions are satisfied the
insurer who has paid first the full assured amount, he can claim contribution from the
other co-insurers. And this claim amount depends on the aggregate of rateable clause
or continental law. Though the doctrines of subrogation and contribution are important
corollaries of indemnity, they differ with each other in the following respects:
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Subrogation Contribution
The loss shifts from one person to another The loss is distributed among insurers
It is against third party It is in between insurers
One insurer -one policy More than one insurer
The right of the insured is claimed The right of the insurer is claimed
7. What is the legal doctrine of proximate cause?
Ans. The legal doctrine of proximate cause is based on the principle of cause and effect. It
does not concern itself with the cause of causes. The law provides the rule
‘causaproxima non remotaspectaturì which means to be proximate, a cause must be
immediate cause, which is effectual in producing that result but not the remote or distant
one. And this cause has to be selected by applying common sense standards, i.e. the
standards of a man in the street.
An insurance policy is designed to provide compensation only for insured perils [named
in the policy as insured Eg.. fire, theft, etc.] but not for uninsured [not mentioned in the
policy] and excepted or excluded perils [stated in the policy as excluded] .The liability of
the insurer arises only if the loss is caused by an insured.
The selection of proximate cause is not an easy and simple task because loss may be
caused by several events acting simultaneously or one after the other. It is necessary to
differentiate between the insured peril, the excepted peril and the uninsured peril.
Application of the doctrine: It is, not the latest, but the direct, dominant, operative and
efficient cause that must be regarded as proximate.
• If there are concurrent causes, i.e. causes happening together and no excluded
peril is involved, there is liability under the policy.
• When an insured peril and an excepted peril operate together to produce the loss,
the claim will be outside the scope of the policy.
• If the results of the operation of the insured peril can be easily separated from the
effects of the excluded peril, then there is liability under the policy.
• Where several events occur in unbroken sequence and no excepted peril is
involved, the insurer is liable for all loss resulting from the insured peril.
• If an excepted peril precedes the happening of an insured peril, there is no claim
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• If the insured peril is followed by an excepted peril, there is a valid claim for part,
at least, of the loss.
• If the happening of an excepted peril is followed by the occurrence of an insured
peril, as a new and independent cause, there is a valid claim for loss caused by
the happening of an excepted peril.
Modification of the doctrine: In the event of loss, the onus of proof [or burden of proof]
is on the insured. He has to prove that his loss is proximately caused by an insured peril.
The onus is shifted to the insurer, if the insurer argues that the loss was caused by an
excepted peril. They have to prove that the loss was proximately caused not by the
insured peril, but by the excepted peril.
Value of the doctrine: This doctrine serves not only to define the scope of coverage
under the contract but also to protect the relative rights of the parties to the contract.
• It maintains a balance between the rights of the insureds and insurers.
• In the absence of this rule, every loss could be claimed by the insured and every
loss could be rejected by the insurer.
• It permits application of common sense to the interpretation of an insurance
contract to the mutual advantage of the parties.
SECTION – C
Case Studies
Proximate Cause in Marine Insurance
(a) Reischer v Borwick(1894) 2 QB 548 CA
A tug called Rosa was insured with the defendants only against collision with any object
including ice. In her voyage along the River Danub, it collided with a floating snag, causing
damage to its machinery and a hole in the cover of the condenser, which allowed water to
enter the tug. It was then anchored and by temporary measures the hole was plugged, but
afterwards when another tug arrived and started towing it towards the nearest dock, the hole
reopened because of the motions and it was filled with water. Finally Rosa was beached and
abandoned. The insured claimed damages for the total loss of the tug but the underwriters
paid only for the damage from the snag and denied greater liability. At first instance, judgment
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wasgiven in favour of the insured for the whole amount claimed; the underwriters appealed.
The court of appeal upheld the decision of the trial judge and ruled in favor of the insured,
holding that the collision was the efficient and predominant cause of the loss of Rosa.
(b) Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd (1918) AC
350, HL
In 1915 a steamship named Ikaria, was insured with the defendant under a policy, which
covered perils of the sea but contained an F C and S clause that stated: ‘Warranted free of
capture, seizure and detention and the consequences thereof or any attempt thereat piracy
excepted, and also from all consequences of hostilities or warlike operations’. Ikaria was
torpedoed by a hostile submarine while awaiting a pilot outside Le Havre off the French coast.
Two large holes were made in the hull and eventually it was filled with water. Nevertheless it
managed to reach the port of Le Havre, and it would have been saved if it had been allowed to
remain there. But a gale caused the Ikaria to bump against the quay and the authorities fearing
it would sink and block the quay, ordered it to move to the outer harbour, near the breakwater.
In the outer harbour because of the weather conditions and the fact that it was down by the
head as a result of the torpedo damage, it grounded at each low tide and, eventually, sank and
became a total loss.
The assured contended that only the cause last in time could be regarded as proximate and
thus the loss was caused by perils of the seas. But the underwriters refused liability and
argued that the proximate cause of loss was torpedo and therefore within the F C and S clause
of the policy. The House of Lords, in endorsing the decision of both the lower courts, ruled that
the loss was not due to perils of the seas and the torpedoing was the proximate cause of the
loss. The House of Lords unanimously rejected the last in time approach to proximity of
causation. Lord Shaw of Dunfermline in his judgment with a prefect wording observed : “The
true and overruling principle is to look at a contract as a whole and to ascertain what the
parties really meant. What was it, which brought about the loss, the event, the calamity, the
accident? And this is not in an artificial sense, but in a real sense which parties to a contract
must have had in their minds when they spoke of cause at all.”
(c) Heskell v Continental Express and Another [1950] 1 All ER 1033
It often happens that more than one cause has led to a loss or damage. The causes may
operate successively, or simultaneously, separately or in combination, as seen in this case.
In this case plaintiff sold three bales of poplin to a Persian buyer and instructed Continental
Express to forward the bales to the vessel Mount Orford Park. Continental Express negligently
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did not forward the goods. Strick Line Ltd, the charterer of Mount Orford Park, allocated space
for the bales of poplin in the vessel, by mistake, issued a bill of lading for the goods that were
never received. The ship arrived in Persian Gulf without the goods and it was discovered that
the goods had never been dispatched from the warehouse. The plaintiff after he had made
recompense to the buyer, claimed against the both companies, Continental Express and Strick
Line Ltd. The court ruled that the issuing of bill of lading by Strick Line Ltd was a misstatement
but since there was no contractual relationship between the plaintiff and Strike Line Ltd the
plaintiff could not recover from them. However, damages were awarded against Continental
Express for a breach of contract. This case shows a situation, where there are two proximate
causes of loss of equal efficiency, one is the initial breach of contract and the other, an
intervening act by another party. The court was faced with the problem that the intervening act
of the issuing of the bill of lading, and the initial failure of Continental Express to forward the
goods to the ship, were equally operative causes of the loss.
Case Studies with Answers

1. Mr. Ajith made a proposal to an insurance company for an insurance policy on his
life for Rs.8,00,000. He truthfully answered all questions on the proposal form and had
disclosed all relevant facts. A few days later, but before the proposal was accepted, Mr.
Ajith fell ill with pneumonia. The proposal was accepted by the company the next day.
Two days later Mr. Ajith died of pneumonia and the company learnt for the first time of
his illness.
Is the insurance company liable to make the payment?
Ans: A contract of insurance is a contract of absolute good faith. The duty of observing
utmost good faith by the proposer to an insurance contract continues throughout the
negotiations till the proposal is accepted by the insurance company and the contract becomes
operative. Thus, the insurance company is entitled to get notice of any material alteration in
the risk between the day of the proposal and its acceptance. In this case, such notice was not
given, and therefore , there was a breach of good faith. The insurer is, therefore not liable for
making the payment.
2. The cargo on a ship was insured against loss on account of sea water. Some rats
in the ship caused a hole in the botton of the ship resulting in the entry of sea water into
the ship resulting in the loss of the cargo. The insurance company refuses to pay the
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money on the ground that the loss was caused on account of rats, which was not an
insured peril. How will you decide.
Ans: The insurer is liable to compensate the insured for any loss arising on account of sea
peril insured against. Such peril should be the proximate cause of loss. In this case, the rats
were a remote cause of loss and sea water was a proximate cause. Since the loss was on
account of sea water, which is an insured peril the insurer is liable to pay for the loss.
3. Mr. Sharma insured his goods in a warehouse against fire with XYZ Insurance
Company. The goods were burnt and Mr. Sharma recovered the full value of Rs.
10,00,000 from the insurance company. Subsequently Mr. Sharma also sued the
warehouse. And recovered a sum of Rs.10,00,000 . Can Mr. Sharma retain this money?
Ans: According to the doctrine of subrogation in a contract of indemnity, an insured cannot be
allowed to make any profit from an insurance claim. He cannot take benefit of an insurance
policy as well as any other alternative remedies. On the basis of the above principle, Mr.
Sharma ought to return a sum of Rs.10,00,000 to the insurance company.
4. A steamer was insured for Rs. 11 lakhs, although its declared value was Rs. 13
lakhs. In a collision with a ship, the steamer was completely lost. The insurer paid a
sum of Rs. 1,00,000, being the insured amount to the owner of the ship. Later, the
insurer recovered a sum of Rs. 21 lakshs from the owner of the ship responsible for the
collision. Can he retain the sum insured?
Ans: The doctrine of subrogation entitles the insurer to all altenative remedies and rights.
Available to the insurer against the third-party. However, it is to be noted, that subrogation of
the insurer extends to the value insured and not more than that.
5. Mr. Prakash effected insurance on his goods against loss or damage by fire. Mr.
Prakash and his wife quarreled and the excited wife set fire and destroyed the goods.
Can Mr. Prakash recover under the policy? If yes, can the insurer sue the wife under the
doctrine of subrogation?
Ans: Mr. Prakash can recover the loss amount under the policy as the wife had set fire to the
goods without his approval. But the insurer cannot sue the wife under the principle of
subrogation, because there can be no subrogation of those rights which the insured himself
does not have. In this case, the husband himself cannot sue his wife for her act.
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6. Mr. Aakash contracted to buid a ship for Mr. Bunny for Rs. 5,00,000. All the
materials were to be supplied by Mr. Bunny. Can Mr. Aakash get all the materials
insured for the period of construction?
Ans: Yes. Mr. Aakash can get the materials insured because he has an insurable interest
therein, as he would suffer financial loss on the destruction of the materials.
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CHAPTER – 2
FIRE INSURANCE
1. Introduction
2. Fire Insurance Contract
2.1. Characteristics of Fire Insurance Contract
2.2. Distinction between Life Insurance and Fire Insurance
3. Types of Fire Policies
4. Rights of an Insurer in a Fire Insurance Policy
5. Rating of Fire Insurance Policy
6. Fire Claims
7. Termination of Fire Insurance Policicy
8. Solved Case Studies
9. Summary
10. Questions
FIRE INSURANCE
• Explain the importance of a fire insurance policy to cover against the risks of
fire.
• Explain the features and characteristics of a fire insurance policy.
• Differentiate between fire insurance and life insurance.
• Describe the intricacies in a fire insurance contract.
• Evaluate the different types of fire insurance polices based on the need.
• Explain the pricing fundamentals for rating fire insurance policies.
• Describe the process and procedure for fire insurance claims
• Explain the grounds for termination of fire insurance policies.
1. Introduction
Property Loss exposure refers to the inherent risks to which the different types of property
are exposed. The various risk exposures are natural calamities, fire, floods, theft, etc. All
general insurance policies seek to protect the insured from the financial consequences of
these risks. This Chapter deals with property loss exposures and the ways in which such
property loss exposures may be covered in practice. The various types of property include
Buildings, Personal assets, Money, securities, Motor vehicles , Property in transit, Ships ,
cargo, Boilers , machinery etc.
Causes of loss, or perils, that can damage or destroy property are sometimes listed in
insurance policies called “Named Perils” policies. Other policies called “Special Forms
coverage” or “Open Perils”, provide coverage for any direct loss to property unless the
loss is covered by a peril that is specifically excluded by the policy. The financial
consequences of a property loss can include:
• A loss of/reduction in the value of the property
• Loss to income because the property cannot be used
• Increased expenses
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It is to be noted that, in any loss situation, there are other parties, in addition to the
property owner, who might be affected by a property loss. These parties include secured
lenders, users of property and other holders of property.
Thus, any property either personal or commercial can be insured to mitigate the impact of
financial losses to the owner. These polices include all policies classified under the
general insurance category.
In the present Chapter Fire insurance is discussed in detail. Other Chapters will discuss
other types of policies.
2. Fire Insurance Contract

A contract of fire insurance can be defined as a property insurance agreement whereby
the insurer undertakes to compensate the financial loss suffered by the insured due to
damage or destruction of the insured property by fire or other specified perils, during a
stated period. Like other insurance contracts the general provisions of Law of Contract as
laid down in the Indian Contract Act, 1872 govern fire insurance contracts. It implies that
fire insurance also has to satisfy the essentials of a valid contract.
Definition of fire insurance
The Insurance Companies Act ,1958 of England defined fire insurance business as “the
issue of, or the undertaking of liability under policies of insurance against loss by or
incidental to fire”.
Section 2 (6) of the Indian Insurance Act, 1938 defines fire insurance business as “the
business of effecting, otherwise than incidentally to some other class of insurance
business, contract of insurance against loss by or incidental to fire or other occurrence
customarily included among the risks insured against in fire insurance policies”. From the
above definitions the test of fire insurance contract can be summarised thus:
It is a contract of insurance where -
• the primary object is insurance against loss or damage caused by fire
• the liability of insurer is limited to the extent of the sum assured or to the extent of
damage caused by fire, whichever is less
• the insurer has no interest in the safety or damage of the insured property other than
the liability undertaken.
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FIRE INSURANCE
Definition of Fire
The term fire in a fire insurance contract is used in its popular and literal sense. It means
the production of light and heat by combustion. Combustion occurs only at the actual
ignition point. Hence there is no fire without ignition. Loss or damage which occurs as a
result of putting out the fire would be covered by the fire risks. However, fire policies do
not cover the risk of fire caused by earthquakes, riots, civil commotion, foreign enemy,
rebellion. etc.
Causes of Fire
The cause of fire is immaterial. However, the loss is significant. Generally, the fire waste is
usually the result of two types of hazard:
1. Physical Hazard: It refers to the inherent risk of fire in the property which may occur due
to inflammable nature, construction, artificial lighting and heating, lack of extinguishing
applicances in the property, etc.
2. Moral Hazard: This hazard depends upon humans just as physical hazard depends on
the property. The property may be set on fire by the owner or by any other person with his
willingness, or carelesseness, and lack of sense of duty which may also increase the fire
waste. Sometimes when the market price is going down, the owner can willingly set on fire
the property to gain from the payment from the insurance company. Thus, when losses are
caused deliberately, moral hazard exists.
2.1 Characteristics of Fire Insurance Contract

The above discussion implies that a fire insurance contract like other general insurance
contracts has the following specific characteristics:
• It is a contract of indemnity
• It is a contract of utmost good faith
• It is a personal contract
• Generally the cause of fire is immaterial
• Existence of insurable interest
• It is an indivisible contract
• Subrogation and contribution
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2.2 Distinction between Life Insurance and Fire Insurance

Sl. Basis of Life Insurance Fire Insurance
No. Distinction
1 Types of contract The contract is a contract of It is a contract of indemnity
certainty
2 Occurrence of Death will certainly occur The fire may or may not
event occur
3 Period of insurance Policies issued for 10 to 20 Policy issued usually for one
years year
4 Insurable interest Insurable interest exists at It must exist from the date of
the time of taking policy the proposal to the
completion of the contract,
5 Protection and It includes elements of Includes only the element of
investment protection and investment protection
6 Premium Premium rates fixed on the Premium is determined
basis of nature of risk according to the type of risk
involved
7 Payment of Can be paid in monthly, Premium generally paid in
premium quarterly, half-yearly or lump sum at the time of
yearly installments taking the policy
8 Surrender value Policy can be surrendered Fire policies cannot be
and insured will get the surrendered at all
surrender value as refund
9 Moral hazard It is very nominal Degree of moral hazard is
maximum
10 Value of policy Life insurance can be issued Amount of policy cannot
for any policy amount exceed the total value of
goods or property insured
11 Indemnity of loss Law of indemnity does not It is a contract of indemnity
apply to life insurance as loss caused by uncertain
contracts event is compensated.
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FIRE INSURANCE
3. Types of Fire Policies

Fire policies can be of the following common types
1. Specific Policy: A specific Policy is one where the insurer undertakes to make good
the loss upto the amount specified in the policy, irrespective of the value of the property.
For example, if a property worth Rs. 20 lakh is insured for Rs. 10 lakhs, and the actual
loss is only Rs. 15 lakhs, he can only recover the actual loss if it is equal to or less then
the value of the policy, but if his loss is more than the sum insured, he can recover only
the amount of the policy.
2. Valued Policy: A Valued policy is usually taken when it is not easy to determine the
value of the property. For example, the value of works of art, pictures, sculptures, etc.
cannot be determined precisely and easily. In the case of total loss in a valued policy, the
insurer undertakes to pay the value of the property as mentioned in the policy or the
declared value irrespective of the actual or market value.
3. Average Policy: A fire policy containing an average clause is called as Average
Policy. In this policy, the insured is penalized for under-insurance of the property. In other
words, the insured is considered as self -insured to the extent of under-insurance.
For example: When a property worth Rs. 8 lakhs is insured for Rs.6 lakhs and the loss
caused by fire is Rs. 4 lakhs, the amount of claim to be paid by the insurer will be Rs. 3
lakhs, calculated as under:
Rs. 6,00,000 x 4,00,000 = Rs. 3,00,000
Rs. 8,00,000
The average clause applies only when there is under-insurance and a partial loss. It the
loss is total, the insured amount will be paid. For example, if in the above example, the
entire property is lost, then the claim that is admitted is
Rs. 6,00,000 x 8,00,000 = Rs. 6,00,000
Rs. 8,00,000
4. Comprehensive Policy: This policy undertakes full protection not only against the
risk of fire but also against the risk of burglary, riot, civil commotion, theft, damage from
pest, lightning, etc. The policy is also termed as All Insurance Policy. Comprehensive does
not however mean that every type of risk is covered.
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5. Adjustable Policy: This is a policy issued on the stocks of the businessman with
liberty to the insured to vary at his option. The premium is adjustable pro-rata according to
the variation in the stock. This policy is issued for the definite term on existing stock.
Whenever there is variation in the stock, the insured informs the insurer. As soon as the
information is received, the policy is suitably endorsed and the premium is adjusted on a
pro-rata basis. Thus, the policy amount changes from time to time.
6. Rent Policy: This policy protects the building owners against the loss of rent. If a
tenant does not pay rent because of fire, the insurance company will pay for such loss.
Such a policy may constitute a separate policy, or can be included within other forms of
cover and may be effected either by the owner, or tenant or by an owner – occupier.
7. Transit Policy: A Transit policy covers goods in transit from one place to another by
rail, road, air or sea transport. Under this policy the insurance company promises to make
good the loss or damage to merchandise while it is being moved.
8. Builder’s Risk Insurance: These policies are issued to protect against fire loss to
buildings, including machinery and equipment, in the course of construction and to
material incidental to construction. This policy is called as ‘Contractor’s risks’ or ‘contract
works risk policy’.
9. Excess Policy: This policy is suitable for those businessmen who deal in different
stocks of goods in their usual course of business and whose value of stocks also fluctuate
from time to time. Such businessmen take two policies namely Loss Policy and Excess
Policy. ‘Loss policy’ is taken for the minimum value of stocks which is held always. The
‘Excess policy’ is taken for the excess value of stocks which may be held at any time over
the minimum stock within a stipulated period.
10. Sprinkler Leakage Policy: This policy insures destruction or damage due to
accidental discharge or leakage of water, from automatic sprinklers installed in the insured
premises. However, the discharge or leakage of water due to heat caused by fire, repair or
alteration of building, sprinkler installation, earthquake, war or explosion are not covered
by the policy.
11. Blanket Policy: This policy is issued to cover several properties or all assets fixed
as well as at the current location of the insured under one insurance. More than one type
of property in one location or one or more types of properties at several locations can be
covered under this policy.
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12. Maximum Value with Discount Policy: This type of policy is taken for a maximum
amount and full premium is paid thereon. At the end of the year, in case of no loss, one
third of the premium paid is returned to the policyholder. Generally this type of policy is not
issued on all types of commodities and is confined only to selected commodities.
13. Consequential Policy: Under this policy, the insurer agrees to indemnify the
insured for the loss of profits which he suffers due to dislocation if his business as a result
of fire. This is also known as ‘Loss of Profits Policy’. This policy covers
• Loss of goods or property damaged
• Loss of net profits
• Outstanding expenses (interest on debentures, salaries, rent on building, etc)
• Prepaid expenses.
The following types of Fire Insurance policies are explained in greater details:
14. Standard Fire & Special Perils Policy
Scope & Coverage of Cover
The Standard Fire & Special Perils Policy can be issued to cover standard fire risks as
well as certain special perils. There are 12 different types of risks covered under the this
policy:
1. Fire
2. Lightning
3. Explosion / implosion
4. Aircraft damage
5. Riot, Strike, Malicious and Terrorism damage (RSMTD)
6. Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation
(STFI)
7. Impact damage by rail/ road/ vehicle or animal
8. Subsidence and landslide (including rockslide)
9. Bursting and/or overflowing of water tanks, apparatus and pipes
10. Missile testing operations
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11. Leakage from automatic sprinkler installations

12. Bush fire – damage caused by forest fire is excluded
The liability of the insurance company shall in no case exceed:
• In case of individual items – the sum insured (SI) for each item stated in the
schedule
• As a whole – the total sum insured (TSI)
Add-on-covers
With certain additional premiums, and subject to certain conditions and warranties, there
are 14 add-on-covers that can be availed such as:
1. Architects, Surveyors, and Consulting Engineers fees (in excess of 3% of adjusted
loss)
2. Cost of removal of debris (in excess of 1% of claim amount)
3. Deterioration of stocks in cold storage premises due to
— Power failure
— Change in temperature
4. Forest fire
5. Impact damage due to insured’s own vehicle, forklifts etc.
6. Spontaneous combustion including own fermentation and natural heating
7. Omission to insure addition/ alteration/ extensions
8. Earthquake (fire and shock) – India has four zones for rating purposes and hilly
terrain of the Himlayas are earthquake prone and come within the perview of Zone
1, next part is zone 2 and the coastal areas are mainly in zone 3 and the remotest
part from the Himalayas i.e. Tamilnadu comes under the safest zone i.e. zone 4.
9. Spoilage material damage cover – due to retardation or interruption of any process.
10. Leakage and contamination cover – applicable to oils and chemicals only.
11. Temporary removal of stocks – not exceeding 10% of S.I. under the policy.
12. Loss of rent – caused by operation of insured perils.
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13. Additional rent for alternative accommodation – caused due to operation of insured
perils, Start-up expenses.
14. Damage due to molten material spillage.
15. Start up expenses.
16. Terrorism damage.
General Exclusions
The Standard fire and special perils policy does not cover the following:
1. Five per cent of each and every claim –
- Subject to a minimum of Rs. 10,000/- in respect of losses arising from Acts of
God Perils
- Rs. 10,000/- for each and every loss out of other perils
The excess shall apply per event per insured.
2. Loss, destruction or damage caused by
- war
- ionizing/ radiation/ nuclear fuel or material
- pollution
3. Loss, destruction or damage caused to
- bullion, precious stones, works of art for an amount exceeding Rs. 10,000,
books of accounts, paper money, explosives etc. (to be specifically described
and valued)
- stocks in cold storage
- any electrical/electronic machinery/ appliances (fans, wiring due to short
circuit)
4. Loss of earnings, loss by delay, consequential loss etc.
5. Loss/ damage by spoilage, interruption/ cessation of any process
6. Loss by theft during or after the occurrence of an insured peril
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7. Loss by natural calamity

8. Loss due to temporary shifting of machinery for repairs, cleaning, renovation for a
period not exceeding 60 days
9. Expenses in excess of
- 3% of adjusted loss in respect of Architects, surveyors, engineers fees
- 1% of claim amount in respect of debris removal
15. Reinstatement Value Policies
‘Reinstatement’ simply means replacement of lost property or repairing damaged property.
The clause is related to the fire insurance policy of fixed assets like buildings, machinery,
furniture and fittings etc.
A reinstatement value policy is the standard policy with a value reinstatement clause. The
reinstatement clause of the policy states that in the event of loss, the payment to be made
to the insured will be the cost of reinstating the same kind of property by a new one. Unlike
a standard policy where the insured can recover only the depreciated value of the insured
property here the insured is entitled to recover the cost of replacing the lost or damaged
property.
The conditions governing the reinstatement by insurer are stated in Condition 7 of the
policy. The following points are considered in a reinstatement value policy:
• The insured shall intimate the insurer about his interest in reinstating the property
within the time allowed. Otherwise the loss is settled on indemnity basis.
• If the insured is not interested in reinstatement, the insurer is liable only for the
market value (or the depreciated value) of the property lost by fire.
• Until reinstatement is carried out and expenditure incurred, the insurer’s liability is
on an indemnity basis.
• The insured must carry on the process of reinstatement within a reasonable time
and complete it within 12 months after destruction of the property or within the time
stipulated by the insurer. If the insured fails to do so the insurer’s liability is on the
basis of market value.
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• The insured has to submit the plans, specifications and other details needed for the
reinstatement, to the insurer at his expense. In addition, when the insurer demands
for such plans it does not imply that he has chosen to reinstate the property.
• The insured may agree for reinstatement at a different site provided the insurer’s
liability doesn’t increase.
• The insurer after electing to reinstate should put the property considerably close to
what it was before the fire. He is liable for the damages if he fails to do so
(Braithwaite v.. Employer’s Liability Assce. Corp.).
16. Floating Policy
Floating policy is applicable to the inventory of the policyholder. Some traders have stocks
that are stored in more than one warehouse or lying in process blocks. They may not be
able to keep an account of these stocks on daily basis. Such traders can furnish the total
value of all the stocks to the insurer and obtain a floating policy of fire insurance. A floating
policy covers stocks located in various godowns in a single sum insured. Such policies
involve higher risk and therefore higher premium. The premium charged is the highest rate
chargeable to any one location with a nominal rate of loading. If the stocks are located in
the same compound no loading is charged on the premium. The premium may be loaded
by say 25% for three locations and 50% for more than 3 locations. (during 2007, after
detariffing, insurers were allowed to give a max. of 51.25% discount on the applicable
rates. Now, pricing and wordings and terms can be decided by individual insurers – after
clearance from IRDA)
Illustration 1
A trader has stocks stored in 3 godowns namely X, Y & Z. The premium chargeable
at different locations is given below:
Godown Rate of premium per ‘000
X Rs. 1.25
Y Rs. 1.75
Z Rs. 2.00
Sum assured Rs. 12,00,000
Since the highest premium is Rs. 2.00 per Rs. 1000 the premium chargeable is Rs. 2400.
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The loading is taken as 25% here because there are only three locations. So, the loading
is 25% of Rs. 2400 that is equal to Rs. 600. Thus, the premium payable is Rs. 25000.
General features of floating policy
• The policy is issued only for the stocks and does not apply to immovable properties
like machinery, furniture etc.
• The insured has to give the address of each godown. Any change in address should
be intimated to the insurer.
• The insured is required to have an efficient internal audit and accounting system that
can provide the total amount at risk and locations whenever required.
17. Declaration Policy
Declaration policy is a special policy related to stocks of the insured. It is issued in the
interest of those traders who deal in seasonal goods. The stocks may have fluctuating
values. During peak time the stock values are highest and during the slack season their
value is reduced. It is difficult to fix a sum assured for such goods. There may be over
insurance if the value is ascertained during peak season and under insurance if the value
is ascertained in the slack season. To overcome this problem, a declaration policy is
devised.
In the declaration policy the sum assured is selected by the insured on the basis of highest
stock value. On this value premium is computed provisionally and is paid as provisional
premium. Subsequently, the insured declares the actual stock value at risk every month.
Monthly declarations are based on (a) The average of the values at risk on each day of the
month or (b) The highest value at risk during the month. Declaration policies can be issued
only when the minimum sum assured is Rs. 1 crore and in respect of stocks, which are the
sole property of the insured. In policies covering stock in different locations – the sum
insured in at least one of these locations should not be less than Rs. 25 lacs.
Illustration 2
Sum assured Rs.5,00,00,000/-
Rate per 1000 Rs.1.20
Premium due Rs.60,000/-
Provisional premium Rs.60,000/-
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FIRE INSURANCE
Monthly declarations of stock values:

Jan 3,00,00,000
Feb 2,75,00,000
Mar 4,20,00,000
Apr 2,00,00,000
May 1,00,00,000
Jun 2,25,00,000
Jul 1,50,00,000
Aug 75,00,000
Sep 4,75,00,000
Oct 5,00,00,000
Nov 4,25,00,000
Dec 3,15,00,000
Total Rs. 34,60,00,000
Average sum insured is Rs.34,60,00,000/12 = 2,88,33,333.33
Premium on average sum insured at Rs. 1.20 per 1000 will be Rs.34600. Therefore, the
premium to be refunded is Rs.60,000 – 34,600 = Rs.25,400
The balance refunded to the insured shall not exceed 50% of the provisional premium.
The insurer is liable at the most to the sum insured and cannot receive any excess
premium.
Illustration 3
Let us assume that declaration for April is Rs.6,40,00,000, for May Rs.6,25,00,000 and on
June 6th the stock is destroyed by fire causing a loss of 13,00,000. Later it is found that
the actual declaration for May is 6,50,00,000. Then, the loss payable is calculated as
follows:
1300000
x 62500000 = Rs. 12,50,000
65000000
If the insured has taken any other policy in addition to declaration policy, then the claim is
settled first by the other policy. The declaration policy operates for the excess of the stock
value over the sum insured under the other policy.
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Illustration 4
Value of stock at the time of fire Rs.1,50,00,000
Loss assessed Rs. 15,00,000
Standard policy A incurred Rs. 50,00,000
Standard policy B Rs. 30,00,000
Declaration policy C Rs. 1,00,00,000
Now, when the loss occurs, policy A and B will be applied first. For the remaining loss if
any, the declaration policy C shall be applied. This is explained below.
Apply average Share of loss = Insured value/value of property*loss
50,00,000 × 15,00,000
A’s share = = 5,00,000
150,00,000
30,00,000 × 15,00,000
B’s share = = 3,00,000
150,00,000
It is clear that the loss remains even after receiving payments from A and B. The excess of
loss over the sum insured is the difference between the declared value and the policy
valued in A and B.
Declared value Rs. 1,50,00,000
Policy valued in A and B Rs. 8,00,000 (5,00,000 + 3,00,000)
Excess of loss Rs. 7,00,000 (15,00,000 - 8,00,000)
1,00,00,000
Therefore, C’s share = × 15,00,000 = Rs. 10,00,000
1,50,00,000
However, since the claim amount is only Rs.15,00,000, the liability under the Declaration
Policy will be limited to Rs.7,00,000.
If the stock values at the time of loss are collectively greater than the sum insured then the
insured shall be liable for the rateable proportion of the loss accordingly. This is known as
the prorata condition average.
The sum insured will be maintained at the same level at all times during the currency of
the policy. Even when loss occurs, prorata premium shall be charged on the amount of
loss paid.
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FIRE INSURANCE
18. Floater Declaration Policy

Floater Declaration Policies can be issued subject to a minimum sum insured of
Rs.2,00,00,00 and compliance with the rules of Floater and Declaration Policies
respectively except that the minimum retention should be 80% of the annual premium.
Discount in premium
The insurance company allows discount to those insured, where the insured take utmost
care and precautionary measures in preventing fire. For instance, the insured may be
entitled for a special discount if the insured installs a sprinkler (or other favourable
features) in the insured building.
Difference between Declaration Policy and Adjustable Policy
Sl. Declaration Policy Adjustable Policy
No.
1. Insurer’s liability is the insured’s last Insurer’s liability is the value of the last
declaration declaration of the amount
2. Periodical declarations have no direct Periodical declarations have direct
bearing on the measurement of bearing on the measurement of
indemnity indemnity
3. Maximum amount insured would be Risk cover is always for the declared
considered as risk during the period of value.
policy.
4. Declaration is meant only for the Declation is on the basis of policy
purpose of ascertaining the average of amount adjusted by endorsement.
the actual cover given throughout the
year to arrive at the figure to which the
actual premium will be calculated.
5. High premium is fixed at the beginning Premium is calculated according to the
for the maximum cover of risk. Excess variation of the risk and liability of the
premium if any, will be returnable at the insurer.
end of the year.
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19. Fire Loss of Profit/ Business Interruption Insurance Policy

Standard fire policy indemnifies the insured for the physical loss (material damage) to his
property caused by fire or other perils. The fire policy is intended to put the insured in the
pre-loss position so far as the material damage is concerned in respect of the insured
property including building, plant, and machinery, furniture and fixtures, stocks, etc., but
not the consequential loss arising out of business interruption due to accidental fire. The
fire consequential loss policy can be extended to cover loss of profit to the insured due to-
— Accidental failure of public electricity / gas / water supply
— Damage to customers’ premises due to perils covered under fire policy
— Damage to supplier’s premises due to perils covered under fire policy
The SI under consequential loss (CL) policy should represent the gross profit of the
indemnity selected. Thus, the coverage under the fire policy can be summarized as
follows:
• Fire insurance – covers capital loss ( property damage from operation of insured
perils)
• Consequential Fire Loss Insurance – covers loss of earnings/ gross profits (net
profits + standing charges), when both policies issued.
• Insured perils – same as standard fire policy
Capital Building, Machinery, Stocks Fire Insurance Policy
Variable expenses Raw materials, labour and Diminish with stoppage in
other variable expenses production
Fixed expenses Fixed overhead/standing Consequential loss profit
charges such as salaries,
interest, rent
Earnings Net profit Consequential loss profit
I. Example:
Before fire**After fire
• Turnover / Sales : 5,00,00,000 ** 2,50,00,000
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• Variable expenses: (70%) 3,50,00,000**(70%) 1,75,00,000

• Standing charges: (20%) 1,00,00,000** (40%) 1,00,00,000 (fixed)
• Net profit: (10%) 50,00,000 ** Net loss: (10%) 25,00,000
Here, standing charges and net profit cover 30 per cent of turnover. Loss of profit
policy is to cover the total of net profit and standing charges. Here total of net profit
and standing charges is Rs.1,50,00,000 and turnover is Rs.5,00,00,000, which is
equal to 30 percent of turnover. Hence, 30 percent shortage in turnover of Rs,
2,50,00,000) post fire loss is payable under the FLOP policy which is equal to
Rs.75,00,000 (30% of Rs.2,50,00,000), provided
• Policy is issued for full Sum Insured (Rs.1,50,00,000)
• Claim under the fire policy is admissible
• Indemnity is for full period.
Indemnification
Thus, the indemnity for the loss of interest insured shall be in respect of:
(i) Gross Profit, the loss actually sustained during the indemnity period resulting
from a reduction in turnover including any increased cost of working.
Or
(ii) Specific standing charges, the amount actually not earned during the
indemnity period resulting from a reduction in turnover including any increased
cost of working.
The indemnity shall not exceed the SI for the maximum indemnity period.
Sum Insured
The SI shall be the annual gross profit specified in the Schedule. Gross profit means
projected net profit plus the annual specified standing charges. Upto an indemnity
period of one year, the annual gross profit should be selected as SI. If the maximum
indemnity period exceeds 12 months, the gross profit or the specified standing
charges shall be prorata amount for that period. Thus, GP should be in proportion to
the indemnity period selected, i.e. for 18 months, 1 ½ times the annual gross profit,
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for 24 months – 2 times the annual gross profit, for 36 months – 3 times the annual
gross profit.
4. Rights of an Insurer in a Fire Policy

The following are the rights of an insurer in a fire insurance policy.
1. Right to avoid the contract.
2. Right of control over the property.
3. Right of entering the property.
4. Right of subrogation.
5. Right to salvage.
6. Right of reinstatement.
7. Right of contribution.
They are briefly explained as below.
1. Right to avoid the contract : In case the insured does not disclose any material fact
concerning the subject matter of insurance, the insurer can avoid the contract. This is
because a contract of fire insurance like other contracts of insurance is a contract of
utmost good faith.
2. Right of control over the property : The insurer has an implied right to acquire control
over the goods or property damaged or destroyed by fire. This is because, in the final
analysis, only loss under a fire insurance contract will have to be borne by the insurer who
should, for this reason, be entitled to get control over the damaged property to see if the
severity of loss could be lessened.
3. Right of entering the property : The insurer is entitled to enter upon the premises
insured or wherein the things insured are located. But in order to enable him to do so, the
insured is required to give an immediate notice of the fire with the particulars of damage
done.
4. Right of Subrogation : Upon paying the amount of loss to the insured, the insurer
steps into the place of the insured, taking over all his rights. For example, if the insured
receives any compensation from a third party, he will have to pay it to the insurer. His loss
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FIRE INSURANCE
has been made good by the insurer and therefore, any sum received by him from a third
party should be passed on to the insurer.
5. Right to Salvage : When the insured goods or property is destroyed or damaged by
fire, the insurer has got a right to take possession of the salvage i.e., the stock or property
saved after fire. This right of the insurer is absolute and flows from the contract of
indemnity.
6. Right of reinstatement : In case of damage or destruction of the subject matter, the
insurer has a right either to pay the amount of loss to the insured in cash or replace the
damaged or destroyed property in kind.
But this can be done
1. if the contract of insurance gives him the right to do so; or
2. if he suspects any fraud or arson; or
3. if he is requested to do so by a person other than the insured who owns or is
otherwise interested in the premises damaged by fire.
7. Right of Contribution : This right arises when the same subject matter has been
insured with two or more insurers. Thus, if in case of loss, one of the i insurers has made
full payment to the insured, he can claim rateable contribution from his co-insurers.
5. Rating of Fire Insurance Policies

In today’s tariff free regime, the underwriters have classified fire risks and policies into two
categories for effective underwriting and uniform rate-making by line underwriters and
corporate (nominated) underwriters. They are class-rated policies and individual
experience-rated policies.
(i) CLASS-RATED POLICIES
All risks with a Sum Insured of less than approximately Rs.5 crore, fall under this category.
These policies are to be rated by the line underwriters as per the internal guide rates as
decided by the corporate underwritiers according to the analysis of corporate data bank
and reinsurance treaty terms, conditions and rates. It is also to be noted that in all
proportional reinsurance treaties, the reinsurer is generally interested in the rates, terms
and conditions in the policies issued by the direct insurer.
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The ratings of these policies are generally done as follows:

Method
(a) Rate as per internal guide tariff
(b) Less: Discount for deleting STFI and /or RSMD perils
(c) Scheduled rates (a – b)
Less: (i) For standard construction and/or
(ii) Favourable claims experience
(d) Final rate or merit rate (c-d)
(i) Common practice of discount as per underwriting policy of the company
• Discount for deleting STFI & RSMD perils: 15% & 10%
• Discount for standard construction : 10%
• Discount for favourable claims experience: 10% to 5%
(ii) Claims up to 40%: Discount 10%
(iii) Claims between 40% and 60% : Discount 5%
Note:
STFI – Strike, Typhoon, Floods, Inundation
RSMD – Riot, Strike and Malicious Damage
Example
1. X Ltd. is a biscuit factory situated in Pune. Class rate for biscuit factory is say
Re.1.00 as in Pune, the probability and severity of perils like storm, floos, an
typhoon, inunation an riot, strike and malicious damage is very less. The client does
not want to cover these perils and the average claim experience is only 30 percent
for the last 5 years. What will be the appropriate rate for the fire policy to be issued
for a SI of Rs. 5 crore. As the SI is 5 crore only, it will be class rated fire policy for
which the line underwriter may decide rate according to the given situation of the
client. Following may be the order of rate making in this case:
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FIRE INSURANCE
1. Class rate : Re.1.00

2. Less :Discount for STFI and RSMD deleted (0.15 + 0.10): 0.25
3. Schedule rate : 0.75
Less: Discount for standard construction : (10% of 0.75): 0.075
Discount for favourable claims experience : 10% 0f 0.75): 0.075 = 0.15
4. Final or merit rate = 0.75 – 0.15 = 0.60
(ii) INDIVIDUAL EXPERIENCE RATED POLICIES
All risks having large SI ( say Rs.5 crore or more) or critical/ uncommon risks are to be
rated by nominated or corporate unerwriters. Line underwriters are to refer all such risks to
the nominated underwriters with proper risks analysisas per the corporate risk
management policy.
Considerations
These risks shall be rated by the corporate underwriters at an appropriate level,
depending on the SI with due considerations of the aspects for such types of risks:
• Corporate underwriting policy
• Nature of risks in view of probability and severity of loss
• Corporate claims experience , if any
• Industry claims experience, if any
• International claims experience given by reinsurer
• Reinsurance programming and arrangement – treaty or facultative
• Reinsurers’ guidance, if any
6. Fire Claims
In the event of fire, the insured must immediately give the insurer a notice about the loss
caused by fire. A written claim should be delivered within 15 days from the date of loss. In
addition, the insured is required to furnish all plans, invoices, documents, proofs and other
relevant information required by the insurer. If the insured fails to submit these documents
within 6 months from the date of loss the insurer has the right to consider it as no claim.
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Procedure on receipt of claim

On receipt of the claim the insurer verifies whether the following essentials of a valid claim
are satisfied or not:
(Practically, first a surveyor should be appointed after obtaining the claim form or send
even an oral intimation. Time is of essence in not losing crucial evidences of a fire
accident. If the claim is major it can be a preliminary survey. Only the surveyor gives his
opinion in his report whether the claim is admissible or not)
• The cause of fire should be an insured peril. When fire is caused by more than one
reason the dominant reason should be an insured peril
• The operation of the peril should not be an exception
• The fire caused by insured peril should result in a loss or damage of the property
insured
• Such a loss should occur during the time the policy is under operation
• The insured has to carry out all the terms and conditions of the policy and should
also fulfil the post-claim requirements.
Claim form: If the claim arises in a new insurance or closely after the renewal of the
policy the insurer observes close proximity. This necessitates an extra investigation of the
circumstances. When these conditions are complied with, a claim is registered and a claim
number is allotted for future reference. The claim register records all the details of the
claim like date of fire, policy number, name of the insured etc; a claim form is issued to the
insured after registration. It requires details like
1. Name and address of the insured and the policy number
2. Date, time, cause and circumstances of the fire
3. Details of damaged property
4. Sound value of the property at the time of fire
5. Amount claimed after deduction of salvage value
6. Situation and occupancy of the premises in which the fire occurred
7. Capacity in which the insured claims, as owner, mortgagee etc.
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FIRE INSURANCE
8. Whether any other person is interested in the property damaged

9. Whether any other insurance is in force upon such property, if so details thereof.
10. Whether reported to Fire Brigade and if so, their report. For all fire claims, where
actual fire has taken place, fire brigade report is a must. It is like an FIR for an
accident claim.
The insured completes the form, signs the declaration given in the form as to the
truthfulness and accuracy of the information and returns the same. The issue of the claim
form is in no way deemed to be an acceptance of liability by the insurer.
In-house survey: In-house survey is applied to the uncomplicated claims involving small
losses. An official employed by the insurer investigates such small and simple claims. On
the basis of the claim form and the investigation report the company settles the claim.
Independent surveyor: For large claims the insurance company employs independent
loss surveyor and assessors to investigate and report on the cause and extent of claim. As
per the Insurance Act 1938, a licensed surveyor must survey all claims of Rs. 20,000/- and
above. (IRDA increased the limits to 50,000 after Gujarat floods for a limited period of 2
months).
The surveyor interviews the insured and other persons, inspects the damaged premises
and examines the documents submitted by the insured. After the initial investigation he
submits his first report to briefly point out –
• The date of loss
• Situation of loss and the details of the occupancy at the time of loss
• The cause of the loss if ascertainable
• A preliminary estimate of the loss or damage
• Any other relevant information.
The preliminary report submitted by the surveyor assists the insurer in discussing the
issue with the insured if required. The surveyor may also submit such a report to take the
guidance and instructions from the insurer to overcome the problems of assessment. The
surveyor also submits the interim reports to notify the insurer about the progress in loss
assessment in respect of the specific feature of the loss such as laboratory reports,
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analysis reports etc. Finally, the surveyor submits his final report to the insurer. He can
only recommend. He is not authorised to admit any liability.
Scrutiny: The insurer scrutinises the final report and all the supporting documents like
final bills of repairs, photographs etc., and attachments like fire brigade reports, police
reports, etc.
Adjustment of loss: The next step is to sanction the claim for payment. The insurer
sends a discharge voucher to the insured. All the persons named in the policy as insured
sign and return it to the insurer.
Burden of proof
As per the provisions of the Evidence Act, 1872, “the burden of proof as to any particular
fact lies on that person who wishes the court to believe in its existence.” Therefore, the
burden of proof lies on the insured to prove that he incurred a loss that was caused by an
insured peril. However, if under any circumstances the insured caused the loss, the
burden is on the insurer to prove that the insured himself caused the loss.
7. Termination of Fire Insurance Policy

Insurance under a fire insurance policy may cease where:
• The insured is guilty of misrepresentation, mis-description or non-disclosure of any
material facts.
• The insured building structure or part thereof is destroyed by reasons other than an
insured peril, (on the expiry of seven days there from).
• The company terminates the contract on 15 days notice to the insured on the
request of the insured.
• Where the insurable interest of the owner ceases after the commencement of the
policy.
8. Solved Case Studies

Case Study 1
XYZ Ltd., a manufacturer of pharmaceutical products, took a consequential policy (FLOP)
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for SI of Rs. 1,11,50,000 (gross profits). A fire occurred on 7.3.2015, causing material
damage of Rs.20.50 lakh payable under standard fire policy. The surveyors have collected
the following details for determination of loss under the fire loss of profit policy:
Business trend: Increase 12%
Period of Insurance : 01.01.20015 to 31.12.2015.
Indemnity limit : 6 months, time excess: 3 days
Occurrence of incident : 07.03 2015 at 17.05 hours
Completion of repairs: 15.04.2015 at 17:00 hours
Interruption period: 24-25 days in March and 14-17 days in April, Total : 39 days
Other information collected in this regard:
(i) Net turnover (2014): Rs.3,13,29,000
(ii) Turnover (March and April, 2014) : Rs.26,74,500 and Rs.27,05,900
(iii) Expenses for loss minimization : Rs.20,500
(iv) Reduction insured costs: Rs.6,060.
(v) Actual turnover during interruption: Rs.39,93,100
(vi) Opening Stock: Rs.25,80,000
(vii) Raw materials : Rs.2,11,62,000
(viii) Other expenses : Rs.2,18,000
(ix) Closing stock: Rs.26,83,000
Solution
Calculation of loss of profit (M/S XYZ Ltd.)
Trading account for the year ended on 31.12.2014
Opening Stock: 25,80,000 Turnover : 3,13,29,000
Raw Materials : 2,11,62,000 Closing Stock: 26,83,000
Other expenses: 2,18,000
Gross profit (A) : 1,00,52,00
3,40,12,000 3,40,12,000
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Note: To arrive at LOP amount, the following calculations are essential

— Gross Profit ratio
— Loss of profit due to reduction in turnover
— To adjust turnover with the trend
(i) Gross Profit ratio: 1,00,52,000 / 3,13,29,000 x 100 = 32.1 %
(ii) Turnover for March & April 2014: 26,74,500 + 27,05,900 = Rs.53,80,400
(iii) Adjusted Turnover (with increase trend @12% ) = Rs. 60,26,048
(iv) Actual Turnover interrupted (March and April 2015) = Rs. 39,93,100
(v) Reduction in turnover (D – E) = Rs.20,32,948
(vi) Loss of gross profit : (reduction turnover × GP rate) = (20,32,948 × 32.1%) =
Rs. 6,52,576
(vii) Actual Loss suffered: 6,52,576 + 20500 – 6,060 = Rs. 6,67,016
Is it admissible?
Loss as calculated above is to be adjusted with turnover trend, time excess, under-
insurance, etc. as shown below:
Time excess : 3 days
Gross profit loss : 24.25 + 14.75 = 39 days
Loss for 3 days : 6,67,016 – 51,309 = Rs.6.15,707
Now verify under-insurance
Annual turnover (as per last account) :Rs. 3,13,29,000
Adjusted turnover with increase trend 12%: Rs.3,50,88,480
Gross profit @ 32.1% on Rs.3,50,88,480 : Rs.1,12,63,402
It is under insurance as Rs.1,12,63,402 is more than SI of Rs. 1,11,50,000
Admissible claim: Rs.6,15,707 x 1,11,50,000/1,12,63,402 = Rs.6,09,508
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Case Study 2
X. Ltd. took a fire policy covering machinery, building and stock for Rs.4,00,000 and Rs.
3,00,000, respectively and a FLOP for Rs. 1,00,000 for an indemnity period of 6 months
for the policy period from 1.1.2005 to 31.12.2005. On 1.4.2005, a fire occurred causing
damage to property and turnover was severely affected for 3 months. The surveyor
assessed the loss of machinery and building at Rs. 2 lakh and Rs. 1 lakh respectively, but
loss of stock and loss of profits are yet to be calculated.
Ascertain claim under the fire policy and FLOP policy with the following data:
(a) Particulars of revenue items:
Turnover during 1.1.05 to 31.3.05 2,50,000
Purchase during 1.1.05 to 31.3.05 3,00,000
Manufactured expenses during 1.1.05 to 31.3.05 70,000
Turnover during 1.4.05 to 30.6.05 87,500
Standing charges insured 50,000
Actual expenses incurred after fire 60,000
(b) The general trend is an increase in turnover around 15% but decrease in GP by 5%
due to the increased cost. Turnover includes production and sales.
(c) Trading and Profit and Loss account for year ended 31.12.2004
Opening Stock 20,000 Sales and turnover 10,00,000
Purchase 6,50,000 Closing Stock 90,000
Manufacturing expenses 1,70,000
Gross profit 2,50,000
10,90,000
Administration expenses
Selling expenses _________
Interest 10,90,000
Net Profit
Ans: Value of stock damaged is Rs.2,60,000. Turnover shortage is Rs. 2,12,500.
Adjusted GP ratio is 5 %. Adjusted annual turnover is Rs. 11.50,000. Claim for loss
of profit is Rs. 15,000.
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Case Study 3
In July 2005, due to the floods in Mumbai, a reputed Multinational Shoes manufacturing
company’s various showrooms and depots were affected. They have incurred a total
loss of round 15 Crores.
Insurance Coverage
The insured had taken one Policy which mentions the value of stocks and furniture and
fixture for each locations and the address of all locations was specifically mentioned in
the policy. Subsequently they have made several endorsements to cover or delete
some locations and after cross checking the locations physically, in insurance policy
and the agreements the insurer disallowed the locations, which were not covered under
the policy. But there was one location of Mumbai, Bhiwandi Depot, which was changed
from present godown location to new godown location in the same compound; based
on this fact the insured had intimated the insurers and they had also written that they
were in the process of shifting. The insurers made an endorsement to such effect. As
the loss occurred in both the godowns, it is the duty of the surveyors to present such
facts in the report and give alternative at their discretion. The insurer may or may not
allow the loss due to two reasons:
(a) The insured was in the process of shifting
(b) The loss occurred in both godowns
Physical Inventory
During the course of survey, the insured had segregated the stocks according to their
condition (i.e. safe/damaged) and we conducted the complete inventory of safe and
damaged stocks (model wise) and also noted the MRP from all location. Around 40
days were taken for completing this procedure. This physical inventory ultimately was
compared with stock records and it became the basis of loss assessment.
Valuation of Stocks
We conducted the complete inventory of total stock, (safe and damaged) with the
MRP/WSP rates for each of the affected articles (location wise) ; on further verification
of documents provided by the insured, we noticed the cost involves 70% of MRP
(Maximum Retail Price) and 90% of WSP (Whole Sale Price). Accordingly, while
making calculations, we have also taken into account the WSP & the MRP
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FIRE INSURANCE
1. WSP is the rate taken into account by the Whole Sale Depots.
2. MRP is the rate taken into account by the retail shops and RDC.
We have taken the above said facts for our calculation of loss as well as the value at risk.
Under Insurance
The insured had taken one policy to cover all the show rooms and depots all over India.
Hence we have computed the value at risk as well as the loss assessment location wise.
Disposal of Salvage
The salvage was disposed off through tendering process. The insured had given an
advertisement in three national daily news paper and two local dailies and called for bids
with 10% of EMI. Thereafter the sealed bids were opened in the presence of Surveyor,
insured and the representative of underwriters and all others concerned and the bid was
given to the highest bidder and through this process the maximum salvage value was
realised. Typical problem was faced when cartel was formed by the bidders, which could
only be solved by re-bidding process.
Dead Stock Factor
Surveyor initially proposed 5% dead stock factor, but ultimately deducted the dead stock
factor @2.5% based on the actual data made available by the insured from their system.
Case Study 4 : Limitation Period is Key to Insurance Claims
Limitation period means the time within which a person must file his case before a judicial
authority for exercising his rights. This period is to be calculated from the date of the
cause of action. This term does not have any definition, but it is well settled that “cause of
action” is a mixed question of fact and law. It has consistently been held that for insurance
disputes, the cause of action starts from the date of rejection of the claim.
Yet, a recent judgment of the Supreme Court is being misinterpreted out of context to
claim that the date of rejection of the claim is irrelevant as the limitation period starts from
the date of the incident or occurrence of loss in respect of which the claim is lodged.
Consequently, consumers are at the receiving end as any complaint filed after two years
of the date of the incident is being rejected as time barred without considering the date of
rejection of the claim.
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The law:
The manner of computing the limitation period for insurance claims is given under Article
44 (b) of the Limitation Act 1963, which states that time is to be calculated from “the date
of the occurrence causing the loss, or where the claim on the policy is denied either partly
or wholly, the date of such denial”.
In Sirpur Paper Mills Ltd. v. National Insurance Co. Ltd. [ (1997) II CPJ 36 (NC)] the five
member Bench of the National Commission has interpreted the law on the subject. A fire
had occurred in October 1986. The claim was rejected in November 1986. The insured
made representations to the insurance company which appointed a surveyor who
submitted his report in April 1989. The insurance company slept over the claim and
ultimately rejected it in August 1994. Aggrieved by the rejection of the claim, the insured
filed a consumer complaint in 1995. The issue before the National Commission was
whether the claim was time barred or not. The Commission held that since the claim was
under consideration by the insurance company, it would be just and fair to consider that
limitation would begin to run from the date of final rejection of the claim.
In Oriental Insurance Co. Ltd. v. Prem Printing Press [ (2009) I CPJ 55 (SC)], a similar
issue came up. After the claim was rejected, the insured sent representations to the
insurance company to review the claim. The insurance company agreed to reconsider it,
and later re–affirmed the rejection. The question was whether the starting point for
computing the limitation period would be the date of first rejection or the final rejection.
The Supreme Court observed that by stating that the matter was under fresh
consideration, the insurance company had “dangled a carrot of hope”, because of which
the insured had not taken legal action. Hence, the limitation period cannot be computed
from the date of the original rejection of claim, but would have to be calculated from the
date when the claim was rejected for the second time after reconsideration.
The judgment being mis–interpreted: In Kandimalla Raghavaiah & Co. v. National
Insurance Co. Ltd. & Anr. [(2009) III CPJ 75 (SC), a fire had occurred in March 1998.
Although the insured intimated the insurance company about the fire, the claim was not
lodged for years together. The insured asked for the claim form in November 1992 after
four and half years. As the insurance company ignored the request and did not issue the
claim form, the insured filed a consumer complaint in the year 1997. The Supreme Court
held that the cause of action should be taken to have arisen on the date when the incident
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of fire occurred and the limitation period would begin to run from that date and accordingly
held that the complaint was time barred.
Observations:
One sentence from the judgment in the case of Kanimall Raghavaiah is being picked up
and misquoted to argue that in insurance matters, the limitation period would run from the
date of the accident and not the date of rejection of the claim.
What is lost sight of is the fact that in Raghavaiah’s case, the claim itself was not lodged
and hence there was no question of repudiation of the claim and it is in this context that
the Supreme Court held that the cause of action would run from the date of the incident
when the fire occurred. The well settled principles of law ought not to be given a go–by in
view of the peculiar facts in Raghavaiah’s case. If a claim is settled, there is no cause of
action; whereas if it is rejected, the insured is aggrieved and thus the rejection of the claim
gives rise to a cause of action for initiating legal proceedings. Hence limitation has to be
construed from the date of rejection of the claim.
Impact:
The misinterpretation of Raghavaiah’s case is playing havoc with regard to insurance
claims. Unless the law and facts are properly distinguished, consumers will continue to
find themselves at the receiving end with genuine complaints being thrown out as being
time barred.
Case Study 5
Deokar Exports Pvt. Ltd. v. New India Assurance Co. Ltd. (2001) II ACC 364, AIR 2001
Bom 327; 2001 (4) BomCR 526
1. A few facts
Sometime in August, 1986, the Appellant imported Onion Dehydration Machinery.
This was financed by Maharashtra State Finance Corporation (MSFC). MSFC
arranged for Marie-cum-Erection Policy for 18 months period from 12-9-1988. The
said policy expired on 12-3-1988. On 25-8-1988, MSFC requested the respondent
for renewal of the said policy by letter dated 25-8-1988. Cheque for premium of Rs.
3135/- was also sent. By the said letter, the respondent was asked (i) to renew the
policy and (ii) to issue stamped receipt for the premium paid. This was received by
the respondent on 26-8-1988. The respondent on 26-8-1988 issued a stamped
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receipt recording receipt of the premium. On 7-4-1989, the respondent wrote a letter
to the appellant pointing out that MSFC, Nasik has deposited an amount of Rs.
3135/-towards the premium for fire policy covering the machinery. A standard form
for the fire insurance came to be sent. This was received by the appellant on 16-6-
1989. The appellant filled the same and sent it back to the respondent. It specifically
mentions in para 11 that the period of insurance is from 12-3-1988 to 12-9-1989.
This was received by the respondent and the fire policy came to be issued on 30-6-
1989 covering the risk of fire from 26-8-1988 to 25-8-1989. The policy was sent to
MSFC as it was acting on behalf of the appellant.
2. Fire took place on 10-2-1990 and the machinery was damaged. The appellant orally
informed this to the respondent and intimated in writing to the respondent on 17-2-
1990. By letter dated 18-4-1990, the respondent declined to make payment on the
ground that the insurance cover was from 26-8-1988 to 25-8-1989. On the date of the
fire, there was no insurance in existence and hence it was not liable.
3. The appellant sent the legal notice to the respondent on 8-1-1991, but there was no
reply. The appellant then approached National Consumer Disputes Redressal
Commission (for short NCDRC) on 20-8-1991 under the Consumer Protection Act,
1986. However, on 23-9-1992, the said Commission held that there was no deficiency
in service on the part of the respondent as according to the respondent on 10-2-1992
the insurance policy was not in force. Therefore, it was dismissed with liberty to the
appellant to resort to any other remedy that may be available.
4. Thereafter the appellant filed an appeal against the said order before the Supreme
Court but the Supreme Court declined to interfere by order dated 29-1-1993.
5. The appellant then filed civil suit on 29-4-1993 claiming damages for the loss suffered
by the appellant. It was averred that the fire policy was for one year. It was actually
issued by the respondent on 30-6-1989. Hence, the contract of insurance came into
existence on that day and was valid for one year thereafter. Hence, it was in force
from 30-6-1989 to 29-6-1990. The fire had taken place causing damage on 10-2-1990,
Therefore, the respondent was liable.
6. On behalf of the respondent, it was contended that the policy has come to an end
already. It was in force from 26-8-1988 to 25-8-1989. It was not in force on 10-2-1990.
Therefore, there was no liability on the part of the respondent. It was also contended
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FIRE INSURANCE
that the suit was barred by limitation and it was bad for mis joinder of necessary
parties. It was also contended that the suit was barred by the principles of res
judicata.
7. The suit came to be heard by the learned Civil Judge, Senior Division, Nasik. He held
that the said Insurance policy was in force on 10-2-1990 as it was for one year
commencing from 30-6-1989. Consequently, it was held that the respondent was
guilty of breach of contract. The appellant was entitled to recover damages of
Rs. 26,91,130/- along with interest at 21% per annum. The contention raised on
behalf of the respondent that the suit was bad for non-joinder of necessary party (i.e.
MSFC) was negatived. The contention raised on behalf of the respondent that the suit
is hit by the principles of res judicata was also negatived. However, the contention
raised on behalf of the respondent that the suit was barred by limitation came to be
accepted. Hence, the learned Judge by his judgment dated 16-9-1999 dismissed the
said suit.
8. Being aggrieved the appellant has filed this appeal and the respondent aggrieved by
the findings recorded against it has filed cross-objections.
9. In view of the contentions raised by the learned counsel, the following points arise for
our consideration :--
(i) Whether the suit is barred by limitation?
(ii) Whether it is hit by the principles of res judicata ?
(iii) Whether the suit is bad for nonjoinder of the necessary party ?
(iv) Whether the insurance policy was in existence on the date of fire i.e.
10-2-1990 ?
(v) What order?
10. Our findings are :--
(i) The suit is within limitation
(ii) to (iv) No.
11. Appeal dismissed. Cross-objections partly allowed.
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12. While dealing with the question of limitation, the learned Judge of the trial Court held
that the appellant was not entitled to get the benefit of Section 14 of the Limitation
Act, 1963 as it cannot be said that the respondent has approached the National
Consumer Disputes Redressal Commission bona fide or in good faith. He held that
the appellant has deliberately chosen the said Forum which was not competent one.
The learned counsel for the respondent tried to support this reasoning. On the
contrary, the learned counsel for the appellant has relied upon the judgment of the
Apex Court Saushish Diamonds Ltd. v. National Insurance Co. Ltd. and contended
that the suit was within limitation.
13. We may note that on 10-2-1990, fire broke out and the machinery was damaged. The
respondent was immediately informed orally by the appellant. However, the
respondent was informed in writing on 17-2-1990. Correspondence followed between
the "parties. The respondent declined to pay the claim of the appellant on 18-4-1990.
The appellant approached the said NCDRC on 20-8-1991. The same was decided by
the said forum on 23-9-1992. It came to be rejected on the ground that considering
the contention of the respondent there was no deficiency in service. Therefore, it has
no jurisdiction and appellant can avail of any other remedy available. Article 44(b) of
the Limitation Act, 1963 provides three years limitation from the date of occurrence
causing loss or where the claim on the policy is denied the date of such denial.
Section 14 deals with exclusion of time of proceeding bona fide in Court without
jurisdiction. Section 14(1) is as under :--
14. Exclusion of time of proceeding bona fide in Court without jurisdiction.-- (1) In
computing the period of limitation for any suit the time during which the plaintiff has
been prosecuting with due diligence another civil proceeding, whether in a Court of
first instance or of appeal or revision, against the defendant shall be excluded, where
the proceeding relates to the same matter in issue and is prosecuted in good faith in a
Court which, from defect of jurisdiction, or other cause of a like nature, is unable to
entertain it."
Considering the above position, it cannot be accepted that the resort by the
appellant to the said forum of NCDRC was not in good faith or bona fide or it was
deliberately chosen knowing fully well that it was incompetent to deal with it. The
order passed by the said Forum shows that the appellant has approached the said
Forum bona fide and hence the respondent was permitted to avail of any other
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remedy available. At the most, it may be said that the further steps by the appellant
of going before the Apex Court by filing S.L.P, was not in good faith. However, in
view of Section 14(1) of the Limitation Act, the appellant is entitled for exclusion of
the period from 20th August, 1991 to 30-9-1992. The learned counsel for the
respondent has rightly relied upon the judgment in the matter of Saushish Diamonds
Ltd. v. National Insurance Co. Ltd. . In the said case, precisely the same position
concurred. The appellant had approached the National Commission for Consumer
Redressal. The said Commission in its order held that the Insurance Company has
repudiated the claim. Hence, the relief cannot be granted by it. This order came to
be challenged before the Apex Court. It was observed as under :-
"..... Under these circumstances, the Commission rightly relegated the parties to a
civil action. It is true that limitation has run out against the appellant during the
pendency of the proceedings. Therefore, the time taken between the date of the
filing of the claim before the Commission and the date of its disposal, namely, 28-9-
1995 would be considered by the Civil Court for exclusion under Section 14 of the
Limitation Act, 1963."In view of the above position, we hold that the suit filed by the
appellant was within limitation.
15. It is next contended that the appellant has approached NCDRC making the same
claim and the claim came to be dismissed by the said Forum. Therefore, it is
contended that this suit is hit by the principle of res judicata. We find that the learned
trial Judge has rightly negatived this contention. We have already pointed out that the
said Forum dismissed the application filed by the appellant in view of the conclusion
reached by the respondent that the said insurance policy was not in force on 10-2-
1992 and hence it cannot be said that there was any deficiency in service. Therefore,
it was held that the said Forum was having no jurisdiction and it came to be dismissed
on that limited ground giving liberty to this appellant to pursue any other remedy
available. Considering this position, the provisions of Section 11 of C.P.C. are not
attracted as the question regarding the liability of the respondent to pay damages
under the Insurance Policy, was not decided.
16. The learned counsel for the respondent then contended that the suit ought to have
been dismissed in view of the non-joinder of the necessary party. According to the
learned counsel for the respondent. MSFC should have been joined as a necessary
party to the present suit. As it was not made a party, the suit ought to have been
97
dismissed. It is not possible to accept this. We find that the learned trial Judge is right
in holding that the suit was not bad for nonjoinder as MSFC cannot be said to be a
necessary party. There is no dispute that MSFC was only a financier. It has financed
the transaction of purchase of machinery by this appellant. It was acting as an agent
of the appellant. When the machinery was damaged by fire, the real claimant was the
appellant and the claim was against the respondent. There was no claim against
MSFC. The claim of the appellant arose because the respondent has undertaken to
pay the loss in case of fire to the machinery belonging to the appellant. There was no
liability of MSFC under the said insurance policy. Hence, MSFC was not a necessary
party.
17. The learned counsel for the respondent contended that the trial Court has committed
an error in coming to the conclusion that the policy was in force on 10-2-1990. He
submitted that it was an error to hold that the appellant came to know about the
acceptance of the proposal when the policy was issued on 30-6-1989 and, therefore,
assumption of risk will start to run from 30-6-1989 and as the policy was for one year,
it was in existence on 10-2-1990. He submitted that the trial Court has committed an
error in relying upon the judgment of the Apex Court reported in 1984 Acc. CJ 345 :
(AIR 1984 SC 1014), Life Insurance Corporation of India v. Raja Vasireddy
Komalavalli Kamba and the other delivered by one of us (P. S. Patankar, J.), Oriental
Fire and General Insurance Co. Ltd. v. Panvel Industrial Co-operative Estates Limited.
He submitted that those judgments have no application in the present case date of
assumption of risk has nothing to do with the date of conclusion of the contract or the
issuance of the policy. The learned counsel for the respondent supported the
reasoning given by the trial Court and also relied upon the two Judgments cited
above.
18. First we shall examine the two judgments on which the trial Court has relied upon
(cited above). In the Apex Court judgment of the LIC of India (1984 Acc. CJ 345 : AIR
1984 SC 1014), the question was relating to the life insurance. In the said case, one
Raja Vasireddy died on January 12, 1961. He had filed the proposal on 27th
December, 1960. He was also medically examined on that day. Two cheques for two
premiums were issued by him. The cheques were accepted without demur or
qualification. One was encashed by the Life Insurance Corporation on 29th
December, 1960. The other was initially dishonoured but it came to be honoured on
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11-1-1961. On 16-1-1961, the widow of Raja Vasireddy made a claim. However, the
Corporation denied its liabiity. According to the Corporation, those amounts realised
of the cheques were put by the Corporation in the Suspense Account and not adjusted
towards the premium. The policy was not issued though prepared. Therefore, it was
contended that there was no acceptance of the terms of the insurance contract ? and
the proposal cannot be said to have been accepted. In the light of those facts, the
question arose whether there was a concluded contract of insurance or not. The
Supreme Court laid down that the expression ‘underwrite’ signifies ‘accept liability
under’. Acceptance must be signified by some act or acts agreed upon by the parties.
It was held that as there was no acceptance as contemplated by Section 7 of the
Contract Act, there was no concluded contract of insurance. It was held that mere
receipt and retention of premium even for a long time is not acceptance and cannot
give rise to a contract. In view of this, the Apex Court reversed the judgment of the
High Court. It was observed as under (Para 15 of ACJ: Para 14 of AIR) :--
19. Though in certain human relationships silence to a proposal might convey acceptance
but in the case of insurance proposal, silence does not denote consent and no binding
contract arises until the person to whom an offer is made says or does something to
signify his acceptance. Mere delay in giving an answer cannot be construed as an
acceptance, as, prima facie, acceptance must be communicated to the offerer. The
general rule is that the contract of insurance will be concluded only when the party to
whom an offer has been made accepts it unconditionally and communicates his
acceptance to the person making the offer. Whether the final acceptance is that of the
assured or insurers, however, depends simply on the way in which negotiations for an
insurance have progressed. . . ."
20. In the case of Oriental Fire and General Insurance Co. Ltd. (cited supra), Section 64-
VB of the Insurance Act, 1934 and Sections 7 and 8 of the Contract Act, 1872 were
considered. The question related to fire insurance. In that case, agent accepted the
cheque towards the premium covering the sheds and also promised to issue cover
note after inspection of the premises. No proposal form was submitted by the insured.
The premises caught fire and extensively damaged. One of the questions involved
was whether mere payment of premium amount and its acceptance by the insurance
agent can amount to concluded contract of insurance. It was answered in the
negative. Section 64-VB(1) was considered and it was observed-
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"In my view, the object of the said section is to secure advance payment of premium
by the Insurance Company before the assumption of risk. Section 64-VB(1) places a
prohibition upon the insurer that unless and until it receives the payment of premium
or the same is guaranteed to be paid in a particular manner and within a particular
time as may be prescribed in advance, there can be no assumption of risk on the
part of the insurer. Sub-section (2) of the said section lays down that risk may be
assumed not earlier than the date on which the premium has been paid in cash or by
cheque to the insurer in case of those risks for which premium can be ascertained in
advance. The Explanation further makes it clear that the premium may be tendered
by postal money order or by cheque sent through the post and the risk may be
assumed on the date on which the said money order is booked or the cheque is
posted. In my view, Sub-section (2) is an enabling provision for the insurer. The
contract between the insurer and the assured may be concluded later on. However,"
the insurer can assume the risk from the date when the money order is booked or
the cheque is posted towards the premium. The phrase 'risk may be assumed not
earlier than' in Sub-section (2) and the phrase 'may be assumed' used in the
Explanation thereof clearly indicates this. Neither Sub-section (2) nor the
Explanation means that the risk attaches immediately on payment of premium and
the insurer undertakes the risk. ..... Therefore, in my view, this section does not lay
down that payment and acceptance of the premium meant that there was concluded
contract. ..... "
It was held that there was no unqualified acceptance and risk cannot attach as the
matter was still under negotiation and no binding contract resulted. In our opinion.
The question involved in the present appeal was not at all for consideration in either
of these cases. The question that was considered was when the contract of
insurance is said to be concluded. Hence they have no application here. In the
present case the question is on what date the risk can be assumed so assumed
here. The legal provision makes it clear that it can be assumed even from a prior
date of conclusion of the contract or issuance of the policy. The only limitation put is
by Section 64-VB(1)and (2) on such assumption which is as under :
"64-VB. No risk to be assumed unless premium is received in advance-- (1) No
insurer shall assume any risk in India in respect of any insurance business on which
premium is not ordinarily payable outside India unless and until the premium payable
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is received by him or is guaranteed to be paid by such person in such manner and

within such time as may be prescribed or unless and until deposit of such amount as
may be prescribed, is made in advance in the prescribed manner.
For the purposes of this section, in the case of risks for which premium can be
ascertained in advance, the risk may be assumed not earlier than the date on which
the premium has been paid in cash or by cheque to the insurer."
Clearly, this is an enabling provision. The said section is already paraphrased in the
case of Oriental Fire and General Insurance Co. Ltd. (cited supra) and quoted
above. We approve this.
Therefore, in the present case, the date of issuance of policy 30-6-1989 is
immaterial from the point of view of assumption of risk. The risk came to be
assumed on 25-8-1988. It was in force till 25-8-1989. The policy was sent to
M.S.F.C., which was acting as agent of the appellant. It never raised any objection
to the same. Whether MSFC sent it in turn to the appellant or not is not relevant. If
there is any negligence on the part of the said MSFC and consequently the appellant
has suffered loss then it will have to sue MSFC on that ground. In addition, we find
that even the proposal filed by the appellant on 16-6-1989 was for the period 12-3-
1988 to 12-9-1988 (Clause 11). It was signed by the appellant. The learned trial
Judge has rightly considered the admissions of the plaintiff's witness No. 1 and
concluded that it can be assumed that appellant had sufficient knowledge about the
terms and conditions of the policy and the contents of the proposal form which was
signed and submitted by him after the premium was paid by MSFC.
The date of conclusion of a contract of insurance or issuance of the policy is
different from the acceptance or assumption of risk. Section 64-VB only lays down
broadly that insurer cannot assume risk prior to the date of receipt of the premium.
Rule 58 of the Insurance Rules, 1939 speaks about advance payment of premiums
in view of subsection (1) of Section 64-VB which enables the insurer to assume the
risk from that date onwards. If the proposer did not desire a particular date, it was
possible for the proposer to negotiate with the insurer about that term. Precisely,
therefore, the Apex Court in the matter of L.I.C. (AIR 1984 SC 1014) (cited supra)
has said that final acceptance is that of the assured or insurer depends simply on
the way in which negotiations for insurance have progressed. In the present case,
the Insurance policy clearly mentioned that it was for a period of one year from 26-8-
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1988 to 25-8-1989 and neither the appellant nor his agent MSFC has controverted it.
Hence, the said term be accepted. It was irrelevant whether it was sent to the
appellant or not. However, it was sent to MSFC which was acting as agent for the
appellant. Further generally, fire policy was for one year. Rule 59 of Insurance
Rules, 1939 deals with relaxation and Rule 59(i) suggests that generally fire policy is
for one year. In the present case, the fire policy was issued by the insurer for a
period of one year and the premium of Rs. 3135/- was paid by the MSFC on 26-8-
1988. It has assumed the risk from that date onwards for one year i.e. 25-8-1989.
Hence, it cannot be said that policy was not in force on 10-2-1990. Therefore, the
view taken by the learned trial Judge in this respect was not correct. We answer the
point in the negative.
In view of the above discussion, we pass the following order :--
The appeal is dismissed. Cross-objections are partly allowed.”
SUMMARY
• Fire is one of the gravest cause of loss. Property Loss exposure refers to the
inherent risks to which the different types of property are exposed. The various risk
exposures are natural calamities, fire, floods, theft, etc.
• All general insurance policies seek to protect the insured from the financial
consequences of these risks.
• A contract of fire insurance can be defined as a property insurance agreement
whereby the insurer undertakes to compensate the financial loss suffered by the
insured due to damage or destruction of the insured property by fire or other
specified perils, duringa stated period.
• There are a number of variety of fire policies available in the market to suit to the
requirement of every business.
• An insurer has many rights in a fire insurance policy such as
— Right to avoid the contract.
— Right of control over the property.
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— Right of entering the property.

— Right of subrogation.
— Right to salvage.
— Right of reinstatement.
— Right of contribution
• For rating purposes, the Underwriters have classified fire risks and policies into two
categories for effective underwriting and uniform rate-making by line underwriters
and corporate (nominated) underwriters. They are class-rated policies and individual
experience-rated policies.
• In the event of fire, the insured must immediately give the insurer a notice about the
loss caused by fire. A written claim should be delivered within 15 days from the date
of loss. In addition, the insured is required to furnish all plans, invoices, documents,
proofs and other relevant information required by the insurer.
• If the insured fails to submit these documents within 6 months from the date of loss
the insurer has the right to consider it as no claim.
• Insurance under a fire insurance policy may cease where the insured is guilty of
misrepresentation, mis-description or non-disclosure of any material facts.
• The company terminates the contract on 15 days’ notice to the insured on the
request of the insured.
REVISION QUESTIONS
SECTION – A
1. A fire Policy is a
(a) valued policy (b) unvalued policy
(c) indemnity policy (d) agreed value policy
(e) none of the above
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2. Insurable interest in a FIP must be present

(a) at the inception of the policy
(b) during the continuance of the policy
(c) on the date of loss
(d) at the time of loss
(e) all of the above
3. Cause of fire generally in case of a loss is
(a) material (b) immaterial
(c) intentional (d) unintentional
4. The doctrine of subrogation and contribution is
(a) applicable to a fire policy
(b) not applicable to a fire policy
(c) applicable only in case of floater policies
(d) not applicable to floater fire policy
5. To which of the following assets a reinstatement policy is not applicable?
(a) building (b) land
(c) furniture (d) plant & machinery
6. Excess in a fire policy implies
(a) a discount (b) a malus
(c) a deductible (d) a bonus
7. Fire floater and declaration policies are issued to those companies whose
turnover is
(a) very high (b) very low
(c) huge and fluctuating values (d) permanent values
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FIRE INSURANCE
8. Which one of the following is a mega risk?

(a) A petroleum refinery insured for Rs 3000 cr
(b) An organization having 25 different locations with overall SI of Rs 2500 cr
(c) A power plant insured for Rs 2000 cr
(d) A fertilizer plant with SI of Rs 600 cr
9. Risk under fire policy in a manufacturing premises is treated as silent risk when
(a) The factory is closed for 1 week continuously
(b) The factory is closed for 15 days continuously
(c) The factory is closed for 30 days or more continuously
(d) None of the above
10. Please indicate which of the following statements is true.
(a) Tsunami is a peril covered in standard fire policy
(b) Fire policies are agreed value policies
(c) Stocks can be covered with replacement value clauses
(d) None of the above.
11. Which one of the following is not taken into account for processing fire claims:
(a) Condition of average
(b) Breach of warranty
(c) Confirmation of Surveyor about verification of books of accounts
(d) Distance from fire station
12. Which will be treated as Hazardous goods under Fire and special perils policy?
(a) Methylated spirits (b) Common salt
(c) Sodium carbonate (d) Sugar
13. Long term Fire Policy can be issued for dwellings
(a) For a minimum period of 2 years
(b) For a minimum period of 3 years
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(c) For a minimum period of 5 years

14. Which of the following Add on covers is/are not available in standard fire Special
Perils Policy
(a) Spontaneous combustion (b) Loss of rent clause
(c) Start up expenses (d) None of the above
15. Which of the following losses is not covered under fire insurance policy?
(a) Process losses (b) Impact Damage
(c) Missile testing operations (d) Aircraft damage
16. In consequential Loss (Fire) Insurance policy, the sum insured is arrived at by
(a) All standing charges plus net profit
(b) Specified standing charges plus net profit
(c) Only net profit
17. Subsidence and landslide loss covers
(a) Coastal and River Erosion
(b) Visible physical damage to property
(c) Defective design
(d) Demolition by government authority
18. Standard Fire Policy contains the following number of conditions
(a) 13 (b) 14
(c) 15 (d) 16
19. As per AIFT how many earthquake zones are there ?
(a) 3 (b) 4
(c) 5 (d) 6
20. Loss or damage to property caused by sprinkler leakage is covered under Fire
Policy if leakage is caused by
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(a) Heat due to fire

(b) Leakage due to repair or alteration to the building or premises
(c) Loss or damage to property caused by sprinkler installation
(d) Sprinkler installation by either repaired or extended
21. Stock is divided into how many categories for spontaneous combustion cover
(a) 3 (b) 4
(c) 5 (d) 6
22. Which of the following risks is not considered as add on cover?
(a) Spontaneous combustion (b) Lightning
(c) Earthquake (d) Startup expenses
23. What is meant by spontaneous combustion?
(a) Charring due to self heating
(b) Spread of fire
(c) Change of color or deterioration in quality due to self heat
(d) Loss or damage due to fire caused by own fermentation or natural heating
24. Reinstatement value policy can be issued for
(a) Stock in process (b) Building
(b) Stock in godown (d) None of the above
25. Standard Fire policy covers
(a) Loss due to explosion of boiler
(b) Loss due to explosion of domestic boiler
(c) (a) and (b)
26. Terrorism cover under fire policy can be granted on First loss limit up to
(a) Rs. 200 crore (b) Rs. 300 crore
(c) Rs. 500 crore (d) Rs. 600 crore
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27. Declaration Policy has minimum SI of

(a) Rs. 5 Crores (b) Rs. 10 Crores
(c) Rs. 1 crore (d) Rs. 0.50 crore
28. Declaration policy can be issued
(a) For short period (b) Stocks undergoing process
(c) Stocks in Rly Sidings (d) Fluctuation in stock
29. Minimum SI for floater declaration policy is
(a) Rs. 5 Crores (b) Rs. 10 Crores
(c) Rs. 15 Crores (d) Rs. 2 Crores
30. Co-Insurance in Fire Policies pertain to
(a) SI distributed over no. of locations
(b) Policy shared amongst various insurers
(c) Double insurance
(d) Insured opting for an higher excess
31. Reinstatement value policy can be issues in respect of
(a) Stocks (b) Building, Plant & machinery
(c) Stock in process (d) All the above
32. Which of the following statements is incorrect under fire policy subject to agreed
bank clause?
(a) Material change in risk does not affect the interest of the Banker
(b) Valued policies can be issued whose market value cannot be ascertained
(c) In multiple occupancy building per se ratings is permitted
(d) Insurable interest does not automatically pass onto the legal heir
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Answers
1. (c) 2. (e) 3. (b) 4. (a) 5. (b) 6. (c) 7. (c) 8. (c) 9. (a) 10. (d)
11. (a) 12. (b) 13. (d) 14. (a) 15. (b) 16. (b) 17. (d) 18. (b) 19. (c) 20. (b)
21. (b) 22. (d) 23. (b) 24. (b) 25. (c) 26. (c) 27. (d) 28. (d) 29. (b) 30. (b)
31. (a) 32. (a)
SECTION – B
1. What is the meaning of ‘Fire’?
Ans: To constitute fire, there must be combustion and ignition. The meaning however
does not extend to chemical actions which do not result in actual ignition though
they correspond in their effects to fire. Thus, lightning may be a form of fire, but loss
occasioned by lightning unaccompanied by ignition, is not, in the ordinary meaning
considered as a loss caused by fire. However, where lightning results in ignition, a
loss occasioned by such ignition is a loss by fire. To start a fire, there are three
essential factors:
(a) There must be a flammable gas and vapour.
(b) There must be oxygen present.
(c) There must be source of heat, e.g. flame or a spark.
2. Define Fire Insurance
Ans: Fire Insurance is a contract of insurance by which the insurer agrees, for a
consideration, to indemnify the assured upto a certain extent and subject to certain
terms and conditions against loss or damage by fire which may happen to the
property of the assured during a specified time. There is said to be fire within the
meaning of fire insurance when:
(a) There is actual ignition.
(b) The fire is purely accidental or fortuitous in origin so far as the insured is
concerned.
(c) The fire has burnt/ damaged the property of the insured.
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3. Enumerate the essential characteristic features of a Fire Insurance Contract.

Ans: A contract of fire insurance is a species of a contract of insurance and it exhibits all
the following characteristics, namely:
(a) It is a contract of indemnity
(b) It is a contract uberrima fide (utmost good faith)
(c) It must be distinguished from wagering contract and a contract of guarantee
(d) It is a personal contract
(e) The cause of fire is immaterial generally.
4. What is the difference between subject-matter of insurance and the subject-
matter of a contract of insurance?
Ans: The main object of the contract of insurance is to indemnify the assured from the
loss caused by damage or destruction by fire of the property of the assured. This
physical object is called the subject matter of insurance. On the other hand, the
subject-matter of contract of insurance is not the physical object or property of the
assured but is money and money alone. It must be noted that what is insured is not
the physical property of the assured but only loss of it by fire because by this
contract loss by fire cannot be prevented. It is not an insurance against accidents
but an agreement to protect against damage by a fire accident.
5. State whether an FIP is a personal /impersonal contract?
Ans: A contract of fire insurance, though appears to be a property insurance, is not so
and it is a personal contract between the insurer and the assured, for the payment of
money, in case the loss is occasioned to the property of the contracting party by fire.
The purpose of the contract is not to insure the safety of the property but only to
save the insured from the loss caused by damage to the property by fire. Therefore,
where a property insured against fire is consumed by fire but still there is no
pecuniary loss to the owner of the property, the insurer will not be liable to pay any
amount.
6. What is the coverage offered in a standard fire and special peril policy?
Ans: Under a standard fire policy, the insurance company agrees for a specified premium,
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to pay the amount of such damage or reinstate or replace such property, if the
insured property be damaged or destroyed by any of the perils specified hereunder:
• Fire
• Lightning
• Explosion / Implosion
• Aircraft Damage
• Riot, Strike, and Malicious Damage
• Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and
Inundation.
• Impact Damage
• Subsidence and Landslide including Rockslide
• Bursting and / or overflowing of Water Tanks, Apparatus and Pipes.
• Missile testing operations
• Leakage from Automatic Sprinkler installation
• Bush Fire
7. Can you have a separate consequential loss policy without an ordinary FIP?
Give some examples of consequential losses.
Ans: No, there cannot be a separate consequential loss policy without an ordinary fire
policy. Under an FIP, not only can one insure the property but any consequential
loss can also be covered. The claim under this head can succeed only if the insurers
adjust their liability for loss of property by fire under an ordinary policy. The following
are some of the examples of consequential loss for which indemnity is provided:
(a) Loss of profits
(b) Standing charges
(c) Increased cost of working
(d) Increased cost of reinstatement
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8. Is an FIP a contract of insurance?

Ans: Yes, an FIP is a special contract of insurance, the object of which is to indemnify the
other party from loss caused to him by damage or destruction of his property by fire.
In certain contracts, other than contracts of fire insurance, such a duty to indemnify
the owner from any loss to the property, including loss by fire may be either imposed
or implied by the law or may be undertaken by the express terms of the contract
(bailment, tenancy contracts).
9. In an FIP the cause of Fire is said to be immaterial. Justify.
Ans: In an FIP the cause of fire is immaterial. If the assured is careful and still there is
fire, it would be unjust to disentitle him to claim and even when he or his servants
are negligent and there is fire, it would be unfair to disentitle him to claim, for it is
precisely for these reasons that an FIP is taken. One should understand that it is the
damage and not the cause of fire that is insured. But in the following two cases,
compensation is not given:
• When damage is caused voluntarily or willfully.
• When the cause is within an exception of the contract
10. Give some examples of remote causes of fire.
Ans: A loss for which fire is not the proximate cause but only a remote cause, is not
recoverable under an ordinary fire insurance policy. Examples of remote causes of
loss by fire are:
• anticipated profits
• continuing expenditure
• increased expenditure
• depreciation liability
For a loss covered by an FIP, there must be an actual fire or ignition. Any loss
attributed to the fire whether by actual burning or by cracking or scorching or by
smoke or otherwise will also have to be borne by the insurer.
11. What is a cover note? Discuss its validity.
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FIRE INSURANCE
Ans: A cover note is not a policy of insurance. It is only an interim protection note. It is a
temporary and limited agreement. The effect of the cover note is that if the fire takes
place between the date of the receipt of the cover note and the date of intimation by
the insurance company regarding the acceptance or refusal of the policy, the
insurance company will be responsible.
12. What are salvage expenses? Who incurs these expenses? What is the
implication of ‘sue and labor’ clause in an FIP policy?
Ans: Salvage expenses are those expenses incurred by the assured in salvaging or
saving the property. It is the duty of the assured to minimize the loss by saving the
property and preventing the spread of fire, because a fire insurance contract is a
contract of indemnity. In modern fire policies, with a view to encourage the assured
to take steps to save the property a clause known as the “sue and laborí clause” is
inserted under which the insurance company will be liable to pay the expenses
incurred by the assured in salvaging the property even though nothing has been
saved.
13. State the significance of the doctrine of Proximate Cause with respect to fire
insurance claims.
Ans: The doctrine of Proximate Cause holds a very significant place in the determination
of fire related claims. Proximate cause means the active efficient cause that sets in
motion a chain of events which brings about a result without intervention of any force
and working actively from a new and independent source e.g. where insured object
is burnt, cause is plainly fire and insured is entitled to recover unless the insurer can
show that the fire was caused by exempted peril or willfully by insured or with his
consent such as:
1. Where there is an explosion during a fire, the concussion damage falls within
the exception and the insured cannot recover.
2. Where subject matter is burnt but fire, which burned it, was due to natural
consequences of excepted peril, the insured cannot recover.
3. Where fire was set in operation by earthquake, if not covered by insured under
fire policy and then spread by natural causes, i.e. spread by wind or one thing
catching fire from another and so on, the insured cannot recover.
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14. What are the general exclusions in a standard fire policy?

Ans: The following are the general exclusions in a standard fire policy:
i. This policy does not cover the first 5 % of each and every claim subject to a
minimum of Rs. 10,000/- in respect of each and every loss arising out of
lightning, STFI, landslide, and rockslide.
ii. The first Rs. 10,000/- of every loss in respect of which the insured is
indemnified by this policy.
iii. Loss, destruction or damage caused by war, invasion, civil war, mutiny, civil
commotion, and so on.
iv. Loss, destruction or damage caused by ionizing radiation, radioactive toxic,
explosives, etc.
v. Loss caused by contamination and pollution.
vi. Loss caused to bullion, precious stones, works of art, exceeding Rs. 10000/-
vii. Loss or damage caused to the stocks in the cold storage premises caused by
change in temperature.
viii. Loss or damage caused directly or indirectly by earthquake, volcanic eruption,
etc.
ix. Loss of earnings, loss by delay, loss of market, or any other consequential or
indirect loss.
x. Loss or damage caused by spoilage due to retardation or cessation of work
/operations.
xi. Loss by theft during or after the occurrence of any insured peril.
xii. Loss or damage to any electrical machine due to overrunning or excessive
pressure, short circuiting, self heating or leakage of electricity, etc.
xiii. Terrorism damage.
15. What is the liability of the insurance company if the value of the property lost
is of greater value then the sum insured?
Ans: A fire contract is a contract of indemnity and therefore only the actual loss can be
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FIRE INSURANCE
recovered by the assured. The amount recoverable depends upon whether the
policy is a valued or unvalued one. Fire policies are supposed to be unvalued or
open policies, wherein the amount of insurance specified in the policy does not
necessarily represent the measure of indemnity. In such cases the amount is
calculated according to the intrinsic value or the market value on the date of the fire.
In the leading case Butter v Standard Fire Insurance Co the insured was held
entitled to recover the value of the stock as at the date of fire, though, in fact it was
greater than its value at the time of insuring.
The contract of fire insurance is a contract of indemnity, and the insured is not
adequately indemnified against the loss of property, unless, so far as money can do
so, he is restored to the position which he occupied at the time of loss.
Prima-facie, therefore, the basis of calculation is either the market value of the
property destroyed or the cost of reinstatement. It is to be noted that, what the
insured is entitled to recover is the value of the property. Whichever basis is
adopted, it is only as a basis for calculating the real value of the property, and the
insured does not recover more than the market value or the cost of reinstatement as
such. In many cases the market value of the property destroyed represents its real
value. In such cases, payment of the market value is an adequate indemnity, since
the insured, by purchasing similar property in the market with that money can be
said to have been completely restored to his original position.
Theoretically, the market value and the cost of reinstatement ought to be the same.
In practice, however, there is a difference between them. In a leading case,
Equitable Fire Insurance Co v Quinn”, it was held that the insurers were liable to pay
the market value at the time of fire, which exceeded the cost price although the
insured had not insured the profit.
In another case, McCuaig v Quacker City Insurance Co’, where a steam boat was
insured against fire, the insurers were held liable to pay the real value of the
steamboat notwithstanding the fact that there was a depreciation in the value of
steam boat caused by circumstances which might only be temporary.
Hence, the view that in all cases the basis of calculation is the market value of the
property, is not applicable. There are cases in which, the loss cannot be made good
except by reinstatement. The insured is not restored to his original position, if he is
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unable to reinstate the property out of the proceeds of the insurance. Payment of
market value therefore does not give the insured an adequate indemnity, since he
cannot reinstate the property with this sum representing its market value, but is
necessarily compelled to incur further expenditure before he can restore the
property to its original position. Consequently, a basis of calculation must be
adopted which gives him adequate indemnity, and the basis is the cost of
reinstatement.
However, where the cost of reinstatement is taken as a basis of calculation, the
reinstatement contemplated is a reinstatement sufficient to restore the property
insured to the condition in which it was at the time of loss. But very often, by
reinstatement the assured will be more than fully indemnified because an old
property is now substituted by a new property.
In certain cases, neither reinstatement nor market value can be the basis of
valuation as reinstatement is impossible and the market value does not exist. The
property may not have market value, except perhaps as scrap and it may be capable
of physical reinstatement but it may not be commercially practicable to do this. In
such cases, the test is the real value to insured at the time of loss.
16. Can an insurance company be compelled to replace / reinstate the damaged
property? Is it optional?
Ans: Reinstatement literally means replacement of what is lost or repairing the damaged
property and bringing to its original value and utility. The word ‘reinstate’ in a policy
of fire insurance refers to buildings or chattels, which have been damaged, and the
word replace refers to those which have been totally destroyed.
Under an insurance policy, the normal liability of the insurer is generally to indemnify
the assured, by paying the value of the thing lost or the expenses incurred by the
assured in repairing the damage occurred by an event insured against. Though the
insurer, in certain cases, makes payment of money with the consent of the assured,
it may discharge their liability by reinstatement.
The right of ‘reinstatement’ is usually stipulated as an option to the insurer in the
sense that on the happening of the loss, the insurer will have right to elect either to
pay the assured in money or to reinstate the property.
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FIRE INSURANCE
The assured will not have the right to compel the insurer to reinstate, nor the insurer
has a right to compel the assured on payment of money to apply the proceeds of the
policy in reinstatement. The assured has always an unbridled right to utilize the
policy proceeds as he pleases without any interference from the insurers.
The right of the insurer to reinstate the property instead of paying the money may
spring up:
• Either from a contract in the form of a clause under the policy, or
• Under a statute.
This type of clause is not inserted in all branches of insurances, e.g. it is not and
cannot be included in life policies.
Only in indemnity insurances, in appropriate branches of insurance, like fire,
burglary, steam boilers, or motor vehicles insurances, this clause called the
reinstatement clause, entitling the insurers to exercise an option, on the happening
of the insured event, either to reinstate or to pay the insured money can be
incorporated. This only empowers the insured to exercise the option and under no
circumstances the assured can compel the insurer to reinstate. The insurers on the
other hand, can exercise this option by expressly giving a motive to the assured or it
may be inferred from their conduct.
17. What are the rights of co-insurers to combine in reinstatement?
Ans: When two or more insurers grant insurance on the same subject-matter and if they
combine together to reinstate, the assured cannot prevent them from joining to do
the work and when once they complete reinstatement they are discharged from their
liability. This right of combination sometimes may be a valuable right where the
policies relate to separate interest on the same subject-matter because the cost of
reinstatement may then be very much less and more economical than the measure
of loss.
18. Discuss the implication of the doctrine of subrogation in a fire insurance
policy.
Ans: The doctrine of subrogation is a necessary incident to the contract of indemnity and
therefore applicable to a contract of fire insurance and marine insurance. Under this
doctrine, as applicable to fire insurance, the insurer has a right of standing in the
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shoes of the insured and avail himself of all the rights and remedies of the insured,
whether already enforced or not. The principle of subrogation prevents an insured
who holds a policy of indemnity from recovering from the insurer a sum greater than
the economic loss he has sustained.
Therefore, if a loss occurs under such circumstances that he has an alternative right
to recover damages, under common law, tort or statute and if the loss is also
covered by the policy he can recover the entire loss from the insurer and if he so
receives, the insurer is entitled to, or is subrogated to, the former alternative rights
and remedies of the insured and this is technically called ‘subrogation’. The insurer
is entitled to subrogation only to the extent he has paid the insured.
The important rights in respect of which subrogation arises are those arising out of a
tort, contract or statute. The right of subrogation is exercisable at common law after
the amount has been fully paid, but Condition 9 in the standard policy enables the
insurer to claim against the third party even before the payment is made.
The insurer cannot recover from a third party before he has indemnified his own
insured, but can only take steps to hold the third party liable pending the settlement
of the claim under the policy. It is from actual payment under the contract of
indemnity that the right of subrogation springs. As subrogation means substitution,
where the assured himself cannot bring an action, the insurer also cannot claim
anything by subrogation. For example, where the wife of the assured set fire to his
house and the insurers paid, it was held in Midland Insurance v Smith that the
insurers cannot recover the insurance money as the assured had no right of action
against his wife.
Similarly, where two ships belonging to the same owner collide by the fault of one,
the insurers of the ship not in fault will not be entitled to any claim on the owner for
acts of the other ship, though the insurers of the cargo owned by the third party
would have had a claim against him.
Following are the limitations of the doctrine:
(i) It does not apply to life and personal accident policies;
(ii) Insurer must pay before he can claim subrogation;
(iii) Assured must have been able to bring action.
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FIRE INSURANCE
19. What are the underwriting factors to be considered for a fire insurance cover?
Ans: Underwriting the peril of fire focuses on the physical hazards presented by a
particular loss exposure. To assure a thorough review of these hazards property
underwriters use an approach that scrutinizes four specific areas. These are
traditionally referred as COPE - construction, occupancy, protection, and external
exposures.
Construction of the covered property is of primary concern to the underwriter. The
building construction is directly related to its combustibility when exposed and its
construction as fuel once ignited. The Insurance Services Office (ISO) divides
building construction into six classifications:
(i) Fire resistive
(ii) Modified fire resistive
(iii) Masonry noncombustible
(iv) Noncombustible
(v) Joisted masonry
(iv) Frame
Occupancy factors affect the frequency and severity of losses. These factors which
vary from one occupancy to another can be grouped into three headings:
(i) Ignition sources or fire causes
(ii) Combustibility
(iii) Damageability
Fire protection can be of two types: public or municipal protection provided by towns
and cities, and private protection provided by the property owner or occupant.
External exposures are those outside the area owned or controlled by the insured.
These exposures fall into the following categories:
(i) Single-Occupancy Exposures
(ii) Multiple-occupancy Exposures
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When the property being underwritten consists of a single building, fire division, or
group of buildings owned and controlled by the same policyholder, a single-
occupancy exposure exists. A multiple-occupancy exposure occurs whenever other
portions of the same fire division are owned and controlled by persons other than
the policyholder.
SECTION – C
Case Studies
1. Reliance General Insurance Company Ltd. delivers a fire policy to Mr. Ajay on
April 15. However, the insured paid the premium on a latter date. Unfortunately
there was a fire in the premises resulting in loss of property insured. The
company denied its liability on the basis of the fact that the premium was
overdue at the time of loss. Is it correct? Discuss.
Ans: No, the company cannot deny its claim. When an insurance company delivers a
policy without requiring immediate payment of the premium, they incur responsibility
for the risk, because having delivered the policy, they are held to have given credit
for the premium. Moreover, when once the contract is concluded with the premium
and other particulars fixed, the policy drawn and delivered, the insurer becomes
liable for loss by fire, and it is immaterial whether the premium is paid before or after
the fire.
2. Mr. Amar lost his factory furniture valued at Rs. 200,000 as on the date of fire.
He wanted to recover a claim of Rs 2,50,000 for he had a policy of Rs 500,000.
On enquiry he found that for new furniture the cost would be Rs 1,75,000. If the
principle of indemnity is to be applied how much of his claim is to be
accepted?
Ans: Since the market value of the furniture lost was Rs 2,00,000 and the cost of
reinstatement would cost the insurers only Rs 1,75,000, the insurers would opt for
reinstatement and accept the claim of Rs 1,75,000.
3. Mr. Shetty, owner of an inn, took out an FIP with Bajaj Alianz Ltd. A fire took
place and his inn was destroyed. The assured included in his claim the
sumwhich he had to pay by way of rent, the cost of hiring alternative
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FIRE INSURANCE
accommodation, and loss caused by customers not frequenting the inn during
the period of repair. Justify his claim.
Ans: No, his claim is not justified. Where a fire destroys property, from the use of which
the insured expects to earn a profit in the ordinary course of business, he does not
merely lose his property but also loses the chance of earning the profit, which he
might have earned if the property had not been destroyed.
But this anticipated loss of profit is regarded as very remote and is not recoverable
under an ordinary fire policy on the property lost by fire. Accordingly, insurance upon
a hotel, shop or factory covers only the value of the hotel, shop or factory but does
not cover the loss of business. In the above case, none of the above items is
covered by the policy. Anticipated profit is to be distinguished from the profit
ascertained at the date of loss to ascertain the value of the subject-matter and in
fixing the amount recoverable under the policy. [Wright v Pole]
4. Mr. Kishore insured his machinery and stock of goods stored in the factory
premises against damage by fire and a protection note was given, subject to
the usual conditions of the company’s policy, one warranty clause being
“smoking and cooking be strictly prohibited in or about the premises”. The
stocks were damaged by fire said to be accidental in nature. But the insurance
company claimed that smoking a cigarette or bidi carelessly by some
employee occasioned the fire. Is the denial justified?
Ans: In the above case, the company denied the claim on the ground that there was a
breach of warranty as the fire was occasioned by smoking which is strictly
prohibited. But as there was no eye-witness to the origin of the fire, the court held
that the cause of fire was a matter of conjecture. [Bhattacharjee v Sentinal Insurance
Co.]
In the famous case Dekhari Tea Co v Assam Bengal Roadways Co it was also held
that fire cannot always be explained, and it must be a matter of conjecture. As
regards the warranty, as the plaintiff had put notices strictly prohibiting smoking in
and around the places, in fact there is no breach of warranty. Hence, the denial on
the part of the insurance company is not justified. On the other hand, the company
should make good the loss.
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CHAPTER – 3
MARINE INSURANCE
1. Introduction
2. Marine Insurance Business Governing Legislations
2.1 Carriage of Goods Act (COGSA), 1992
2.2 Marine Insurance Act, 1963
3. Maritime Perils
3.1 Insured Marine Perils
3.2 Uninsured Perils
4. Types of Marine Losses
4.1 Total Loss
(i) Actual Total Loss
(ii) Missing Ship
(iii) Constructive Total Loss
4.2 Partial Loss
4.2.1 General Average
MARINE INSURANCE
(i) General Average Sacrifice

(ii) General Average Expenditure
(iii) General Average Contribution
4.2.2 Particular Average
(i) Particular Average on Cargo
(ii) Valuation of Services
(iii) Particular Average on Ship
(iv) Particular Average on Freight
4.3 Expenses
4.3.1 Particular charges
4.3.2 Sue and Labour charges
4.3.3. Salvage Charges
5. Types of Marine Insurance Policies
6. Warranties
6.1 Express Warranties
6.2 Implied Warranties
7. Freight Insurance
8. Hull Insurance
8.1 Terms used to measure a ship
8.2 Types of Vessels
8.3 Types of Hull Insurance policies
9. Cargo Insurance
10. Inland Transit Insurance Clauses
11. Marine Insurance Claims
12. Exchange Control Regulations
13. Summary
14. Questions
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• Explain the intricacies in the contract of Marine insurance
• Describe the important provisions governing marine insurance business
• Explain the coverage and exclusions in the various types of marine insurance
policies
• Evaluate the claims processes and loss amounts for different types of losses
1. Introduction
Marine insurance as we know it today, originated in England owing to the frequent sailing
of ships over high seas for trade. Marine insurance is an important element of general
insurance. It essentially provides cover from loss suffered due to marine perils. Marine
insurance extends beyond marine perils to provide cover for loss incurred during shipment
of cargo over water bodies like rivers, lakes and inland waterways. It also covers ships
under construction, docked for repairs, stranded at ports and ships transporting
consignment.
The contract of Marine insurance is a special (insurance) contract of indemnity which
protects against physical and other losses to moveable property and associated interests,
as well as against liabilities occurring or arising during the course of sea voyage (R.
Thomas).
According to Section 1 of the Marine Insurance Act, 1906: “A contract of marine insurance
is a contract whereby the insurer undertakes to indemnify the assured, in the manner and
to the extent thereby agreed, against marine losses, that is to say, the losses incidental to
marine adventure.”
It is a contract of indemnity. While in fire insurance, the indemnity is limited to actual loss,
in Marine insurance it is ordinarily based on values agreed upon in advance.
Maritime insurance business today is governed by the provisions of the English Maritime
Insurance Act 1906, and in India the business is regulated by the Indian Marine Insurance
Act 1963, which is based on the original English Act.
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MARINE INSURANCE
Marine insurance covers three main interests in a marine venture. They are:
• Hull – it represents the ship;
• Cargo – the goods being transported by the vessel; and
• Freight – is the profit or earnings of the ship at the end of a marine venture.
(“Marine” insurance policy covers not only sea voyage but also purely inland transits
through any mode like rail / road / multimodal / even by post.)
Marine contract is also like any other contract. It has certain general characteristics, which
will help in a better understanding of different aspects of a marine insurance contract.
2. Marine Insurance Business Governing Legislations

2.1 Indian Carriage of Goods By Sea Act, 1925 (COGSA, 1925)
This Act may be called THE INDIAN CARRIAGE OF GOODS BY SEA ACT, 1925. It
extends to the whole of India. Subject to the provisions of this Act, the rules set out in the
Schedule (hereinafter referred to as “the Rules”) shall have effect in relation to and in
connection with the carriage of goods by sea in ships carrying goods from any port in India
to any other port whether in or outside India.
The salient features of the Act are as follows:
a. Shipowner's responsibilities and liabilities
a) To exercise due diligence and care to make the ship seaworthy, properly manned,
equipped and fit to carry the cargo.
b) Properly and carefully load, handle, stow, carry, keep, care for and discharge the
goods carried, subject to the various immunities provided
c) On demand and after receipt of the goods, to issue a bill of lading showing:
(i) leading marks necessary for the identification of the cargo ;
(ii) number of packages, pieces, quantity or weight, as furnished in writing by the
shipper ;and
(iii) the apparent order and condition of the goods, provided there is no obligation
to show such details if the carrier suspects the accuracy, or he has no
reasonable means of checking.
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d) Such a bill of lading (B/L) shall be prima facie evidence of receipt by the carrier of
the goods therein described.
e) The shipper shall be deemed to have guaranteed to the carrier the accuracy of
marks, numbers, quantity and weight of the goods as furnished by him; otherwise
the shipper shall indemnify the carrier against all loss, damage and expenses arising
from inaccuracies in such particulars.
b. Shipowner's rights and immunities
(a) The carrier shall be relieved from liability for loss/damage arising or resulting from
unseaworthiness unless caused by want of due diligence on the part of the carrier
to make the ship seaworthy, to secure that the ship is properly manned, equipped
and supplied and to make the ship fit to carry cargo. Thus, when loss or damage
has resulted from unseaworthiness, the burden of proving the exercise of due
diligence shall be on the carrier or other person claiming exemption from liability.
(b) Neither the carrier nor the ship shall be responsible for loss or damage arising or
resulting from :–
i) negligent navigation or management of the ship
ii) fire, unless caused by the actual fault or privity of carrier
iii) perils, dangers and accidents of the sea or other navigable waters
iv) Act of God, act of war, act of public enemies
v) Arrest or restraint of princes, rulers or people or seizure under legal process
vi) Quarantine restrictions
vii) Act or omission of the shipper or his agent or representative
viii) Strikes, lock-outs, stoppage or restraint of labour; Riots and civil commotions
ix) Saving or attempting to save life or property at sea
x) Inherent defect or vice of the goods; Insufficiency of packing
xi) Insufficiency or inadequacy of marks
xii) Latent defects not discoverable by due diligence
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MARINE INSURANCE
xiii) Any other cause arising without the actual fault or privity of the carrier, or
without the fault or neglect of the agents or servants of the carrier, but the
burden of proof shall be on the person claiming the benefit of this exception.
(c) The carrier shall not be liable for any loss or damage resulting from any deviation in
saving-or attempting to save life or property at sea or any reasonable deviation.
(d) The carrier shall not be liable for loss or damage to the goods if the nature or value
thereof has been knowingly misstated by the shipper in the bill of lading.
c. Dangerous Cargo
Goods of inflammable, explosive or dangerous nature, to the shipment whereof the carrier
or master has not consented with knowledge of their nature and character, may at any
time be landed at any place or destroyed or rendered innocuous by the carrier without
compensation and the shipper shall be liable for all damages and expenses arising out of
or resulting from such shipment.
If any such goods are shipped with the knowledge and consent of the carrier and they
become a danger to the ship or cargo, they may, in like manner, be landed at any place or
destroyed or rendered innocuous by the carrier without liability on the part of the carrier,
except to general average, if any.
d. Limitation of monetary liability of the carrier
Liability of the carrier for loss or damage to cargo is limited to 666.67 SDR (Special
Drawing Rights) per package or unit of freight or 2 SDR per Kg. of gross weight of the
goods lost or damaged, whichever the amount is higher, unless the nature and value of
such goods are declared by the shipper and inserted in B/L.
(Note: Before amendment of this Act in October, 1992, the monetary limit of liability of the
carrier was £100 per package or unit of freight).
Where a container, pallet or similar article of transport is used to consolidate the goods,
the number of packages or units enumerated in the B/L as packed in such article of
transport shall be deemed to be the number of packages or units for the purpose of this
paragraph as far as these packages or units are concerned. In that case, the limit of
liability will apply to each package or unit contained in the pallet or container.
If the B/L does not show how many separate packages are there, then each article of
transport (pallet or container) will be deemed to be an entire package or unit of freight for
the purpose of applying the limit of liability.
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Notice of loss or damage: Unless notice of loss or damage be given in writing to the carrier
at the port of discharge or at the time of removal of the goods into the custody of the
person entitled to delivery thereof under the contract of carriage, or if loss/damage be not
apparent, within THREE days, such removal shall be prima facie evidence of delivery by
the carrier of the goods as described in the B/L. Such notice in writing need not be given if
the state of the goods at the time of their receipt was the subject of joint survey or
inspection.
Time limit for legal action: The ocean carrier is discharged from all liability in respect of
loss or damage, unless suit is brought within ONE YEAR after delivery of the goods or the
date when the goods should have been delivered. This period may, however, be extended
if the parties so agree after the cause of action has arisen; provided that a suit may be
brought after the expiry of the period of one year referred to above, within a further period
of not more than three months as allowed by the Courts.
COGSA, 1925 applies to "goods” and "goods" are defined as "including goods, wares,
merchandise, containers, pallets or similar articles of transport used to consolidate goods
if supplied by the shipper and articles of every kind whatsoever, except live animals and
cargo which by the contract of carriage is stated as being carried on deck and is so
carried."
The SDR (Special Drawing Rights) is a "currency basket" made up of five currencies as
follows:
Currency Weightage
U.S. Dollar ..... 42%
German DM ..... 19%
Pound Sterling ..... 13%
French Franc ..... 13%
Japanese Yen 13%
It is a relatively stable unit, since a fall in the value of one currency usually means a rise in
value of the others. Its actual value is re-calculated daily by the International Monetary
Fund (IMF) which promulgates the SDR as a churrency unit. The Covention holds that the
conversion to national currencies for compensation payable as a result of judicial
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MARINE INSURANCE
proceedings shall be at the rate announced for the day of judgement. Value of an SDR is
published daily in important financial dailies and in the Lloyd's List in terms of £ Stg. and
U.S. Dollars. Currently, 1 SDR = £0.940050 or U.S. $1.46629

As we already know that London was the centre of all operations regarding marine
insurance transactions and hence all customs and branches of the trade developed here.
Further a bench of jurors was also appointed by Lord Mansfield to settle disputes arising
as a result of breach of contract or misinterpretations or due to false claims. For years, all
countries across the world followed the British Act. But necessary changes had to be
made by the respective countries to suit their requirements. After Independence, the
Indian Navy and shipping began growing rapidly yet there was no Indian law governing
marine insurance, which was still subject to the English Marine Insurance Act.
Furthermore, the Insurance contracts in India had to abide by the Indian Contract Act,
1872, and there was often a conflict between the Indian Contract Act provisions and those
of the English Marine Insurance Act, 1906. It therefore became essential to draft a
legislation to suit the Indian scenario. As a result of this, the Marine Insurance Act was
enacted by the Indian Parliament, which came into force from August 1st, 1963.
The Marine Insurance Act, 1963, defines marine insurance as a contract between insurer
and insured. The insurer as per the agreement undertakes to indemnify the insured
against marine losses incidental to marine adventure.
3. Maritime Perils
Maritime perils can be defined as the fortuitous (it represents an element of chance or ill
luck) accidents or casualties of the sea caused without the willful intervention of human
agency. There are different forms of perils at sea, of which only a few are covered by
insurance while others are not. In this part we will be enumerating both the insured and
uninsured perils of the sea.
3.1 Insured Marine Perils

Generally the perils that can be insured under any Marine insurance policy are as follows:
• Fire – is a common peril at sea.
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• Pirates and Thieves – according to Carver: “ Piracy is forcible robbery at sea,

whether committed by marauders from outside the ship or by mariners or
passengers within it.
• Barratry – it is an act willfully committed by the master and the crew against the
owner or charterer of the ship. Barratry includes fraudulent sale of cargo or deviation
of ship, crew’s refusal to discharge the cargo, etc.
• Jettison – this is throwing of cargo overboard due to either a deliberate act or at the
wake of grave danger.
• Taking at sea – is a situation when the vessel is captured by the enemy or others.
• Foundering at Sea – if a ship has been reported lost and after a stipulated time,
there is no news of its whereabouts then it is presumed to be lost due to perils of the
sea.
• Stranding – arises when the ship deviates from its course due to an accident and is
stranded in shallow waters and suffers damages.
• Collision – is caused when the ship collides with another ship or with other objects,
causing damage.
• All other Perils – includes all perils similar in nature to the ones mentioned in the
policy.
• Perils not explicitly dealt with – there are two other losses the insurer is bound to
provide cover for.
• They are:
A) Insurer’s Liability in respect of General Average Loss (Sec 66) – General
average loss is expenditure or loss incurred consciously while countering a
peril for saving the ship and /or consignment. This is borne proportionately by
all having insurable interests in the marine adventure.
B) Insurer’s liability in respect of salvage charges – These are charges awarded
to a salveger for retrieving property from the sea. This is not part of a marine
contract. This amount is contributed by all holding insurable interest in the
marine adventure. The insurer is liable to cover the salvage charges incurred
by the assured. This is treated as part of general average loss.
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MARINE INSURANCE
3.2 Uninsured Perils

All losses and damages caused due to reasons not considered as perils of the sea are not
provided insurance cover.
• Wear and Tear – This is the regular deterioration that inflicts the vessel due to the
corrosive action of the sea, action of winds and other maintenance problems caused
to the body of the ship due to sailing. This includes perishable commodity that is
transported.
• Leakage – If a leak develops in a vessel then insurance does not provide cover for
the loss caused, unless the leak is caused by an accident. Ordinary leakage of liquid
cargo is also not covered.
• Breakage of goods – Goods damaged due to movement of the ship are not covered
by insurance. But goods damaged by the violent action of the waves are covered, as
this is treated as a peril at sea.
• Inherent Vice – This refers to the inherent properties of the cargo being transported.
Thus, the insurer cannot be made liable for perishable commodity, which has an
inherent process of decomposition. This would apply to fruits, vegetables, meat, etc.
• Loss by Rats and Vermin – This loss is not considered as a peril of the sea. (e.g.
Hamilton v Pandrof- a rat gnawed a hole in a pipe, causing damage to the cargo of
rice by seawater, there was no negligence. The insurer was not held responsible).
• Loss by Delay – This means that the insurer of the vessel and the cargo cannot
claim for loss caused due to delay, even if the delay is caused by a peril of the sea,
which is covered by insurance. (Normally, coverage till completion of transit/
reaching destination and not defined in terms of date/days – except in case of
annual declaration policies).
4. Types of Marine Losses

Different kinds of loss incurred during a marine adventure are enlisted in the Marine
Insurance Act, 1963 in Sections 55 to 63. According to Section 55 (1) of the Act, the
insurer is liable for any loss caused only due to perils of the sea, which has an insurance
cover. According to sub section (2) the insurer is not liable for any loss incurred due to a
malpractice by the assured, but the insurer is liable if the loss is proximately caused by a
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peril of the sea even if it could have been avoided by competent crew and the master. The
sub section also excludes delay, wear and tear, leakage, etc from the insurance cover,
unless the policy otherwise provides for it.
Losses are primarily divided into three categories. They are
• Total loss
• Partial Loss
• Expenses
• General Average Contribution
4.1 Total loss

Total loss is a situation when the loss is completely irrecoverable and irretrievable. Total
loss is further divided into:
(i) Actual Total Loss [Section 57 (1)]- This situation arises when the insured object is
irretrievably lost, that is it is completely damaged and does not resemble the object
that had been insured prior to the marine adventure.
(ii) Missing ship (Section 58) - Actual total loss can be presumed if the ship under
question is missing beyond the stipulated time.
(iii) Constructive total loss [Section 60 (1)]- This section says that there is constructive
total loss when the insured object has to be abandoned as actual total loss is
inevitable; that is the object is damaged beyond repair and repair would cost many
fold when compared to the cost of the object. Section 60(2) states that there is a
constructive total loss when the insured is deprived of the object, and when he is
unlikely to recover the object, and when the cost of recovery of the object would
exceed the value of the recovered object.
4.2 Partial Loss

When the loss is not constructive or actual then it is termed as partial loss.
Partial loss is classified into two categories:
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MARINE INSURANCE
4.2.1 General Average (Section. 66)

This refers to the loss incurred by the sacrifice made during extreme circumstances for the
safety of the vessel and the cargo. This loss has to be borne by all the parties who have
an interest in the marine adventure. General average compensation and liability are
completely independent of marine insurance. General average is defined as a loss caused
by or directly consequential on a general average act which includes a general average
expenditure as well as a general average sacrifices. The general average loss will be
there where the loss is caused by an extraordinary sacrifice or expenditure voluntarily and
reasonably made or incurred in times of peril for the purpose of preserving the property
imperiled in common adventure.
Conditions that qualify for general average contribution are as follows:
• The general average act must be voluntary and intentional accidental loss or
damage is excluded.
• loss must be incurred for common safety;
• loss must be at the face of impending danger;
• the intention behind the loss should be general safety;
• expenditure caused as a result should be extraordinary,
• the expenditure at the face of danger should have been judiciously incurred,
• the imperiled subject matter should be saved; and
• the person responsible for the danger cannot claim a share in the contribution.
• Loss must be the direct result of a general average act. Indirect losses such as
demurrage and market losses are not allowed as general average.
• If the sacrifice proves abortive, it will be allowed as total loss. Therefore, to call it
general average sacrifice, it must be successful latest in part.
Example: The master of a ship saw smoke coming from the hold of the ship, and
presumed that the hold had caught fire. He ordered high-pressure steam to be let into the
hold to extinguish the fire. This damaged the cargo of resins being transported by the ship.
When the insurance claim was put through on the grounds of General Average loss, the
court rejected the claim. This is because the court held that the loss was not due to
general average loss and the peril was not real but imagined.
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The General Average losses are further divided into two classes:
(i) General Average Sacrifices : The general average sacrifices are made for
common safety. For example ‘jettison’ which means throwing away of the cargo in order to
lighten the ship. Similarly, the use of cargo as fuel or cutting away of a spare and sails.
(ii) General Average Expenditure : The general average act involves expenditure. In
this case extra expenditure are involved for common safety. Here additional charges are
incurred at the port, when the ship is repaired, expenses are involved for lightening and re-
loading of the cargo.
4.2.1.1 General Average Contribution : The general average loss is ratably contributed
by the parties interested. In contribution of general average loss the contributory interest,
amount to be made good and contributory values are considered.
(a) Contributing Interests : The interests saved by the general average act are liable
to contribute rateably to make good the sacrifices or expenses. There are certain
articles which are not required to contribute towards general average loss. For
example: postal articles, parcel, crews’ effects and personal effects of passengers
not shipped under bill of lading.
There are three main contributing interests: ship, freight and cargo. When a general
average loss occurs among different interests, it is of vital importance that the
interest which has been sacrificed must also rateably contribute to the loss,
otherwise it would be in a better position than the interests saved by the general
average act.
(b) Amounts to be made Good : The amount to be made good in a general average
act differs from adventure to adventure.
(i) Ship : The amount to be made good in a general average in respect of ship is
measured by reasonable cost of repairs less the actual deductions (if any) .
The cost of repairs are taken into account as they have been actually effected
either at a port of refuge or at destination.
(ii) Cargo : The amount of general average in case of goods is their net value.
The net value in turn is calculated taking into account the value of goods
sacrificed at their safe arrival and from this the expenses (i.e. freight unpaid,
duty and landing charges) which would have been incurred had the goods
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MARINE INSURANCE
arrived safely, are deducted. Thus, the net value of goods is arrived at.. The
remaining cargo arrives damaged from causes which would have actually
affected the sacrificed goods. The amount to be made good for general
average purposes is their net value based on what the goods sacrificed would
have realized, had they reached the destination damaged to some extent as
the other cargo. For goods arriving damaged owing to general average
sacrifice, the allowance is the difference between their net value in sound
condition and net value in damaged state.
(iii) Freight : Where the freight has to be paid at destination in respect of a cargo
which is used for general average act, the ship owner will lose it and it would
be made good in general average. The ship owner is entitled for the gross
freight which he would have earned, had the goods not been sacrificed less
the charges which he would have incurred to earn such freight during the
remainder of the voyage, but which he has not incurred as a result of the
sacrifice.
(iv) Expenses : All the extra ordinary expenses properly incurred by the ship
owner in time of peril for the common safety of all the interests are also made
under the general average contribution.
(c) Contributory Values : The third process is to determine what are the basis to
contribute to the general average. The interest contributes on their net value at the
place where the voyage ends, i.e. at destination or at an intermediate port if the
voyage is abandoned there. The values are known as contributory values. It may be
of three types:
(i) Ship : The ship owner will contribute on the ship’s value as saved by sacrifice.
The value is the amount for which the ship owner as a reasonable man would
be willing to sell her on arrival at her destination. Any amount that may have
been contributed in respect of general average damages is added to this value
to arrive at contributory value.
(ii) Cargo : The cargo owner will contribute on the market value of goods saved at
the place where the voyage ends; to arrive at the value the expenses
incidental to the safe arrival of the cargo is deducted from the selling price of
the cargo.
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(iii) Freight : If freight has been paid in advance, it would have been included in
the value of separate interest. The good arrived safely at the destination will
have to contribute on the basis of the net value of freight saved if the freight
was not paid in advance. The contribution of freight will be arrived at by
ascertaining the actual sum of freight received at port of destination less the
expenses of earning it from the date of general average act.
4.2.1.2 Application of General Average to Insurance
In the absence of anything contrary to the contract, the general average losses and
contributions are recoverable from the respective marine insurers insuring ship, freight,
and cargo if the general average has been incurred for the purpose of avoiding a peril
insured against. The extent of insurers’ liability for general average contribution is the full
amount of the contribution provided the contributory value does not exceed the insured
value.
The method of adjusting the general loss is as follows.
The ship-owner or his representative arranges for the adjustment of the loss and usually
employs an experienced average adjuster for the purpose. The master of the vessel is
required to keep the interests together until adequate security for any liability can be
obtained. A general average bond and a marine insurance policy are usually sufficient, but
in the absence of the latter a cash deposit may be required; after a survey of the damaged
goods and determination of the amount of loss, the various interests are appraised to find
out a basis for the respective contributions.
Example
A vessel is valued at Rs. 300,000, the cargo at Rs.400,000 and freight at Rs.40,000, and
in the course of the voyage Rs.7,400 of cargo is sacrificed for the general benefit under
conditions that make it a general average loss. ; the cargo is owned by one shipper.
The total value of the venture is found to be as follows:
Vessel Rs. 300,000
Cargo Rs. 400,000
Freight Rs. 40,000
Total Rs. 7,40,000
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MARINE INSURANCE
Each interest contributes to the general average loss in proportion the value of its interest
bears to the value of all interests, as follows:
Vessel 30/ 74th of Rs.7400 or Rs.3000
Cargo 40/74th of Rs.7,400 or Rs.4,000
Freight 4/74th of Rs.7400 or Rs.400
All Interests Rs. 7,400
It is to be noted that the cargo owner must also contribute Rs.4000 as his share of the
general average loss. Therefore he receives only Rs.3,400 as reimbursement.
If the parties carry full insurance, each can be reimbursed in full. On the other hand, if they
are partially insured, the law permits them to recover only in proportion the insurance
taken bears to the value of the interest.
In the above example, if the vessel owner had insured his vessel for one half of the value,
he could recover only one half of his contribution of Rs.3000 or Rs.1,500
4.2.2 Particular Average
This is a partial loss of the insured property, by a peril it is insured against. For example if
a ship is damaged due to turbulent weather the loss incurred is a particular average loss.
This loss may be on the ship, cargo or the freight.
(i) Particular Average on Cargo : The particular average loss may be either the damage
and depreciation of a particular interest or a total loss of its part. If the property is insured
under one value for the whole and is all the same kind, quality or description, a total loss
of part will be recovered as a particular average loss. Where goods are delivered in
damaged condition or where the value is depreciated, the resulting particular average loss
will be adjusted upon the basis of comparison between the gross sound value and
damaged value.
The process of valuation is as follows:
1. The gross sound value of the goods damaged is found out. This is the value for
which the goods would have been sold if the goods had reached the port of
destination in sound condition.
2. After calculating the above value, the gross damaged value of the goods damaged
or depreciated is found out on the basis of market price at that time.
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3. Deduct the gross damaged value from the gross sound value. The difference is the
measure of the actual damage or depreciation.
4. The ratio of the damage or depreciation is calculated by dividing the amount of
damage or depreciation by the gross sound value.
5. Apply the above ratio to the value (insured or insurable value as the case may be) of
the damaged or depreciated goods which will give the amount of particular average
loss.
6. Of the amount thus arrived at, the insurer is liable for that portion which the sum
insured bears to the value (insured or insurable).
Examples
1. A quantity of cotton is shipped and insured under a valued policy for Rs.10,000
being its full value. The cotton is damaged to the extent of 20 percent during the
voyage; in addition, the market value of cotton has declined. If the cotton had arrived
uninjured, it would have been sold for Rs.8000, owing to it decline in market value.
In its damaged condition it gets sold only for Rs,6,400.
It is by this comparison of sound and damaged values at the destination that the
extent of damaged is ascertained.
2. Calculate the partial loss amount payable from the information given below:
Cargo worth Rs. 20,000 was sent on a shipment. Half of the goods are damaged
which realized Rs.4000 at destination. If the damaged goods would have realized
(a) Rs.8000, (b) 16,000, had they reached undamaged, calculate the loss in each
case.
(a) Gross sound value on arrival (half) Rs. 8000
Gross realized value on arrival Rs. 4000
Damage Rs. 4000
Damage is Rs.4000, which is half of gross sound value. Therefore, the claim on the
policy is half of Rs.10,000 , that is Rs. 5000.
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(b) Gross sound value on arrival Rs. 16,000

Gross realized value on arrival Rs. 4000
Damage Rs.12,000
Damage is Rs.12,000, which is three fourths of the gross sound value. Therefore,
the claim on policy is three fourths of Rs.10,000, that is Rs.7,500.
The main reason for the above computation is to keep the underwriter free from the
liability or otherwise of the rise or fall in the price of the damaged goods.
(ii) Valuation of Services : The valuation of services removes the defects of
memorandum clause which is used to free certain commodities from particular average
and in the case of other commodities the damage has to be at least 5 percent to become
recoverable.
Specifically, the provisions are:
• Corn, fish, slat, fruit, flour, hides and skin etc. are warranted free from particular
average unless the ship is stranded.
• Sugar, tobacco, hemp, flax, hides and skins etc., are warranted free from particular
average unless the ship is stranded or the loss amounts to 5 %.
• All the other goods are warranted free form particular average unless the ship is
stranded or the loss amounts to 3 %.
The stranding of the ship vitiates the Memorandum and renders insurers liable for any
particular average loss which has occurred on the voyage irrespective of the franchises
mentioned. Percentage has to be taken into consideration in ascertaining whether the
franchise is reached, but when attained, the damage is paid in full. If the particular
average reaches the stated percentage, the insurer becomes liable in respect of the whole
loss and not merely for the excess over the franchise or exemption limit.
As has been mentioned above, the particular average loss can be claimed only when it
exceeds ‘certain fixed limit’ of the total value of the goods. But this limit or percentage may
account for a huge amount when a very large amount has been insured. In such a case, it
will work as a great hardship to the assured as he will have to suffer this partial loss
himself. In order to lessen the rigours of memorandum clause, the subject matter is
divided in sections known as ‘series’ and the franchise i.e. the exemption limit will be
considered for each series separately for the purpose of calculating particular average
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loss. The subject – matter may vary according to the type of interest, packing, original
localities. The last series which does not fulfill the required limit or amount is called tail
series. A tail series is dealt as a complete. The assured is free to recover particular
average in respect of each series separately.
(iii) Particular Average on Ship : In case of partial loss of ship, the following factors are
considered:
1. Where the ship has been repaired, the assured is entitled to the reasonable cost of
the repairs less the customary deductions. The amount on repairs shall not be more
than the sum insured.
2. Where the ship has been partially repaired, the assured is entitled to reasonable
cost of such repairs and reasonable depreciation.
3. If the ship has not been repaired, and has not been sold in her damaged state
during the risk, the assured is entitled to be indemnified for reasonable depreciation
arising from the unrepaired damage.
Thus, the measure of indemnity for particular average is the reasonable cost of repairing
the damage less customary deductions ‘new for old’. If the damaged parts of the ship are
old, then the insurer is obliged to indemnify the insured only to the extent of the value of
old parts. But, when new parts are added, the difference between the value of new parts
and the value of the old parts are made. Insurers are liable for the cost of repairing
particular average damage to the ship irrespective of the insured or actual value of the
ship; where temporary repairs are necessary the insurers are liable for such repairs in
addition to the permanent repairs. Where a ship cannot be repaired, at the port of refuge,
cost of removal to another port is regarded as part of the cost of repairs. Extra expenses
involved in ‘over-time’ working are not allowed.
(iv) Particular Average in case of Freight : Where there is a partial loss of freight, the
measure of indemnity is such proportion of the sum fixed by the policy in the case of a
valued policy, or of the insurable value in the case of an unvalued policy as the proportion
of freight lost by the assured bears to the whole freight at the risk of assured under the
policy.
4.3 Expenses
These are the expenses incurred by the ship owner for labour, salvage, etc. They are
discussed below:
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(a) Particular Charges [Section 64 (2)]

Expenses other than General average charges and salvage charges are called Particular
charges. It is the loss incurred consciously to safeguard the insured subject matter.
Particular charges are however, not included in Particular Average.
(b) Sue and Labour Charges (Section 78)
This can be explained citing the following example. A ship is transporting hide. But during
the trip it is found that seawater has damaged the hide. So the expenses incurred in
reconditioning the hide at an intermediate port would qualify for sue and labour charges.
This however does not include general average loss, salvage charges, expenses caused
in averting an uninsured loss.
(c) Salvage charges (Section 65)
This is the amount payable to the person recovering or salvaging property from sea.
(d) Difference between General Average Loss and Particular Average Loss
General Average Particular Average
It is incurred for the benefit of all interests It is incurred for the benefit of any of the
or parties. interests or parties.
It is always done voluntarily and It is accidental or fortuitous.
intentionally and is reasonably incurred
Loss is shared by all those who are It is paid by the insurer.
benefited by the general average loss act
It includes expenditure and sacrifice along It results from an accident or normal perils
with loss of the sea.
5. Types of Marine Insurance Policies

Different aspects of a marine policy are dealt with in Sections 24 to 34 of the Marine
Insurance Act, 1963. According to this Act a marine contract is not acceptable if it is not
embodied in a marine policy (Section 24). A marine policy should contain the following
specifications mentioned in this Act (25) :
1. Name of the assured, or someone representing him
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2. The object being insured and the perils against which the insurance cover is sought
3. The voyage, period of time, or both
4. Insured sum
5. Name of insurer.
Time and Voyage Policy (Section. 27) – The voyage policy is the one used to insure a
subject matter ‘ at and from or from one place to another. This policy covers the subject
matter irrespective of the time factor. It covers the subject matter from the port from where
the voyage commences (terminus quo) till the port where the voyage ends (terminus ad
quem).The time policy on the other hand covers a subject matter for a specific period of
time.
Valued Policy (Section 29) – This kind of policy specifies the settled value of the subject
matter that is being provided cover for. According to this policy unless there is a fraud, the
value decided by the insurer and the assured is irrefutable, whether the loss is total or
partial. A valued policy is in consonance with a wagering contract, that is if the subject
matter is overvalued, then a valued policy becomes a wagering contract because a
marine insurance contract is a contract of indemnity (there is no scope of making a profit
out of such a contract). For a marine contract to become a wagering contract it has to be
proved that the over- valuation was fraudulent.
Unvalued policy (Section 30)– This policy does not fix the value of the subject matter
being insured.
Floating policy (Section 31) – This kind of policy includes only the general insurance
terms. It does not include the name of the ship and other details. The other details are
required to be furnished through subsequent declarations, which should be eventually
endorsed on the policy. This kind of policy is helpful for the assured who does not know
the name of the ship transporting his goods, or by carriers, warehousemen with limited
interests in the goods.
Open Policy: Open policy and Open cover are different. Open policy is for transit within
India. Premium is collected in advance at the commencement of the one year period
based on the expected total declaration value i.e., sum insured. Only declaration sheets
are sent by the insured and open policy is stamped with Re.1/- as it is inland. Open cover
is for import/export. The sum insured is not mentioned in open cover document. Individual
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certificates are issued and insurance stamps are affixed based on the sum insured of
respective values.
An open cover is issued in the case of import/export. The indigenous purchases/ sales can
be covered under an open policy for a continuous automatic cover. An open policy, unlike
an open cover is a stamped document with necessary clauses attached. It is issued for a
period of 12 months and all consignments cleared during the period are covered by the
Insurer.
6. Warranties
Sections 35-43 of the Marine Insurance Act, 1963 deal with the warranties. There are two
types of warranties, those warranties that simply denote the insurance cover provided, and
the second being promissory warranties - promise by the insurer that the warranties will be
upheld.
Section 35 (2) classifies warranties as Express and Implied warranties.
Breach of Warranty is permitted only under three conditions that are listed in Section 36 of
the Marine Insurance Act, 1963. According to this section a breach can be excused:
(a) If the warranty is rendered unlawful by a subsequent law, that is by statute
(b) If due to changed circumstances the warranty loses relevance
(c) If the insurer waives the breach, that is by volition.
6.1 Express Warranties

This form of warranty may be any form of word that serves as an inference of warranty. An
express warranty must be included in the policy or incorporated into the policy by
reference if it is contained in any other document.
(i) Warranty of Neutrality (Section 38) : Sub-section (1) states that insured property,
whether goods or ship is expressly warranted neutral. This implies that as far as the
assured can control, the insured property is deemed neutral. This is to ensure neutrality of
the vessel and the goods in case of a war situation.
Sub-section (2) deals with the neutrality of the ship alone. It states that the ship should be
properly documented, and should produce necessary documents to establish neutrality. It
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also states that the shiper should not suppress documents or falsify them. The insurer is
not liable if there is a breach.
(ii) Warranty of Good Safety (Section 40) : “Where the subject-matter insured is
warranted “well” or “in good safety” on a particular day, then it is sufficient if it be safe at
any time during that day.
6.2 Implied warranties

(i) Warranty of Seaworthiness of ship (Section 41)
(a) This section states that at the commencement of a marine adventure there is
an implied warranty in the voyage policy that the ship is seaworthy. However,
this does not apply to the cargo.
(b) There is an implied warranty that while a ship is at a port before embarking on
the marine adventure, the ship should be able to withstand the common perils
of the port.
(c) A voyage has different stages, thus there is an implied warranty that the ship
should be seaworthy (with respect to equipment, crew, etc) for every stage
she has been insured for.
(d) A ship is considered seaworthy when she is capable of countering the
common perils of the sea, for that marine adventure, which has insurance
cover.
(e) There is no implied warranty of seaworthiness of the ship in a time policy. But
if the assured sends the ship in an unseaworthy condition then the insurer is
not liable.
(ii) Warranty of Legality (Section 43) : This section states that there is an implied
warranty that the insured marine adventure should be lawful. An adventure that is insured
should abide by local and foreign laws, or else it is deemed illegal. Similarly, the adventure
should be carried out in a lawful manner, unless the assured can prove that the mis-
demeanour crept in without his knowledge, and that it was beyond his realm of control.
For example in Pipon v Cope the ship was arrested in England for the act of smuggling,
and it was found that the master and the owner were hand in glove in the entire act. The
insurer was help not responsible.
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7. Freight Insurance
Freight’ is defined as the profit that a ship owner makes by transporting his own cargo or
the cargo of another person.
7.1 Types of Freight:
(a) Prepaid Freight – This is paid in advance by the owner of the goods, at his own
risk. He covers this cost while insuring the goods, but in case of failure of delivery
the freight is not refundable.
(b) Freight payable on delivery – This is paid once the goods are delivered. If the
carrier fails to deliver the goods, then they are not entitled to the freight. But they are
entitled to the freight even if the goods are delivered in a damaged state.
(c) Lump sum Freight – This is under certain conditions (when a huge consignment is
being transported), when the carrier is not required to deliver the entire cargo to
receive the lump sum of freight, but a sizeable amount of the cargo should be
delivered.
(d) Time charter hire – This is paid to the ship owner by the owner of the goods for
making use of the ship for transporting his goods. But if due to any cause the ship is
not operational for more than 24 hours then the payment ceases.
8. Hull Insurance
‘Hull’ in marine insurance refers to ocean going vessels (ships, trawlers, barges, fishing
vessels, etc.), their hull and machinery. This also covers “builders risks”, that is when the
ship is under construction.
Ships are the subject matter of hull insurance. There are different kinds of ships with
respect to design, which decides the purpose of the ship. The design and construction of a
ship is regulated by the respective Classification societies. They scrutinise the material
used for construction, steel, engines, boilers, etc. Once the ship is constructed it has to be
registered in compliance with the Merchant Shipping Act. The Indian Register of Shipping
(IRS) deals with the registration of ships. This society provides the certification after
assessing the mechanical and structural fitness of the ship.
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8.1 Terms used to measure a Ship

(a) GRT (gross Register Tonnage): This is calculated by dividing the volume in cubic
feet of the hull, below the tonnage deck, plus all spaces above the deck with
permanent means of closing by 100 cubic feet. Gross register tonnage (GRT,"gt") a
ship's total internal volume expressed in "register tons", each of which is equal to
100 cubic feet (2.83 m3). Gross register tonnage uses the total permanently
enclosed capacity of the vessel as its basis for volume. Gross register tonnage is not
a measure of the ship's weight or displacement and should not be confused with
terms such as deadweight tonnage or displacement.
(b) NRT (Net Register Tonnage): This is the space that is meant only for the carriage of
goods. It is therefore the gross tonnage excluding space occupied by machinery,
ballast space, accommodation of crew, etc. Net register tonnage subtracts the
volume of spaces not available for carrying cargo, such as engine rooms, fuel tanks
and crew quarters, from gross register tonnage.
(c) DWT (dead weight Tonnage): Is the amount of cargo in tons required to load a ship
to her maximum.
8.2 Types of Vessels

(a) Ocean going or general cargo vessels – These vessels are in the 5,000 to 15,000
GRT range.
(b) Dry bulk carriers – These vessels range from a few thousand to over 70,000 GRT.
Mostly employed in carrying coal, bauxite, iron, other ores, food grains, phosphates,
etc.
(c) Tankers or Liquid bulk carriers – They are used to transport liquid shipments. There
are also- super tankers for carrying huge consignments.
8.3 Types of Hull Insurance Policies

1. Hull and Machinery Insurance: This policy is to protect the ship owner from loss,
like partial, total loss (actual total loss or constructive total loss). This also covers
the ship owner’s contribution in case of a general average loss and also bears
expenses like salvage charges, liability towards other vessels in case of collisions,
labour charges etc. It provides cover to the hull, equipment, engines, boilers, other
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machinery, stores etc. But this policy does not provide cover to the consignment
being shipped.
2. Disbursement and Increased Value Insurance: This policy provides insurance for
all those items not included in the hull insurance estimation. This insured value can
amount to 25 percent of the hull insurance value. This is meant to cover the charges
borne by the ship owner while preparing the ship and stocking the ship before
embarking on the marine adventure. But this amount can be insured only if freight
insurance is not already taken. This policy also provides protection to the ship owner
from loss, which may be partial or total (actual total loss or constructive total loss).
This also covers the ship owner’s contribution in case of a general average loss and
also bears expenses like salvage charges, liability towards other vessels in case of
collisions, labour charges etc.
3. Premium of Insurance: This is also called the premium reducing policy. The
amount of insurance cover provided for a marine adventure is very high; therefore
the premium is also a considerable amount. So, it is safe to insure the premium on
these covers, including the premium of the premium reducing policy. This is
applicable only to a total loss situation, whereby the amount of indemnity
depreciates by one-twelfth every month.
4. Returns of Premium: This policy is also applicable for a total loss situation. It is to
insure the prospective returns in case of total loss.
5. Loss of Hire Insurance: This policy protects the owner from the loss incurred by
him incase the ship is stranded due to some failure in machinery or anything else
that is covered in the hull and machinery policy.
6. Loss of Profits Insurance: This is also to protect in case of total loss. This cover
protects the Charterer’s loss of profits. This is provided over the period the ship is
chartered for in case the ship is time chartered, or for the voyage if the ship is on
hire for a voyage.
7. Ship Repairer’s Liability: Even when the ship is being repaired, there is a chance
of expenses other than the repairs, if there is negligence or an accident. Thus, the
repairer is liable to the ship owner in case something happens while the repair work
is in progress. This insurance provides cover to the repairer against such a situation.
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8. Builders’ Risk Policy: Like the previous policy, this covers the risk of the builders.
It covers the builders from the beginning of construction, till delivery. It also includes
all the test and trials conducted before the delivery of the vessel to the concerned
buyers.
9. Charterer’s Liability Policy: When a vessel is chartered, if some damage is caused
to the ship due to the fault of the charterer, then the charterer is held responsible.
This policy provides cover against such a loss.
10. War Risks: The Government war risks scheme covers loss under policies like hull
and machinery, reducing premium, freight, disbursement, in case of war and strikes.
But this policy does not provide cover against policies like loss of hire, etc.
9. Cargo Insurance
Cargo insurance is codified under the Institute of Cargo Clauses (A), (B) and (C). Under
each of the three clauses the provisions are categorised as follows:
(i) Risks Covered : Risks covered under the three Institute Cargo Clauses (ICC) are
different.
(ii) Risk Clause : This clause lists the different types of risks covered by ICC (A), (B)
and (C). ICC (A) –
• This clause provides cover for all perils, which are capable of causing loss or
damage to the insured subject, and excludes perils that are not specified in the
policy. It covers the general average charges and salvage charges caused as
a result of perils included in the policy only. It also provides cover to the
assured in case of a collision, where both the ships are to be blamed.
(a) ICC (B) and ICC (C)
The risks covered under these two clauses are enumerated below.
• Fire – This clause states that any damage caused as a result of a fire or an
explosion (heating, smoke,), including damage caused while extinguishing the
fire are covered by insurance. However, this does not apply to a situation
where the fire is caused due to a peril, which is excluded (not covered under
the insurance). Cargo that is affected is also not covered.
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• Covers a ship that is sunk or stranded or capsized. Loss caused due to land
conveyance.
• Collision with another vessel or with any other object from land or air – this
does not cover loss caused due to movement of goods in the ship due to
turbulent weather. Likewise, it does not cover damage caused to goods due to
jolting, while being transported by rail or road.
• Disposal of cargo at a port of distress
• General average loss
• Jettison – This states that jettison (to throw property overboard) done with the
intention of countering an imminent danger can be classified as a general
average sacrifice. But in a situation like this if the cargo and the ship belong to
different owners then a claim for general average sacrifice can be put up. If
the ship and the cargo belong to the same owner then there is only one
interest involved, so it does not qualify as general average sacrifice, the loss is
however covered under the policy.
The loss and damage caused due to the above mentioned is provided cover under
both ICC (B), and ICC (C). But apart from the listed risks ICC (B) provides cover
against some other risks like - are:
• Lightning, earthquakes, loss caused due to volcanic activity.
• Washing overboard - It has to be proved beyond doubt that the cargo was
washed overboard and not lost overboard to claim such a loss.
• Loss caused due to incursion of water (sea, river or lake) into the vessel that
may damage engine, cargo, storage, etc.
• It also covers the loss incurred when a package is lost or is damaged in the
loading and unloading process – this is also called sling loss.
The difference between the ICC (A), (B) and (C) is that ICC (A) covers all risks
except the ones specifically excluded from the policy. For cover under ICC (A), the
assured has to show that loss of cargo was during the period for which the insurance
cover was provided. If the insurer thinks otherwise then he has to prove that an
excluded peril was involved in causing the loss.
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On the other hand ICC (B) and (C) cover only specific risks. For cover under ICC (B)
and (C), the assured has to prove that the loss was caused within the time frame of
the policy and that the loss was caused by a listed peril. Unless the insurers are able
to prove otherwise, the assured is entitled cover.
The Risk Clauses listed in the three sets of the Institute of Cargo Clause are
different and also, there are some differences in the General Exclusions Clauses.
Other than this all the other clauses are the same.
(b) General Average Clause (Clause 2)
• This says that the General Average and Salvage Charges are covered by
insurance only if the loss is caused due to perils that are included in the policy.
• The assured has to make a contribution towards a common fund, in case of
loss of goods due to average general sacrifice.
• The insurer is liable to cover the entire contribution of the assured in case of
general average contribution. But the insurer is not liable to cover the
contribution in case of under insurance.
• Salvage charges can be recovered under the policy.
• If a salvage award is given then the beneficiaries of such an award are to
make a contribution for the same. But the contribution of each should be in
proportion to the saved interest.
• The insurer is liable to salvage charges incurred by the assured. That is, the
insurer is liable to cover the contribution made by the assured towards such a
contribution.
(c) “Both to Blame Collision” Clause (Clause 3) : This states that the insurer is liable
to cover loss incurred by the assured in case of a collision, as under the contract of
affreightment.
(d) Exclusions : These are the perils or risks that are excluded from a marine
insurance policy, that is they are not provided insurance cover.
Statutory Exclusions: These are described under Section 55 of the Marine
Insurance Act, 1963. According to Section 55 (1) of the Act the insurer is liable for
any loss caused only due to perils of the sea, which has been provided insurance
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cover. According to sub section (2) the insurer is not liable for any loss incurred due
to a malpractice by the assured, but the insurer is liable if the loss is proximately
caused by a peril of the sea even if it could have been avoided by competency from
the crew and the master. The sub section also excludes the following from insurance
cover, unless the policy otherwise provides for it:
• Delay,
• Wear and tear,
• Leakage,
• Loss due to rats and vermin,
• Loss due to inherent vice of the insured subject matter,
• Damage to machinery not caused due to perils of the sea.
It is pertinent to discuss statutory exclusions, before going into the other exclusion
clauses embodied in the Institute Cargo Clauses. The different Exclusions under
ICC are:
General Exclusions Clause (Clause 4) - This is applicable to ICC (B) and (C)
This clause enumerates the different types of loss/damage/expenses that are
excluded from a policy. Sub clauses dealing with the exclusions are as follows:
4.1 – Loss attributable to willful misconduct of the assured
4.2 – Ordinary leakage, breakage, wear and tear
4.3 – Loss due to improper or insufficient packing of the insured cargo
4.4 – Loss due to inherent vice of the subject matter: If goods are stored close to
goods that possess an inherent vice that causes loss then it is covered by
insurance.
4.5 – Loss caused due to delay, even if the delay is caused due to an insured peril
of the sea. This however, does not apply to general average and salvage
charges.
4.6 – Loss due to financial default on behalf of the owners, charterer’s, etc.
4.7 – Willful destruction or damage of the insured subject matter by the act of a
person or group.
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4.8 – Loss due to weapons using nuclear fissile material.

Note: Except Sub Clause 4.7 all the other sub clauses appear in the General
Exclusion under ICC (A). This risk therefore is covered under “ all risks” of ICC (A).
(e) Unseaworthiness and Unfitness exclusion clause(Clause 5): This states that
there is an implied warranty as embodied in section 41 of the Marine Insurance Act,
1963 that the ship should be seaworthy at the beginning of each stage of the
voyage.
(f) War Exclusion Clause (Clause 6): It states that insurance will not provide cover for
loss or damage caused as a result of:
6.1 – “war, civil war, rebellion, insurrection or civil strife arising there from, or any
hostile act by or against a belligerent power”.
6.2 – “capture, seizure, arrest, restraint or detainment, and the consequences
thereof or any attempt thereat”.
6.3 – “derelict mines, torpedoes, bombs, or other derelict weapons of war”
Note: The above-mentioned clauses are as under ICC (B) and (C). There is one
difference with respect to ICC (A) namely in sub clause 6.2, piracies are also
excluded.
(g) Strikes Exclusion Clause (Clause 7) : This is common to all the three sets of cargo
clauses. This clause excludes loss, damage or expenses caused due to strikes,
riots, etc. from insurance cover.
7.1 – It excludes loss caused by strikes, civil commotion, riots, union uprisings, etc.
7.2 – It excludes loss resulting from strikes, civil commotion, riots, union uprisings,
etc.
7.3 – It excludes loss caused by terrorist activity or by disturbances backed by
political motivation.
(h) Duration : The period for which the insurance policy lasts is covered by the
following clauses:
Transit Clause (clause 8) - This states that the insurance cover is provided for the
goods from the time they leave the warehouse or other place of storage or as
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mentioned in the policy to embark on the voyage, till it is eventually delivered at the
destination. The insurance policy expires:
• Once the goods are delivered at the warehouse or storage facility at the
destination port as mentioned in the policy;
• On arrival at an intermediary warehouse or storage facility at the will of the
assured for storage or distribution; and
• After 60 days from the date of discharge of the cargo at the destination port.
If the goods are transported from the destination to another place before the end of
the policy, then the cover would last only till the commencement of transit to the next
destination.
In accordance to the above clause the insurance cover exists in case of:
• Delay – if the delay is not within the control of the assured then the insurance
cover is provided. At the same time there is no coverage for damage caused
due to delay, even if it is by an insured peril.
• Reshipment and Transshipment – Insurance covers these if mentioned in the
contract of affreightment.
• Discharge of goods.
• Deviation – Although the marine insurance clause exempts the insurer from
liability incase of a deviation, ICC extends the insurance cover without the
need for payment of extra premium or intimation.
(i) Termination of Contract of Carriage (Clause 9): If due to some unforeseen reason
the voyage is terminated or if the contract of carriage is terminated at some port
other than the destination port then the insurance policy also terminates
simultaneously. But if the assured needs cover, then he has to intimate the insurer
and ask for continuation. But the intimation has to be on time and an extra premium
has to be paid. Then the insurance cover would continue till the cargo is sold or
delivered at any intermediary port, or after 60 days of arrival at any such place or
port. The insurer is liable only if the termination is due to an insured peril of the sea.
(j) Change of Voyage Clause (Clause 10): According to the Marine Insurance Act, if
the destination of the ship is voluntarily changed, then it is termed as change of
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voyage. The Act also exempts the insurer from any form of liability in case of a
change of destination, unless it is mentioned in the policy. But clause 10 of ICC
states that the change in voyage is covered, at a premium and conditions decided
on by the insurer on prompt intimation.
(k) Inland Transit Clauses: Manufacturers require transit insurance for the raw
materials purchased by them and finished goods supplied to their customers. An
open policy is issued to cover a number of incoming and outgoing consignments
automatically. For regular exporters and importers, continuous and automatic
insurance protection is afforded by open cover. Open policy is an ordinary cargo
policy expressed in general terms and the sum insured is for an amount sufficient to
cover a number of dispatches. The sum insured is adjusted against each dispatch -
and so it is called a floating policy.
10. Inland Transit Insurance Clauses

The movement of cargo within the country is known as Inland Transit. The inland transit of
the cargo may be by - Rail or Road or Inland water ways and Coastal Shipments.
Sometimes sending cargo by Air or Post is also likely.
1. Inland Transit Rail / Road Clauses: These clauses are attached to policies
covering transit by Rail/Road. There are three types of clauses viz.
(a) Inland Transit Rail / Road Clause “C”: This clause covers the perils of Fire and
Lightning
(b) Inland Transit Rail / Road Clause “b”: This clause covers the perils of:
• Fire
• Lightning
• Breakage of bridges
• Collision with or by the carrying vehicle
• Overturning of the carrying vehicle
• Derailments or accidents of like nature to the carrying railway wagon /
vehicle
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Inland Transit Rail / Road Clause “A”: This clause covers All risks of Loss or
damage to the subject matter insured except the excluded risks mentioned
below:
(c) Common Exclusions Under Clause A/B/C
• Wilful Misconduct
• Ordinary Leakage/ breakage/ shortage etc. i.e. Ullage Losses check
ullage ?
• Insufficiency/ unsuitability of packing
• Delay
• Inherent Vice
• War and allied perils
• Strike, Riot, Civil Commotion & Terrorism (SRCC)*
*Note: SRCC risks can be covered by payment of extra premium.
(d) Common Exclusions Under Clause “B” & “C” In addition to exclusions 1 to 7
mentioned above, Malicious Damage is also excluded. However, this can be
covered by payment of extra premium.
(e) Extention of Cover
2. Under Inland Clause ‘B’/ Icc ‘B’ : Sometimes instead of availing All Risks policy
i.e. as per Inland clause ‘A’ for inland transit and Institute Cargo Clause “A” for
imports and exports, the insured can take cover a per Clause “B” and extend the
same to include various extraneous perils, subject to payment of additional premium.
Examples of such perils include:
— Theft, Pilferage, and Non-delivery
— Fresh/rain water damage
— Damage by Hook/ oil/ mud/ acid
— Damage/Leakage (not ordinary leakage)
— Country damage (Cotton)
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— Shortage
— Bursting and Tearing of bags
— S.R.C.C Risk
Inland policies ‘A’, ‘B’, ‘C’ can be extended to include SRCC risk subject to SRCC Clause.
War and SRCC risks: Ocean policies can be extended to include War & SRCC risks with
additional premium. Air transit policies can be also extended to include war and SRCC
with additional premiums.
11. Marine Insurance Claims

When a policy has been issued the risk for the peril insured against is covered. However,
when the contingency against which the protection is given or when the loss insured
against actually occurs, the insured has got to make a claim on the insurer for
indemnification of loss. If loss does not occur, no payment would be made to the insured.
(i) Evidence : Before admitting a claim, relevant evidence in connection with the policy
is required. In marine insurance, the policy is generally issued on mutual understanding
and Good faith of both the parties. Value of the subject matter, nature of the subject
matter, warranties, insurable interest, etc. are some of the matters to be considered at the
time when the claim comes.
Claim is made in case of loss or damage as specified in a marine insurance contract. But
before a claim can come through several queries have to be answered that will validate
the claim. These are:
• The proximate cause of the loss or damage
• Is the cause of the damage or loss an insured peril in the marine contract?
• Finally, what amount of indemnity is payable, with respect to the above?
As soon as the loss is incurred the claimant should intimate the insurer. The available
details should be recorded to avoid discrepancies, while passing the claim. When a claim
is intimated, the insurer needs to verify certain facts, like:
• If there is a delay in intimation of the claim
• If valid insurance documents are presented
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• Whether timely payments of premium have been made

• Whether the loss occurred during the period for which insurance cover was
provided.
(ii) Procedure : Cargo claims procedures are classified as under :
1. The insured cargo has suffered loss or damage, when it arrives at the destination
port. In such a situation the assured or the consignee has to inform the following:
The insurer – this is done so that the insurer can appoint a surveyor to
• Find out the nature and cause of the damage or loss incurred; and
• Establish the extent of loss.
(Even unloading survey is arranged in many cases and such survey can establish
validity of possible claims.)
This intimation is necessary, as transit cover ceases as soon as the cargo is
delivered to the consignee. Thus any loss caused after delivery is not provided
cover.
• The Representative of the Carrier – This is to enable the consignee to charge
the carrier for loss or damage done to the goods.
• If necessary the Port Authority.
2. If the insured goods have been delivered at an intermediate port – This happens if
the carrier has abandoned the voyage, or if the goods are so badly damaged that
the transit becomes unnecessary. Under such circumstances the insurance cover is
terminated, even if the situation is beyond the control of the assured. So, the
assured has to notify the insurer, and request for continuation of the cover.
3. When the insured goods arrive at the destination port, but the loss incurred is due to
a General Average – In such a situation the consignee is duly informed by the
representative of the carrier, when the consignee presents the bill of lading or other
papers entitling him to delivery. The consignee may then be asked to produce
General Average Security by means of an Average Bond and an additional security
by means of a cash deposit (a percentage of the value of the goods); Bank
Guarantee; or Insurer’s Guarantee.
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In case of a General Average loss, the General Average Adjuster has to be informed
so that he can –
• Check whether the loss was incurred due to General Average causes
• Make appropriate reductions in the contributions in case some amount of
damage is caused during the voyage.
(In all marine claims, there is a concept of recovery from the carrier. The claimant
should protect the recovery rights of the insurer. Otherwise, the claim will be
prejudiced and it may become a non-standard claim where not more than 75% of the
admissible claim is paid. The legal procedures to be followed by the insured to
protect the recovery rights are prescribed in the respective Acts such as Railways
Act, Carriers Act, Carriage of Goods by Air Act, etc. The most important documents
are letter of subrogation and special power of attorney to be executed and noterised
to be submitted to the insurer before receiving the claims payment).
(iii) Documents required for Claim : Following are some of the important documents
required at the time of claim:
1. Policy or certificate of insurance
2. Bill of lading – it defines the scope of the contract of carriage.
3. Invoice or bill stating the terms and conditions of sale
4. Copy of protest –in the event of stranding of or accident to the vessel, the master of
the ship notes ‘protest’ before a counsel or a notary public. The protest states that
everything was done to bring to safety the ship and cargo and loss or damage was
not due to lack of diligence on the part of the master or crew.
5. Certificate of Survey – to find out whether the necessary franchise is reached or not
in case of particular average.
6. Account sales or Bill of Sale – similar documents where goods have been sold. The
difference between the gross sound value and proceeds as per account sales might
be accepted as the amount of loss.
7. Letter of subrogation – it enables the underwriters to sue and recover compensation
from third parties where the same is due.
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MARINE INSURANCE
8. Cost of Protection – incase of partial loss claims, cost of protection is paid by the
underwriters apart from the particular average if there was a successful claim. In
unsuccessful claims insurers are not liable to pay these charges.
Examples
(a) 25 personal computers were insured for Rs.35,00,000 with the following invoice
value:
Model A – 20 pc @ Rs.1,00,000 each = 20,00,000
Model B – 5 pc @ Rs.2,00,000 each = 10,00,000
Total value CIF = 30,00,000
When the consignment arrives at the destination, it was found that one of the Model
A and one PC of Model B were missing.
Invoice value of missing PC
Invoice value of one Pc Model A Rs.1,00,000
Invoice value of one Pc Model B Rs.2,00,000
Total Rs. 3,00,000
Total invoice value of Rs.30,00,000 was insured for Rs. 35,00,000,
So the claim amount is
3,00,000 × 35,00,000
= Rs.3,50,000
30,00,000
(b) A consignment of goods was insured for Rs.22,00,000. The Gross Arrived Damaged
Value (GADV) at destination is Rs. 8,00,000. And the Gross Arrived Sound Vlue
(GASV) is Rs.20,00,000.
The depreciation is
GASV = Rs.20,00,000
Less GADV = Rs.8,00,000
Difference = Rs.12,00,000
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Difference × 100
The Loss is = =%
GASV
12,00,000 × 100
= = 60 %
20,00,000
So, 60% of the insured value of Rs.22,00,000 = Rs.13,20,000 will be paid as claim.
It should be noted here that gross value includes wholesale price, (or the estimated
value) with freight, landing charges, and duty paid.
(c) A consignment of goods under ICC (A) was insured for Rs. 24,00,000. On arrival
broken consignment value was Rs.1,06,800; the invoice value was Rs.21,50,000.
Rs.3000 was paid as sorting charges.
The claim is worked out as below:
1,06,800 x 24,00,000 = 1,19,220 + 3000 = Rs.1,22,220.
21,50,000
(d) A consignment of apples in 400 cases was booked from Mumbai to New York and
was insured for Rs.40,00,000. At the destination it was noticed that
1. 120 cases were damaged by fire – depreciation @ 30%
2. 40 cases damaged by sea water – deprecation @ 50 %
3. 50 cases were found to be missing due to pilferage
4. 10 cases were lost overboard during discharge
5. 218 cases arrived sound.
6. The survey fee was Rs.10,000
The purpose of the given case is to calculate the loss under the different clauses A
B & C.
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Find the claim amount if insurance is under ICC (A), ICC (B), and ICC (C).
Particulars Insures Depreciation Claim
Value
1 120 cases were damaged by fire 12,00,000 30% 3,60.000
2 40 cases damaged by sea water 4,00,000 50% 2,00,000
3 50 cases were found to be missing 5,00,000 - 5,00,000
due to pilferage
4 10 cases were lost overboard during 1,00,000 - 1,00,000
discharge
Total 9,60,000
Solution
A – Claim under – ICC (A) – All Risks
All claims Rs. 9,60,000
+ Survey Fees Rs. 10,000
Total Amount Rs. 9,70,000
B – Claim under – ICC (B) – named risks covered ( pilferage not covered)
Loss amount payable = Total Claim – loss by pilferage
= Rs.9,60,000 – Rs.5,00,000 = Rs.4,60,000 + Survey fees Rs.10,000
= Rs. 4,70,000
C – Claim under – ICC (C) – named risks covered, other losses not covered
except fire loss.
Thus, loss payable is for good a damaged due to fire only.
120 cases lost by fire = Rs. 3,60,000
+ Survey Fees = Rs. 10,000
Total = 3,70,000
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(e) There was a 500 bales consignment for Rs.3,00,000 under ICC (B) . There were 21
unidentified bales and 22 bales were lost. Insurance claim for - 500 bales insured for
Rs.3,00,000 will be as under:.
21 × 600 × 50
(1) 50 % of 21 bales unidentified = = Rs.6,300
100
(2) 22 bales lost @600 = Rs. 13,200
Total = Rs. 19,500
(f) At the time of general average act, a vessel had unrepaired damage from a previous
accident amounting to Rs. 2,00,000.
The Sound value on arrival at destination was Rs.1,00,00,000
The damage sustained on current damage was Rs.5,00,000
Therefore the contributor value would be the sound value Rs. 1,00,00,000
Less cost of repairs Rs. 2,00,000
Outstanding at destination (current) Rs. 5,00,000 Rs. 7,00,000
Contributory value Rs. 93,00,000
(g) Cargo jettisoned on which freight is payable at destination = Rs.4,00,000
Cost of discharging cargo = Rs. 90,000
Therefore, amount to be made good for loss of freight = Rs. 3,10,000
Sound value of the Ship = Rs.50,00,000
Estimated cost of repairing particular average (less) Rs.10,00,000
Value of vessel immediately preceding the GA sacrifice Rs.40,00,000
Amount realized by the sale of the vessel Rs. 4,00,000
Therefore the amount to be made good in GA in respect of the sacrifices
Rs. 36,00,000
(h) Adjust the General Average from the - following facts:
Sound market value of ship at destination = Rs. 8,00,00,000
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MARINE INSURANCE
Damage caused by collision = Rs. 20,00,000

Damage in existence from previous content = Rs 10,00,000
C & I value of 1000 containers = Rs.3,00,00,000
Freight due on all containers = Rs. 80,00,000
Use of discharge @ Rs. 200 per container;20% of the contaniers were jettisioned
for common safety and the vessel was then able to proceed to destination.
General Average Allowed:
1. 20% container jettisoned = Rs. 60,00,000
i.e. 200 containers
2. Freight 20 % of Rs. 8,00,000 = 1,60,000
Less: Expenses saved i.e.
200 × Rs. 200
= 40,000
12,00,000
Ship 72,00,000
Sound market value of ship = 8,00,00,000
Deduct damage = 30,00,000
7,70,00,000
Cargo
C & I value = 3,00,00,000
Deduct 200 containers lost = 60,00,000
= 2,40,00,000
Add freight made good = 60,00,000
= 3,00,00,000
Freight
Gross freight = 64,00,000
Add made good = 12,00,000
= 76,00,000
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Thus, Rs. 7,70,00,000 + Rs.3,00,00,000 + Rs.76,00,000 = 11,46,00,000

(i) ABC Limited, a dealer in chemicals approaches you for an open policy covering their
inland transits. Details are given as below:
• Cargo : Chemicals
• Transit : from anywhere in India to anywhere in India
• Annual turnover : Rs.100 million
• Limit per sending : Rs.2 million
• Limit per location : Rs. 5 million
• Cover required : ITC – A + SRCC
• Claims experience : 60 per cent
Ans: The above information is not sufficient for a prudent underwriting. The
underwriter must collect following additional information for exposure and
experienced underwriting:
(a) Information concerning cargo: packaging, new or used, valuation – basis, and
limits of liability.
(b) Information concerning conveyance: age, flag, ownership, classification, type
and size, ownership and management.
(c) Information concerning season: weather – hot or cold, rain and moisture.
(d) Information concerning voyage : length, route, direct, trans-shipment, inland
legs, road conditions, socio economics, port facilities, storage risk.
(e) Information concerning: political risk, economic conditions, handling facilities,
recovery, repairs, insured, consignee, agents.
(j) A Vessel named ‘The Ashoke on a voyage from Mumbai to Singapore carried 5000
containers with tea. Freight of Rs. 100 per container was payable on delivery. The
ship owner took a freight insurance value policy of Rs.6,00,000 at premium of 3% of
Sum Insured, subject to Institute Voyage Clause. 140 containers were damaged by
fire and 130 washed overboard due to heavy weather.
(i) Determine the claim payable applying the franchise clause on voyage policy.
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MARINE INSURANCE
(ii) Calculate the claim if there is damage of 140 units by fire.

(iii) Calculate claim under an unvalued policy of Sum Insured for Rs. 4,00,000 and
premium @ Rs.15000.
Ans:
(i) Determination of the claim payable applying the franchise clause on voyage
policy.
Claim under valued policy: Gross freight lost ÷ Insured value x Gross freight at
risk
= 270 / 5000 x 6,00,000 = 32,400 (payable)
Claim payable: Rs.270 x 100 = Rs.27,000 as claim exceeds 3 % of 6,00,000.
(ii) Claim only for loss of 140 containers:
140/5000 x 100 = 2.8%, which is less than franchise @3 %. Hence, not
payable
(iii) Claim under unvalued policy for Rs. 4,00,000 with premium
@Rs.15000.
Insurable value of freight = Gross freight at risk + Insurance premium
= 6,00,000 + 15,000 = 6,15,000
If insurable value of Rs.6,15,000 is insured for Rs.4,00,000, then loss of
Rs.27,000 will be payable for 27,000 x 400/615 = Rs. 17,560.
Note: Franchise is an example of deductible, like excess, but the difference is that,
in a franchise agreement, if the loss exceeds the franchise limit (3% in the given
case), the whole loss is payable. On the other hand, if the loss is below the
franchise limit, nothing is payable, like in the case of excess. But in the excess
agreement, when the loss exceeds the excess limit, the loss amount in excess of the
limit is only payable.
(k) From the following particulars, calculate the premium and the slip rate :.
— Vessel: M V Ashok
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— Line: International Shipping line

— Year built: 1990
— GRT : RS.15,000
— Insured value: Rs.20 crores
— Cargo carried: General
— Trading limit: World wide
— Total loss rate: 0.50 %
— Ex – TL rate : Rs.50 per GRT
— Deductible: Rs.10 lakh
Answer
1. Total Loss premium
@ 0.50 % on Rs.20,00,00,000 = Rs. 10,00,000
2. Ex – TL premium @ Rs.50 per GT = 50 x 15,000 = Rs.7,50,000
Total Premium (1 + 2) = Rs.17,50,000
3. Slip rate – 17,50,000/20,00,00,000 x 100 = 0.875%
12. Exchange Control Regulations

1. Direct Insurance outside India by residents – Residents of India are not permitted to
acquire insurance protection from Insurance companies in foreign countries without
prior permission from the Government of India and the Reserve Bank of India in
compliance with the General Insurance Business (Nationalisation) Act, 1972.
2. Currencies in which the marine policy can be issued – coastal shipment policies can
be issued only in the Indian Currency. Policies on consignments between India and
foreign countries can be issued in Indian currency or the currency of the foreign
country.
3. If a marine claim is payable in India, to either a person or a firm then the amount has
to be paid in rupees. If the claimant is abroad then the settlement can be made in a
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MARINE INSURANCE
foreign currency. But if the amount is too high then payment can be made by
remittance from India, though it requires the sanction of the Reserve Bank of India.
4. Remittance of export claims – Remittance in foreign currency is only possible, if the
insurer is able to prove that the person holding insurable interests is a non- resident.
5. Remittance of Import claims – The preferred practice is to settle the claims of the
importer in the local currency, but foreign currency settlements are allowed to pay
the overseas suppliers, so that goods can be replaced in case of damage. The
situation under which such a settlement is allowed is when the import is by the
government or a public sector enterprise and when imports are made against foreign
credits by a public sector enterprise.
6. Customs clearance: For acquiring immediate clearance from customs, documents
relating to the shipment should be filed 15 days prior to the arrival of the cargo. For
clearance, the importer has to submit an Import Bill of Entry, in addition to an
invoice, weight specification, packing list, insurance policy, Bill of lading, and an
Import license valid for the goods being imported, etc.
SUMMARY
• Marine insurance as we know it today, originated in England owing to the frequent
sailing of ships over high seas for trade. Marine insurance is an important element of
general insurance. It essentially provides cover from loss suffered due to marine
perils.
• The contract of Marine insurance is a special (insurance) contract of indemnity
which protects against physical and other losses to moveable property and
associated interests, as well as against liabilities occurring or arising during the
course of sea voyage.
• Marine insurance covers three main interests in a marine venture. They are:
— Hull – it represents the ship;
— Cargo – the goods being transported by the vessel; and
— Freight – is the profit or earnings of the ship at the end of a marine venture.
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• (“Marine” insurance policy covers not only sea voyage but also purely inland transits
through any mode like rail / road / multimodal / even by post.)
• Marine insurance business in India is governed by the COGSA, 1925 and Marine
Insurance Act, 1963.
• Different kinds of loss incurred during a marine adventure are enlisted in the Marine
Insurance Act, 1963 in Sections 55 to 63.According to Section 55 (1) of the Act, the
insurer is liable for any loss caused only due to perils of the sea, which has an
insurance cover.
• Losses are primarily divided into three categories. They are
— Total loss
— Partial Loss
— Expenses
• The general average loss is rateably contributed by the parties interested. In
contribution of general average loss the contributory interest, amount to be made
good and contributory values are considered.
• Different aspects of a marine policy are dealt with in Sections 24 to 34 of the Marine
Insurance Act, 1963. According to this Act a marine contract is not acceptable if it is
not embodied in a marine policy (Section 24).
• Sections 35-43 of the Marine Insurance Act, 1963 deal with the warranties, which
means promise by the insurer that the warranties will be upheld.
• Freight’ is defined as the profit that a ship owner makes by transporting his own
cargo or the cargo of another person.
• ‘Hull’ in marine insurance refers to ocean going vessels (ships, trawlers, barges,
fishing vessels, etc), their hull and machinery. This also covers “builders risks”, that
is when the ship is under construction.
• Cargo insurance is codified under the Institute of Cargo Clauses (A), (B) and (C).
Under each of the three clauses the provisions are categorised as follows:
• Exclusions are perils or risks that are excluded from a marine insurance policy, that
is they are not provided insurance cover.
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• The movement of cargo within the country is known as Inland Transit. The inland
transit of the cargo may be by - Rail or Road or Inland water ways and Coastal
Shipments. Sometimes sending cargo by Air or Post is also likely.
• When a policy has been issued the risk for the peril insured against is covered.
However, when the contingency against which the protection is given or when the
loss insured against actually occurs, the insured has got to make a claim on the
insurer for indemnification of loss. If loss does not occur, no payment would be
made to the insured.
• Exchange control regulations deals with the rules governing the import and export of
goods. Residents of India are not permitted to acquire insurance protection from
Insurance companies in foreign countries without prior permission from the
Government of India and the Reserve Bank of India in compliance with the General
Insurance Business (Nationalization) Act, 1972.
REVISION QUESTIONS
SECTION – A
1. The marine insurance has its origin in
(a) England (b) USA
(c) India (d) France
2. A marine cargo insurance policy is a
(a) open policy (b) valued policy
(c) unvalued policy (d) indemnity policy
3. Insurable interest is necessary in a marine insurance contract on
(a) the policy issue date (b) on the policy termination date
(c) at the time of loss (d) after the loss
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4. The profit made by the ship owner by transporting his own cargo or the cargo
of another person is known as
(a) carriage (b) franchise
(c) excess (d) freight
5. Any expenditure voluntarily incurred for the common safety of the ship is
called as
(a) particular average (b) general average
(c) total loss (d) constructive loss
6. Cargo insurance is codified under the
(a) ITC clauses (b) ICC clauses
(c) IIC clauses (d) IHC clauses
7. Which of the following perils are uninsurable in a marine policy
(a) fire (b) barratry
(c) delay (d) collision
8. A clause aimed to bring about cooperation between the assured and the
insurer such that the rights of neither party is affected with regard to the
goods is
(a) inchmaree clause (b) waiver clause
(c) collision clause (d) proximate cause clause
9. Unseaworthiness and unfitness clause is
(a) an implied warranty (b) an express warranty
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MARINE INSURANCE
(c) an implied condition (d) an express condition

10. ‘Salvage charges’ generally form
(a) a part of the marine contract (b) are not a part of the contract
(c) a part of the general average clause (d) a part of the particular clause
11. Willful misconduct committed by the master and the crew of the ship is called
as
(a) jettison (b) barratry
(c) collision (d) maritime adventure
Answers
1. (a) 2. (c) 3. (c) 4. (d) 5. (b) 6. (b) 7. (c) 8. (b) 9. (a) 10. (b)
11. (b)
SECTION – B
1. Outline the importance of marine insurance to trade.
Ans: A marine insurance policy is indispensable for trade and commerce. Its importance
are-
• Significant in international trade than banking
• Provides security for credit in international trade
• Integral part of overseas trade
• Regarded as handmaid to commerce
• LOC issued by the importer bank on the strength on marine insurance cover.
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2. State the classification of Marine Cargo Policies

Ans: Marine policies can be classified into various categories as follows:
(A) On the basis of Subject Matter
• Cargo
• Freight & Disbursement
• Hull
• Builders Risk
(B) On the basis of Duration
• Voyage
• Time
• Mixed
(C) On the basis of specific terms of insurance
• Single journey
• Floater Builders Risk
• Port Risk
3. Mention the Import / Export Cargo clauses and coverage of marine insurance.
Ans: The broad classification used for the Ocean Transit cover for cargo is
• The Institute Cargo Clause (ICC) “A”
• The Institute Cargo Clause (ICC) “B”
• The Institute Cargo Clause (ICC) “C”
Institute Cargo Clauses “C” covers the following losses:
1. Fire or explosion
2. Vessel being stranded, grounded, sunk or capsized.
3. Overturning or derailment of land conveyance
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MARINE INSURANCE
4. Collision or contact of vessel / craft or conveyance with any external object

(other than water)
5. Discharge of cargo at the port of distress
6. General average sacrifice
7. Jettison
8. General average contribution & salvage charges
9. Liability under both to blame collision clause
Institute Cargo Clause “B” in addition to the above 1-9, the following are
covered
10. Washing overboard
11. Earthquake, volcanic eruption or lightning
12. Entry of sea, lake, or river water into vessel, craft, lift van or place of storage
13. Total loss of any package lost overboard or dropped whilst loading into or
unloading from vessel or craft
Institute Cargo Clause “A” cover
All risks of loss / damage to the cargo other than exclusions.
4. Mention the general exclusions of an MIP.
Ans: 1. Willful misconduct of the insured
2. Ordinary leakage, ordinary loss in weight or volume or ordinary wear and tear
3. Inherent vice or nature of the subject matter
4. Delay
5. Insolvency or financial default of the owners, operators, etc. of the vessel
6. Insufficiency or unsuitability of packing
7. War and allied perils
8. SRCC- Strike, Riot, Civil Commotion and Terrorism
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However, War, SRCC risks can be covered by extra payment of premium. In

addition to the above, ICC ’B’& ICC ’C’ exclude malicious damage which can be
covered by additional premium.
5. Enumerate the extension available under ICC “B” in a marine insurance policy.
Ans: Under the ICC “B” cover, extraneous perils include
(a) Theft, pilferage, and non-delivery
(b) Fresh / rain water damage
(c) Damage by hook, oil, mud, or acid
(d) Breakage or leakage (not ordinary leakage)
(e) Country damage
(f) Shortage
(g) Bursting and tearing of bags
6. Discuss the different types of Marine Insurance Policies
Ans: The different types of marine insurance policies are as follows:
• Specific policy: this type of policy is issued to cover a particular risk proposed
by an insured on an individual proposal. The specific policy will have to be
duly stamped and signed. It contains the details of
 conveyance or vessel name
 B/L, RR number
 Date, sum insured, terms and conditions of cover
 Voyage, description of cargo and premium, etc.
• Cover Notes: When insurance is arranged by the consignee at the time of
opening of the LOC, he may not be aware of the vessel, bill number, date, etc.
For want of details the insurer will not be in a position to issue a stamped
policy, and hence a Cover Note is issued.
• Floating or Open Policies: this is taken by big commercial firms and industrial
establishments having enormous volume of trade, regular and frequent
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dispatches, and when it is difficult to approach insurers for each and single
transit. This policy covers all the despatches from a specified place to
specified places in the policy during the period of insurance.
• Open Cover: This arrangement is beneficial for overseas trade. It covers all
shipments in accordance with the agreement. It is issued for one year in the
form of an agreement to cover shipments by sea/ rail/ road/ between two
specified termini on a worldwide basis. The policy is not stamped and separate
policies are to be issued for all the shipments declared under open cover.
7. What are the underwriting considerations to be taken before a policy of Marine
Insurance is issued?
Ans. Underwriting criteria to evaluate include:
• Seaworthiness of the vessel
• Waters navigated and the season
• Experience of the operators
• Susceptibility of the cargo
• Packaging standards
• Size and value of individual items of equipment
• Financial status of the policyholder
• Past loss history
• Labour relations
The underwriters should properly evaluate the conditions that may increase the
hazards of a fire loss and so should check the installations of such equipment.
8. Discuss the various types of marine loss claims.
Ans: A marine claim upon a policy of marine insurance goods may arise upon the
happening, as a result of insured perils of any of the following:
(i) Total Loss - actual or constructive
(ii) Particular average - partial loss
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(iii) General average loss

(iv) Expenses such as :
 Sue and labour charges and particular charges
 Salvage charges
 Forwarding expenses Extra charges
Actual Total Loss
Actual total loss of the subject matter may occur
• where it is destroyed by an insured peril (sinking of the ship, collision, or
destruction by fire, enemy in times of war)
• where it loses its species, unfit for human consumption
• loss is irretrievable
• it is physical total loss and it is absolute
Measure of indemnity for actual total loss is the insured value under the policy.
Constructive Total Loss
This arises should all or any of the following occur:
• actual total loss is unavoidable
• where the preservation cost of the goods exceeds their value
• where the possession of the goods is unlikely
• where the cost of repairing, and forwarding to the destination exceeds their
value
• where there is a loss of voyage
• it is a commercial total loss
To claim a CTL, the assured must give a notice of his intention to abandon the
goods
Measure of indemnity for CTL is the sum insured less any proceeds of sale which
are due to the insurers.
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Particular average / Partial loss

• It is a partial loss / damage caused fortuitously by an insured peril
• The measure of indemnity for PA to cargo depends upon
 whether it is total loss of part of cargo - damaged cargo
 salvage loss
General Average Loss
Section 66 of MIA, 1963 defines GA as follows:
“A GA loss may be either a sacrifice or an expenditure, extraordinary in nature,
voluntarily and reasonably incurred at time of general peril for the common safety of
the maritime adventure”.
• all interests at risk namely the ship, cargo and freight which have been saved
from loss by GA measures are liable to contribute rateably to make good the
sacrifice and expenditure
• these values are known as ’contributing values’
• the sum necessary to reimburse the interest which have suffered the GA loss
is called ‘Amount Made Good’ or ‘Allowance’
Sue and Labour Charges
• All reasonable expenses incurred in averting or minimizing a loss
• There must have been an operation of an insured peril
• The charges are payable in full irrespective of the value of the goods
• These charges are incurred short of destination
• These charges follow upon loss or damage
Particular Charges
• Section 64 (2) of the MIA, 1963 states that expenses incurred by or on behalf
of the assured for the safety or preservation of the subject matter insured,
other than GA and Salvage charges are called Particular charges
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• Particular charges are incurred at destination

• These charges are conditional on the attainment of the franchise percentage
of loss
• These expenses are incurred where loss is threatening or imminent but
avoided by expense for that purpose (reconditioning expenses)
Salvage charges
Third parties who voluntarily and independent of contract render services to
maritime property at sea which are of material assistance in saving the imperiled
property are entitled to claim salvage.
Forwarding Charges
Forwarding Charges include expenses incurred in unloading, storing, and forwarding
the insured goods at a place other than the destination port, on the termination of
the transit, excluding those charges arising from fault, negligence, insolvency, or
financial default of the assured or their servants.
Extra Charges
• These charges include expenses of protests, survey and other proofs of loss,
commissions, expenses related to auction sale, etc.
• Payable only when a claim is admitted
• These charges follow the claim
9. Name the important documents to be filed for substantiating cargo claims
• Original insurance policy / declaration
• Original copy of sales invoice
• Bill of lading
• Bill of entry
• Letter of subrogation
• Loss overboard certificate in case of loss during loading, or discharge
• Special power of attorney (if applicable)
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• Railway receipt / Transport Receipt / Bill of Lading / postal receipt / air

consignment note
• Open assessment report by the carrier
• Survey report of independent survey
• Claim form and claim bill
• Bankers certificate
SECTION – C
Case Studies
(A) Three friends, Ashok Jadhav, Lalit Kapoor, and Govindahari - teamed up to start a
lobster export business. Jadav owned a ship which was used in the business for fishing as
well as for transporting the processed lobsters to foreign shores. They insured their ship,
the cargo, freight, profits and commission, for a total of Rs. 80 lakhs. Expecting to obtain
enormous profits on their cargo, it was overvalued by the insured. A few months later, the
ship sank in mid-ocean as it had a hole. Consequently the cargo was also lost. The
insured approached the insurance company to file a claim for compensation for the lost
cargo. However, the insurance company refused payment of the entire claim amount. It
only made partial payment of the claim stating that the cargo was insured for an amount
more than its actual market value. Moreover, investigation by the insurance company
surveyor revealed that the insured had intentions to sink the ship. The vessel was
retrieved by the insurance company and was offered for sale as salvage. The insured
approached the court to prevent the sale of the ship.
Questions
1. Was the insurance company violating the insurance contract by refusing
payment to the insured? Justify your answer.
2. Discuss the duty of an insurer pertaining to salvage.
Answers
1. An insurance contract legally binds an insurer to pay the policyholder for the
damages or losses caused by the perils against which the policyholder has insured
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himself. In the given case, the sinking of the ship and the loss incurred by the
insured was due to willful or fraudulent act of the insured and not by the perils
against which the ship was insured. An insurer is not liable for refusing to accept a
claim pertaining to a loss caused by the fraudulent act of the insured. Such losses
are not covered by insurance policies.
However, in taking over the ship to sell as salvage, the insurer was violating the
insurance contract because salvage belongs to the insurer only after he has made
the payment of the loss suffered to the insured. In this case, the insurer should have
rejected any further dealings with the insured once it was apparent that the insured
had involved in fraudulent act by intentionally causing the ship to sink to claim the
insurance amount. Instead, the insurance company took over the insured’s property
for salvage without the latter’s approval.
Thus, the insurer was not acting within the framework of the insurance contract and
was liable to be legally penalized.
2. The term salvage refers to partially damaged property. Salvage belongs to the
insurer after the insurer has paid the insured for the loss incurred. Thus, insurers are
entitled to any material that remains after damage provided they pay the full amount
for the loss. Hence, an insurer can claim his right on the salvage only after he makes
the payment for it to the insured.
The insurer is also entitled to the salvage after paying the claim amount when the
insured is unwilling to retain it or unable to dispose it.
DECIDED LEGAL CASES
(B) Consort Shipping Line Ltd v FAI Insurance (Fiji) Ltd [1998], (29 October 1998);
Marine Insurance- Mandatory Arbitration provision- right to arbitration not waived
by commencement of proceedings
The defendant insured the plaintiff’s vessels with a standard marine hull policy. The policy
included a mandatory provision that provided that all differences be referred to an
Arbitrator. Unaware of the provision, the insured filed a writ claiming damages for the
sinking of his two vessels. On obtaining a copy of the policy the insured sought a stay of
the proceedings so that the matter could be referred to Arbitration. The insurer argued that
since the insured had commenced legal proceedings the court could not be satisfied that
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MARINE INSURANCE
the plaintiff was prepared to go to Arbitration as required by the Arbitration Act.

DECISION: Matter stayed and referred to Arbitration
HELD: The insured had not waived its rights to Arbitration. In fact, the contract of
insurance specified that any waiver or variation of rights must be agreed to in writing.
Further, the commencement of an action does not necessarily indicate a lack of readiness
and willingness for Arbitration.
(C) Kingdom of Tonga & Shipping Corporation of Polynesia Ltd v Allianz Australia
Insurance Ltd [2005] TOSC 8; CV 723 2003 (25 February 2005)
Marine Insurance- Voluntary removal from ‘class’- breach of express warranty -suspension
of insurance- renewal of insurance constitutes a fresh contract- no automatic renewal
The plaintiff’s vessel, the MV Olovaha sustained severe damage in a cyclone on January
15, 2003. The plaintiff looked to its insurer to cover its loss, but the insurer denied
coverage. The plaintiff sued to recover.
DECISION: Action dismissed.
HELD: The defendant was the insurer for 3 of the plaintiff’s vessels including the MV
Olovaha. However, in July 2002 the plaintiffs had removed the MV Olovaha from ‘class’,
referring to a classification by Germanischer Lloyd, a world leading classification Society.
A vessel in class is subject to the Society’s rules including periodic surveying and
maintenance. The plaintiffs had voluntarily removed the vessel because of its age and
were aware that the insurance would be suspended as a result of removal from class
contrary to a warranty in the policy. The defendant claimed that the coverage had not been
renewed for 2003, but even if it had, it would have been subject to the same warranty and
at the date of the occurrence the vessel was not included in the class. The plaintiffs
argued that the defendant had agreed to reinstate cover upon certification that the vessel
was up to requisite standard for Local Class certification- a much less stringent
classification. The plaintiff’s case relied upon various oral discussions and written
communications between the plaintiff’s broker and the defendant’s underwriting manager.
The court decided that any decision regarding reinstatement of coverage could only be
made by the underwriters after proper consideration of all the material facts and there was
no evidence that the underwriter had received a vessel report. Each renewal constituted a
fresh contract and any agreement reached in July 2002 would have no relevance to the
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2003 contract unless that had been expressly agreed to in the negotiation of the 2003
contract. There was no evidence of a promise to automatically renew coverage in 2003
after the plaintiffs had voluntarily suspended coverage in July 2002. This was especially
true where the vessel had been removed from class so the former coverage could not be
renewed.
(D) Laho Ltd v QBE Insurance (Vanuatu) Ltd [2001] VUSC 130; Civil Case 24 of
2000 (2 April 2001)
Marine Insurance- Seaworthiness- Presumption of loss due to ‘perils of the sea’ if it can be
shown that vessel was seaworthy prior to setting out
The vessel owned by the plaintiff went down with 27 people on board. The events
surrounding the sinking were unknown. The plaintiff sought a declaration that the
defendant insurer was obliged to indemnify the plaintiff in respect of the loss. The vessel
was insured for loss due to ‘perils of the sea’.
DECISION: Action dismissed.
HELD: If it was known that the vessel was seaworthy when she set out and she
disappeared with crew, then on the balance of probabilities she must have sunk, and on
the balance of probabilities the sinking must have been due to the perils of the sea. If the
vessel is not shown to be seaworthy when she left on her last voyage, the presumption
does not apply since it cannot be held on the balance of probabilities that her presumed
sinking was due to perils of the sea rather than to her unseaworthy condition. The plaintiff
was unable to prove on a balance of probabilities that the vessel was seaworthy when she
set out on her last voyage. The court dismissed the action on this point, but went on to
consider the defendant’s other claims.
The non-disclosure of material facts will void insurance coverage where the nondisclosure
of the material fact has induced the insurer to assume the risk. In this case the vessel had
taken on water and there had been substantial work done to the hull after the issuance of
the safety certificate which the insured had supplied to the insurer and before the issuance
of insurance. The insured had also applied to increase the passenger load form 20 to 25
and this also was not known to insurer. The court found these to be material facts which
had not been disclosed to the insurer and would have voided coverage.
The court also found that the insured had breached express warranties in the policy. The
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express warranties must be exactly complied with whether material to the risk or not. In
this case the plaintiffs had not complied with the strict manning of vessel requirements.
(E) Pimco Shipping Pty Ltd v Moeder, Hermann and Moeher Trading Pty Ltd
[1987] PGNC 57; [1987] PNGLR 427 (23 December 1987)
Marine Insurance- Carriage of goods by sea- Statutory provision for time for making claim-
Indemnity proceedings- Indemnity proceeding barred if claim barred
The plaintiff owned and operated a coastal vessel. In 1978 goods carried by the vessel
were damaged in transit and as a result the owner of the goods sued the plaintiff and was
awarded damages. The plaintiff claims that at the time of the shipment the defendant was
the actual owner of the vessel and brought suit on the basis that the defendant indemnify
the plaintiff for damages.
DECISION: Action dismissed
HELD: The indemnity action by the plaintiff is time barred pursuant to the Sea-Carriage of
Goods Act, Act. III, Rule 6 which provides that suit in respect of loss of or damage must be
brought within one year after delivery of goods or when the goods should have been
delivered. In the original proceeding the owner of the goods was granted default
judgement against the plaintiff here. The 2nd defendant in that case was the company that
had been formed to buy the vessel. However at the time of the loss the present defendant
was the actual owner of the vessel as the corporation had not yet been formed. The
present defendant should have been, but was not added as a third party in the original
action. Because there was no liability on the part of the defendant to the owner of the
goods established within the time limitation period, the plaintiff cannot now seek
indemnification beyond the time period. Indemnity may not be awarded without the support
of liability on the part of the indemnifier to the injured party.
(F) Westpac Banking Corporation v Dominion Insurance Ltd [1996] FJHC 148;s (8
October 1996) Dominion Insurance Ltd v Westpac Banking Corporation [1998] FJCA
48; (27 November 1998)
Marine Insurance- non payment of premium does not affect the existence of the contract
of insurance- court looks at wording of Renewal notice and history of dealings between the
parties
The plaintiffs were the owner of the insured vessel and the bank which held the mortgage
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on the vessel was named payee on the policy. The defendant was the insurer. The plaintiff
had insured the vessel with the defendant since October 1990. There had been 3 renewals
of the coverage in October 1991, 1992 and 1993. The vessel was damaged beyond repair
in March 1994. The insurer defendant denied coverage on the basis that no insurance
premium had been received since the October 1993 renewal.
DECISION: In favour of the Plaintiff.
HELD: The fact that no premiums have been paid does not affect the existence of the
contract. The court looked at the Renewal notices and the history of dealings between the
parties. As to the Renewal notices, while they demanded payment, there was no clear
statement that coverage would be canceled if payment was not received. As to the
dealings between the parties, the court found that previous claims had been paid as credit
for owing premiums; so clearly in the past it had been the practice to renew without the
payment of premiums.
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CHAPTER – 4
MOTOR INSURANCE
1. Introduction
2. Regulatory Framework for Motor Insurance in India
2.1 The Motor Vehicles Act, 1939
2.3 The Motor Vehicles Amendment Act, 2015
3. Types of Motor Vehicles
4. Motor Insurance Policy & Types
5. Scope of Motor Insurance
6. Motor Insurance Premium
7. Change of Vehicle
8. Cancellation of Insurance
9. Termination of Insurance
10. Transfer of Policy
11. Cancellation and Issuance of Fresh Certificate of Insurance
12. Policy Renewal

13. Additional Policies
14. Concession For Vehicles Laid Up
15. Forms of Losses
16. Common Exclusions
17. Role of A Surveyor
18. Motor Insurance Claims
19. Vehicular Records
20. Arbitration
21. Motor Accidents Claims Tribunal (MACT)
22. Role of Ombudsman in Motor Insurance
23. Recent Regulatory Changes In Motor Insurance
24. Innovative Add -On Motor Insurance Covers
25. New Innovative Motor Insurance Policies By IRDAI
26. Summary
27. Questions
After the completion of the chapter, the student should be able to
• Explain the need and importance of motor insurance
• Appreciate the rationale for mandatory Third Party Motor Insurance cover in
India
• Describe the coverage under the various motor insurance polices
• Examine the rules and provisions for motor insurance claims under different
• Explain the provisions relating to settlement of claims through the MACT
• Describe the new initiatives undertaken by IRDAI in motor insurance coverage
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MOTOR INSURANCE
1. Introduction
Motor insurance is an insurance contract which protects the vehicle as well as the driver.
Being a contract like any other contract has to satisfy the requirements of a valid contract
as laid down in the Indian Contract Act 1872. In addition, it has certain special features
common to other insurance contracts. Motor insurance gives protection to the vehicle
owner against damages to his/her vehicle and pays for any Third Party Liability
determined as per law against the owner of the vehicle. Third Party Insurance is a
statutory requirement in India. The owner of the vehicle is legally liable for any injury or
damage to third party life or property caused by or arising out of the use of the vehicle in a
public place. Driving a motor vehicle without insurance in a public place is a punishable
offence in terms of the Motor Vehicles Act, 1988.
As per the Motor Vehicles Act, “Motor vehicle” or “vehicle” means any mechanically
propelled vehicle:
(i) Adapted for use on roads whether the power of propulsion is transmitted thereto
from an external or internal source and
(ii) Includes a chassis to which a body has not been attached and
(iii) A trailer;
But “vehicle” does not include:
(i) Any vehicle running upon fixed rails or
(ii) Any vehicle of a special type adapted for use only in a factory or in any other
enclosed premises or a vehicle having less than four wheels fitted with engine
capacity of not exceeding [twenty-five cubic centimeters].
2. Regulatory Framework for Motor Insurance in India

The Motor Vehicles Act was passed to mainly safeguard the interests of pedestrians. The
current Act is MV Act 1988.According to the Act, a vehicle cannot be used in a public
place without insuring the third party liability. No insurer can deny TP cover to any owner
of a motor vehicle (Section 146 of MV Act 1988). According to Section 24 of Motor
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Vehicles Act “no person shall use or allow any other person to use, a motor vehicle in a
public place, unless the vehicle is covered by a policy of insurance.”
Compulsory insurance in respect of motor vehicles comprises the following liabilities:
(a) Liability arising out of bodily injury or death of the third party or arising out of the
damage to his property.
(b) Compulsory insurance of passengers carried on hired vehicles.
(c) Compulsory insurance of passengers carried by reason of a contract of employment.
(d) Compulsory insurance of an employee under Workmen’s Compensation Act
considering the factors such as:
— Who was driving the vehicle?
— Whether working as conductor or ticket examiner/coolies
— Nature of goods carried in the goods carriage
The policy comes into effect from the date of issuance of certificate of insurance to the
proposer or the insured. The insurance policy is subject to termination before the policy
period comes to end. Accordingly, the insured is required to submit the certificate to the
insurer within 7 days after termination. And the insurer may withdraw or suspend by
notifying the registration authority within 7 days of action. An affidavit should be produced
in case of loss of certificate as evidence No TP cover can be terminated by any party
without proof of existence of another insurance. RTO has to be intimated in such cases
and insurance certificate is to be called back and cancelled.
(i) Mandatory Motor Third Party Insurance Policy
Motor Third Party Insurance (known as TP Policy / Liability only policy / Act Policy) is
compulsory under law. It is designed to protect the interest of third parties. When a motor
vehicle is in use in a public place, when running or stationery, it can accidentally cause
harm to others. Members of public i.e. pedestrians, passengers in bus, people travelling in
the opposite vehicle, cyclists, employees engaged in the commercial vehicle etc. may be
injured or killed in accident. Property belonging to third party may be damaged. The object
of motor third party insurance is to cover the risk of vehicle owner who is likely to incur
liability for payment of compensation to third party. Motor TP Insurance is different from
other branches of insurance. It covers statutory liability which is unlimited; whereas other
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MOTOR INSURANCE
branches of insurance covers contractual liability limited to the sum insured. Financier has
an interest in the other branches whereas no such term is there in third party policy.
(ii) Exemption U/s 146(3)
Motor vehicles belonging to Central and State Government, any Local Authority, any State
Transport Undertakings are exempted from the provision of compulsory insurance
mandated under Section 146(3) of Motor Vehicles Act 1988, provided any such authority
has to establish and maintain a fund to meet the liability arising out of the use of any
vehicle belonging to such authority.
Motor TP Policies are governed by Motor Vehicles Act, WC Act, Legal Services Authority
Act, Courts, Lok Adalat etc. The terms ‘Tort’, ‘Negligence’, ‘in course of employment’,
‘Vicarious liability’ are relevant for the purpose of dealing with third party claims.
Death/injury/property damage of third party is caused due to the fault of the driver. The
vehicle owner being the master becomes vicariously liable for the fault committed by the
servant (driver) under the law of Tort. Similarly the employer is liable for the damage
caused to employees connected to the vehicle in the course of employment.

The motor vehicles Act, 1988 (4 of 1939), consolidates and amends the law relating to
motor vehicles. This has been amended several times to keep it up to date. The need was,
however, felt that this Act should, now inter alia, take into account also changes in the
road transport technology, pattern of passenger and freight movements, developments, of
the road network in the country and particularly the improved techniques in the motor
vehicles management.
Therefore, a Working Group was, therefore, constituted in January, 1984 to review all the
provisions of the Motor Vehicles Act, 1939 and to submit draft proposals for a
comprehensive legislation to replace the existing Act. This Working Group took into
account the suggestions and recommendations earlier made by various bodies and
institutions like Central Institute of Road Transport (CIRT), Automotive Research
Association of India (ARAI), and other transport organizations including, the manufacturers
and the general public, Besides, obtaining comments of State Governments on the
recommendations of the Working Group, these were discussed in a specially convened
meeting of Transport Ministers of all States and Union territories.
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Important Provisions under MV Act, 1988

Section 133 -Duty of owner, driver or conductor to give all information relating to accident
to police officer on demand.
Section 134 –Duty of driver to take all reasonable steps to secure medical attention for
the injured person.
Section 146 –Compulsory insurance against third party risk.
Section 147 –Requirements of policies and limits of liability towards a Third Party
Third Party Liability– Insurer promises to meet the liability should the vehicle cause death
or bodily injury to any third person. The expression ‘third party’ would mean any one and
every one, except the insurer and the insured. Distinction between ‘passenger’ and ‘third
party’ – persons or classes of persons required to be covered by the policy of insurance
under section 147, would fall under the broad meaning of third party.
However, the Insurance Company’s liability in the following cases is to be taken note of:
— Insurance with two insurers – effect – claimants can recover amount from either –
paying insurer can settle its score with the other insurer – Ganga Ram Patel v. Md.
Jahid Khan, 2008 ACJ 2763 (MP) (DB)
— Pillion rider – insurer not liable under ‘Act only’ policy – risk covered under
‘package policy’ as per TAC circular – UII v. M Laxmi, 2009 ACJ 104 (SC)
— Gratuitous passengers in goods vehicle- insurer not liable – CRPF jawan going
on a goods carriage to join his duty along with a box, suitcase and bed holder – no
liability –NIC v. Phool Singh, 2008 ACJ 58 (SC)
— Occupants in private car – risk covered under ‘package’ policy – TAC circular dt.
17.03.1978 & IRDA circular dated 16.11.2009
— Owner of goods and their representatives – policy covers the risk of owner of
goods or his authorized representative accompanying the goods in the goods
vehicle, provided the entire vehicle is hired by the goods owner and there is
documentary proof of hiring.
— Vehicle hired by deceased for transporting goods - Head load workers not
treated as owner of goods – luggage or personal effects are not goods.
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— Passenger in goods vehicle – vehicle owner has no statutory responsibility to get

his vehicle insured for covering any passenger travelling in the goods vehicle.
— Employees of insured – IMT 18 makes it clear that risk of driver, conductor,
cleaner or person employed in loading or unloading are covered but not exceeding 7
(seven ) in number – liability restricted upto WC limit if no additional premium paid.
— Public place – Statute mandates the necessity for a valid policy in force if the
vehicle is intended for use in a public place – Tribunal had jurisdiction to try an
accident case occurring in a private place – package policy cover is not restricted
foruse of the vehicle in a public place.
Section 148 – Validity of policies of insurance issued in reciprocating countries.
Section 160-Registering authority or the Police officer shall furnish information if asked for
relating to particulars of vehicle involved in accident.
Section 158(6)-Statutory duty of Police to forward report about recording of any accident
or completion of such report within thirty days to claims tribunal and concerned Insurer.
Section 170-Insurer to obtain permission to contest the claim on all or any of the grounds
without prejudice to the provisions contained in Section 149(2).
Section-197-Taking out Vehicle without authority.
Section-194- Driving Vehicle exceeding permissible weight.
Section-192- Using Vehicle without registration
Section- 192-A- Using vehicle without permit.
Section -184- Driving dangerously.
Section -185- Driving by a drunken person or by a person under the influence of drugs.
Section -183- Driving at excessive speed.
Section 3& 4 read with Sec 181- No DL / Invalid DL / ineffective DL.
Section 163 A-Special Provisions as to payment of compensation on structured formula
basis-claimants need not prove negligence of driver –compensation to be assessed as per
the schedule-Notional income of Rs.15,000/- p. a , in case of non-earning person-claim not
entertainable if annual income exceeds Rs.40,000/-.
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Section 149(2)-Deals with the statutory defenses of the Insurer—breach of a specified

condition of the policy etc.
Section 140- No fault liability-Section 140 of the Act provides that where death or
permanent disability has occurred on account of accident arising out of the use of motor
vehicle etc. the owner of the vehicle shall be liable to pay compensation in respect of such
death or disablement, with a liability compensation for Death being Rs.50,000/- and
Permanent disability being Rs.25,000/-
Section 161 -This section deals with a hit and run motor accident i.e. an accident arising
out of the use of a motor vehicle, the identity whereof cannot be ascertained in spite of
reasonable efforts for the purpose. Section 161 provides for a fixed compensation of
Rs. 25,000/- in case of death and Rs. 12,500 in case of grievous hurt.
Section 166-Application for compensation under fault liability –limitation removed for
accidents occurring on or after 14/11/1994-Jurisdiction widened.
Section 167 – Option regarding claims for compensation either under MACT or under WC
Court.
Section 169(2) - Power of the Claims Tribunals enforcing attendance of witnesses and for
discovery and production of documents and material objects.
(a) Various forums for compromise settlement
(i) Lok Adalat Organized from time to time
(ii) Permanent & continuous Lok Adalat
(iii) Conciliation meeting called by the court.
(iv) RICC & DICC as constituted by the insurers in Regional and Divisional Office
level.
(v) Common Mechanism Centre for Compromise Settlement Of Motor Third Party
Claims (CMCSTPC) - Joint memo to be signed by both party after the amount
is agreed by both party and consent order to be passed by Lok Adalat/Court.
(vi) Jalad Rahat Yojana (JRY)–Pre-litigation settlement –Through conciliatory
committee—only injury cases of adults and not pertaining to minors can be
decided.
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(b) Documents Verification for Compromise/Settlement

(i) Common Documents in Death & Injury Cases
The following common documents are necessary for evidencing claims
— FIR
— Charge-sheet
— Final form
— Seizure List
— Motor Vehicle Inspection Report
— Site plan, claim form
— Investigation report
— Driving License
— Permit etc.
(ii) Additional documents in Death cases
The following additional documents are necessary for death cases:
— Post Mortem Report with Dead body challan
— Inquest Report
— Spot Mahazar
(iii) Additional Documents in Injury Cases
— Injury Report/Wound Certificate (Medical Examination on police requisition)
— Outdoor ticket
— Discharge certificate of initial and subsequent treatment
— Medical papers with bills
— Disability certificate if any
— Accident register at hospital
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(iv) Common Documents in case of Service holders/Students/IT assesse

— Salary Certificate
— Service record with date of birth
— High School/School leaving certificate
— Education/qualification /occupation proof
— IT returns with assessment of IT authority
— Business proof etc.
(v) Additional documents in TPPD
— Extent of damage to property
— Insurance details of TP covers of vehicle’s liability
2.3 Important Provisions Under IPC Sections relevant to MV Act

Section 279 - Rash and negligent driving or riding on a public way
Section 337 - Causing Hurt by act endangering life or personal safety of others\
Section 338 - Causing Grievous hurt
Section 304(A) - Causing death by negligence.
Difference between Sections140, 163A and 166 of the Motor Vehicles Act - The issue
of negligence need not be touched under Sections.140 and 163A of MV Act, 1988
whereas in case of Section166 of MV Act proof of negligence of the driver of offending
vehicle is an essential requirement. If there is prima facie proof of accident, the victim of
the accident is entitled to get compensation under Sections 140 and 163A of MV Act. In
both these sections the claimant is not required to plead or establish negligence on the
part of the driver of the offending vehicle. But in proceedings under Section166 of MV Act
the burden lies on the claimants to prove rash and negligent driving on the part of the
driver of the offending vehicle.
(a) Negligence
— Negligence means the omission to do something which a reasonable man
would do or the doing of something which the reasonable and prudent man
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would not do. Thus, it is not only commission of an act but is also an omission
to do something which a reasonable man would do or is obliged to do.
— Negligence does not always mean absolute carelessness, but want of such a
degree of care as is required in particular circumstances.
— Negligence as a tort is the breach of a legal duty to exercise due care.
— Res ipsa loquitur: It means “accident speaks for itself”. Whenever the
presumption of “Res ipsa loquitur” is raised, the claimant need not adduce any
evidence to prove negligence, rather the burden shifts upon the respondents
to explain the accident to rebut the charge of negligence on the part of the
driver.
— Last opportunity rule: It means that as between the driver of the offending
vehicle and the victim of the accident whether the driver had with him the last
opportunity to avoid the accident. Thus, whoever had the last opportunity, he
will be held responsible.
(b) Defense available with the respondent:- Against the plea of negligence, the driver/
respondent can take following defense:
(i) Act of God (Vis Major): Accident caused due to natural causes directly and
exclusively, without human intervention, and the same could not have been
prevented by any amount of foresight , efforts - and care reasonably expected
from the driver.
(ii) Victim, the wrongdoer: Own negligence of the victim- self negligence- claim
not maintainable.
(iii) Classification of negligence
Negligence can be further categorized as follows:
I. Sole negligence: Where in an accident two or more vehicles are involved but
the accident has occurred due to negligence of one vehicle only, the driver of
the offending vehicle is solely negligent.
II. Composite negligence: Where a person is injured or died as a result of
negligence of two or more wrong doers, each wrongdoer is jointly and
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severally liable for payment of entire damages and the injured / LRs of the
deceased have the choice of proceeding against all or any of wrongdoer
III. Contributory negligence: Where a person is injured or died as a result of
partly due to negligence of another person/or persons, and partly by his own
negligence, then negligence on the part of the injured/deceased is referred to
as his contributory negligence.
(c) Difference Between Hire And Reward - ‘Hire’ means availing the motor vehicle for
use or service in exchange for payment whereas ‘Reward’ means something given
or received in return for service or merit.
(d) Pay And Recover Theory - Where the driving license of the driver of the insured/
offending vehicle was found to be fake, the tribunal directed the insurer to pay the
awarded amount to the third party and recover the same from the insured by filing
recovery petition under Section174 r.w. section 149(5) of the MV Act before the
same MACT. The Tribunals are passing pay and recover awards following the
decision of the Supreme Court in the case of National Insurance Co. Ltd. v. Swaran
Singh (2004) ACJ 1.
(e) Difference between fake, ineffective and invalid Driving License (DL) -
— Fake DL - On verification from the licensing authority if the DL is found to have
been issued in some other name or the DL is not at all issued.
— Ineffective DL - means with regard to the type of the vehicle i.e. DL issued for
LMV but the driver was driving HGV.
— Invalid DL - means with regard to the period of DL i.e. on the date of accident
the DL was not in force.
(f) Certificate Of Insurance And Cover Note : ‘Certificate of insurance’ according to
section145 (b) refers to a certificate issued by an authorised insurer in pursuance of
section 147(3); it also includes a cover note complying with the prescribed
requirements. Under rule 141 of Central Motor Vehicles Rules, 1989 an authorised
insurer issues a certificate of insurance to every holder of insurance policy in Form
51 in respect of every vehicle. The cover note contains the following details:
• The registration mark, Engine no. & Chassis no., Model, Make, etc. and the
number of description of the vehicle
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• Name and address of the insured

• Date and time of the commencement of the policy
• Date of expiry of insurance
• Persons entitled to drive
• Limitations regarding the usage of the vehicle
• The validity period of the cover note.
(g) Transfer of ownership : In case of any sale of vehicle involving transfer of policy,
the insured should apply to the insurer for consent to such transfer. The transfer is
allowed, if within 15 days of receipt of application the insurer does not reject the
plea. The insurer has to be approached and new certificate of insurance to be
issued in the name of the buyer of the vehicle by charging transfer fees. The transfer
is normally allowed but can also be refused in the following cases (However, non-
transfer of insurance does not affect TP liability cover under the policy)
• Due to the previous record of the transferee driver and policyholder
• Due to a stated condition in the policy providing prohibiting transfer
• Due to rejection of any prior proposal for transfer from the person seeking
transfer in his name
The insurer’s liability towards the insured comes to an end as soon as the old
certificate is repudiated. However as per the Act the insurer is liable to third party.
The insurer is liable to the new owner for Own Damage Claims (OD claim) only after
a fresh proposal form is filled in and the old certificate is cancelled.
(h) Insurer’s duty to Third Party : It is obligatory on the part of the insurer to pay the
third party since, the insurer has no rights to avoid or reject the payment of liability
to a third party. The duties of the insurer towards a third party are specified in
section (149 of MV Act, 1988) The third party liability is determined by the court and
accordingly compensation is paid. The liability is unlimited. It is the right of the
insurer to receive the notice of the case proceedings.
(i) Insurer’s Rights (section 149(2)) : An insurer to whom notice of the bringing of any
such proceedings is so given shall be entitled to be made a party thereto and to
defend the action on any of the following grounds, namely:-
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• that there has been a breach of a specified condition of the policy, being one of the
following conditions, namely:-
(i) a condition excluding the use of the vehicle
(a) for hire or reward, where the vehicle is, on the date of the contract of
insurance, a vehicle not covered by a permit to ply for hire or reward,or
(b) for organised racing and speed testing, or
(c) for a purpose not allowed by the permit under which the vehicle is used,
where the vehicle is a transport vehicle, or
(d) without side-car being attached where the vehicle is a motor cycle; or
(ii) a condition excluding driving by a named person or persons or by any
person who is not duly licensed, or by any person who has been disqualified
for holding or obtaining a driving licence during the period of disqualification;
or
(iii) a condition excluding liability for injury caused or contributed to by
conditions of war, civil war, riot or civil commotion; or
• that the policy is void on the ground that it was obtained by the nondisclosure ofa
material fact or by a representation of fact which was false in some material
particular.
Exception
Due to the wrong usage of vehicle by the insured the insurers cannot escape the
liability towards third party. But the insurer can recover the sum paid from the
insured.
(j) Rights of Third Parties
1. When Insured is insolvent - According to Section 150 of the MV Ac t, 1988,
in case of an insolvent insured the rights are automatically transferred to the
third party. Similarly, the insurer accepts the liabilities of third party.
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2. When Insured is insolvent

(i) Where under any contract of insurance effected in accordance with the
provisions of this Chapter, a person is insured against liabilities which he
may incur to third parties, then—
(a) in the event of the person becoming insolvent or making a
composition or arrangement with his creditors, or
(b) where the insured person is a company, in the event of a winding
up order being made or a resolution for a voluntary winding up
being passed with respect to the company or of a receiver or
manager of the company’s business or undertaking being duly
appointed, or of possession being taken by or on behalf of the
holders of any debentures secured by a floating charge of any
property comprised in or subject to the charge, if, either before or
after that event, any such liability is incurred by the insured
person, his rights against the insurer under the contract in respect
of the liability shall, notwithstanding anything to the contrary in any
provision of law, be transferred to and vest in the third party to
whom the liability was so incurred.
(ii) Where an order for the administration of the estate of a deceased debtor
is made according to the law of insolvency, then, if any debt provable in
insolvency is owing by the deceased in respect of a liability to a third
party against which he was insured under a contract of insurance in
accordance with the provisions of this Chapter, the deceased debtor’s
rights against the insurer in respect of that liability shall, 79
notwithstanding anything to the contrary in any provision of law, be
transferred to and vest in the person to whom the debt is owing.
(iii) Any condition in a policy issued for the purposes of this Chapter
purporting either directly or indirectly to avoid the policy or to alter the
rights of the parties there under upon the happening to the insured
person of any of the events specified in clause (a) or clause (b) of sub-
section (1) or upon the making of an order for the administration of the
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estate of a deceased debtor according to the law of insolvency shall be

of no effect.
(iv) Upon a transfer under sub-section (1) or sub-section (2), the insurer shall be
under the same liability to the third party as he would have been to the insured
person, but—
(a) if the liability of the insurer to the insured person exceeds the liability of
the insured person to the third party, nothing in this Chapter shall affect
the rights of the insured person against the insurer in respect of the
excess, and
(b) if the liability of the insurer to the insured person is less than the liability
of the insured person to the third party, nothing in this Chapter shall
affect the rights of the third party against the insured person in respect
of the balance.
2.4 Motor Vehicles Act, 1994, 2000 & 2001

The Motor Vehicles Act, 1988 (59 of 1988) is a Central legislation through which the road
transport is regulated in the country. By the Motor Vehicles (Amendment) Act, 1994, inter
alia, amendments were made for make special provisions under sections 66 & 67 so as to
provide that vehicles operating on eco–friendly fuels shall be exempted from the
requirements of permits and also the owners of such vehicles shall have the discretion to
fix fares and freights for carriage of passengers and goods. The intention in bringing the
said amendments was to encourage the operation of vehicles with such eco-friendly fuels.
However, it has been observed that during the last several years, not only the supply of
eco-friendly fuels like CNG has increased tremendously, a large number of vehicles have
come on the road which in terms of sections 66 and 67, as amended by the Motor
Vehicles (Amendment) Act, 1994, are operating without any requirement of permits and
are, therefore, not subject to any control of the State Governments. The number of such
vehicles is likely to further increase substantially. The aforesaid situation is likely to lead to
indiscipline on the road and consequent increase in the road accidents. It is, therefore,
considered essential to remove exemption provided under sections 66 and 67 of the said
Act to CNG operated vehicles so that vehicles which operate on eco-friendly fuels are also
covered by the terms and conditions applicable to all other vehicles.
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Hence the Act was amended in 2000. However, with changing needs and demands, the
Motor Vehicles Act has been amended from time to time.
The Government of India recently passed the Motor Vehicles Act, 2015 and
accordingly the IRDAI has passed Regulations to suit the amendments. These are
discussed later in the chapter.
3. Types of Motor Vehicles

As per the Motor Vehicles Act for the purpose of insurance the vehicles are classified
into three broad categories such as.
(a) Private cars
(b) Motor cycles
(c) Commercial vehicles
(a) Private Vehicles - Private car insurance covers the motor insurance needs of
individuals and businesses using private cars, as opposed to goods carrying vehicles,
passenger carrying vehicles, motorcycles and special types vehicles. Private vehicles
include
(i) Private Cars – vehicles used only for social, domestic and pleasure purposes
(ii) Private vehicles – Two wheelers, including Motorcycles, Scooters, Auto cycles,
Mechanically assisted pedal cycles
There are different categories of vehicles plying on the road in accordance with the
provisions of the Motor Vehicles Act.
(i) Private Vehicles
• Motor vehicle: Any mechanically propelled vehicle used upon roads and includes a
chassis to which body is not attached and trailer but does not include vehicle run or
fixed rails or specially adopted for use within the factory premises.
• Private car: Private car is a type of a vehicle used for social, domestic, pleasure
and professional purpose and not for carriage of goods (other than samples)
excluding use of vehicle for hire or reward, pace making reliability trial and speed
testing and used for any purpose in connection with motor trade.
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• Two Wheeler: Motorcycle is a mechanically self-propelled two-wheeler with gear or

without gear but a kick starter vehicle is treated as Geared vehicle for Insurance
Rating.
• Scooter: It is a mechanically propelled two-wheeler with variable gears.
• Auto cycles: Pedal cycle mechanically assisted by a motor engine (up to the 75 c.c.
Capacity).
• Valued policies can be given for Vintage Cars Only but for the Sum Insured =
Agreed Sum and for TL/CTL – No depreciation.
(ii) Commercial vehicles : Commercial vehicle is any type of motor vehicle, used for
transporting goods or paying passengers. The European Union defines a "commercial
motor vehicle" as any motorized road vehicle, that by its type of construction and
equipment is designed for, and capable of transporting, whether for payment or not: (1)
more than nine persons, including the driver; (2) goods and "standard fuel tanks". These
include by and large, Goods Carrying vehicles, Trailers, Vehicles used for carrying
passengers on hire or reward, Miscellaneous & Special types of vehicles
• Good carrying vehicle (private carriers):The owner of the transport vehicle who
uses the vehicles only for carriage of goods, which are his properties, or carriage of
goods, which are necessary for the purpose of his business.
• Good carrying vehicle (public carriers):The owner of the transport vehicle who
uses the vehicles only for carriage of goods, which are not his properties, or carriage
of goods, which are necessary for the purpose of his business.
(iii) Public service vehicle : A motor vehicle used for carrying passenger and includes
motor cab, contract carriage and stage carriage.
• Motor cab / Taxi: Motor vehicle used to carry not more than 6 persons excluding
driver for hire or reward.
• Contract carriage: Motor vehicle which carry passengers for hire or reward under a
contract and the vehicle used as whole for an agreed sum either on time basis or
point to point basis.
• Stage carriage: A motor vehicle which can carry more than 6 passengers excluding
driver for hire or reward with fares paid by individual passenger for the whole journey
or for stages of the journey.
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(iv) Miscellaneous types of vehicles : All other vehicles, which do not fall under any of
the categories listed above, are classified under this category. Examples are: Ambulance,
Tractor and Trailer, Road Rollers, Excavators etc. Policy schedule wording regarding
"limitations as to use" and driver clause is important to remember specifically when
‘limitations as to use’is imposed as below in such items:
• Agricultural and Forestry Vehicles IZ-303
Used only for agricultural and forestry purposes.
The Policy does not cover:
(a) Use for hire or reward or for racing pace making reliability trial or speed
testing.
(b) Use for the carriage of passengers for hire or reward.
(c) Use whilst drawing a greater number of trailers in all than is permitted by law.
• Ambulances/Hearses IZ-303
Use only for ambulance purposes
(i) The Policy does not cover:-
(a) Use for hire or reward or for racing, pace making, reliability trial or speed
testing.
(b) Use whilst drawing a trailer except the towing (other than for reward)
of any one of disabled mechanically propelled vehicle.
(ii) In the case of Hearses, substitute "Use only as a hearse".
• Cinema Film Recording and Publicity Vans, Delivery Trucks, Pedestrian
Controlled Trolleys , Goods Carrying Tractors, Vehicle used for Driving Tuition
IZ - 303
Use in connection with the insured's business.
The Policy does not cover:-
testing.
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(b) Use for carriage of passengers for hire or reward.

(c) Use whilst drawing a trailer except the towing (other than for reward) of any
one disabled mechanically propelled vehicle.
Note: In the case of vehicles used for Driving Tuition, add the words ‘other than for the
purpose of driving tuitions’ after the words ‘hire or reward’.
• Cranes - Breakdown Vehicles, Mobile Cranes and Goods Carrying vehicles
having a crane as a part of or fixed to the Vehicle or Trailer. IZ-303
The Policy does not cover :
(a) Use for racing pace making reliability trial or speed testing.
(c) Use whilst drawing a greater number of trailers in all than is permitted by law.
• Dumpers, Dust carts, Water carts, Road Sweepers and Tower Wagons
Mechanical Navies, Shovels, Grabs, Excavators, Mobile Plant, Road Rollers,
Site Clearing and Leveling Plant, and Tar Sprayers IZ-303
The Policy does not cover :
(a) Use for racing pace making, reliability trial or speed testing.
• Fire Brigade and Salvage Corps Vehicles IZ-303
Use for Fire Brigade / Salvage Corps purposes
The Policy does not cover
testing.
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NOTE: Where premium is paid for use of trailers, amendment to be made in item (2)
or (3) as applicable to read - "Use whilst drawing a greater number of Trailers in all
than, is permitted by law".
• Mobile Shops and Canteen IZ - 303
Use in connection with the Insured's business
The Policy does not cover:
testing.
(v) Driver Clause as applicable for Miscellaneous Vehicles : “Any person including
the insured - Provided that a person driving holds an effective driving license at the time of
the accident and is not disqualified from holding or obtaining such a license. Provided also
that the person holding an effective Learner’s license may also drive the vehicle**and that
such a person satisfies the requirements of Rule 3 of the Central Motor Vehicles Rules,
1989".
** When the vehicle is used for transport of goods add the following words:
- when not used for the transport of goods at the time of the accident
** When the vehicle is used for transport of passengers add the following words:
- when not used for the transport of passengers at the time of the accident.
4. Motor Insurance Policy and Types

Motor Insurance Policy
A Motor Insurance Policy is a stamped document, which forms the evidence of contract of
Insurance. In the event of dispute, the terms and conditions embodied in the policy are
referred to in the court of law.
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Policies issued by the Insurance companies have the following sections:

The Preamble clause: This clause introduces the parties to the contract namely the
Insurer and the Insured.
The Recital clause: Recital clause expresses what is agreed between both parties and
narrates the period of Insurance and about the consideration.
The Operative clause: The operative clause speaks about the perils covered, exclusions
and General exceptions.
The Schedule: This clause talks about the subject matter of Insurance covered along with
terms and conditions applicable to the policy.
The Attestation clause: This specifies the duly constituted authority to issue policies,
namely the authorized signatory.
The above are the various sections that are common to Insurance Policies. In line with the
above, Motor Insurance policy deals with the following sections:
• The parties to the contract namely the Insurer and the Insured.
• The perils covered under the policy
• Specific exclusions
• General Exceptions
• Conditions
The perils covered, exclusions, exceptions and conditions for different type of vehicles of a
Motor Insurance policy is shown below in the form of comparative chart and the policy
forms are available in the form of Annexure for ready reference.
Motor insurance policies are available in various forms depending up on the type of
vehicle and the purpose for which it is used. In general, compulsory cover to ply the
vehicle on road is called as the ‘Third Party Insurance’ or as ‘Act only Policy’ or also
known as ‘Liability Cover’ – TPI/TPD/TPPD.
The ideal cover for a Motor vehicle is the Comprehensive cover - i.e. the Package
Policy of Motor OD + TP (i.e. Liability) Policy. But apart from this (1) PA to Owner-
Driver or (2) EC (i.e. erstwhile WC) Policy to the paid driver may be opted by the owner of
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the vehicle.Type of cover required - Comprehensive, Third party, Fire only, Theft only,
Fire/Theft and Third party only.
The insurance cover requirement also may vary depending on the following parameters:
(i) Type of use of vehicle
(ii) Details of the vehicle
(iii) Age, experience, past claims experience, previous insurance, if any
(iv) Value of the vehicle including accessories fitted thereon.
The various motor insurance policies are explained in detail as follows:
(i) Act Only Policy (Third party liability towards death and/or bodily injury and/or
property damage)
(ii) Comprehensive Policy (Accidental damages to the vehicle insured or loss of the
vehicle and liabilities to third party towards death and/or bodily injury and/or property
damage)
(iii) Act only with Fire and/or Theft
(iv) Fire and/or theft only
(v) Motor Trade Policies
(vi) Internal Road Risk Policy.
(i) Act Only Policy: It is the minimum cover required under the Motor Vehicles Act and
provides compensation for death and/or bodily injury and/or property damage to third
parties out of use of motor vehicle in the public place for which the Insured is liable to pay.
The extent of liability is as per the Motor Vehicles Act.
(ii) Comprehensive Policy: An Insurance policy which covers Accidental Damage to
the vehicle involved in an accident along with or in addition to the third party liability.
(iii) Act Only and Fire and/or Theft: A restricted cover under comprehensive policy by
which the insurer accepts to insure the risk of Fire and/or theft only of the vehicle to be
insured in addition to third party liability. This decision is taken by the underwriter after
considering the various factors such as make, model of the vehicle, declinature of
Insurance by previous insurers, past claims experience etc.
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(iv) Fire and/or Theft Risk: This cover is given if the vehicle to be insured is laid up in
the garage of if it remains unused.
(v) Laid Up Vehicles: ‘Laid up vehicle’ is one, which is laid up in the garage and not in
use for a period of two consecutive months or more and not left for repairs due to an
accident. Concession is provided for such vehicles provided the period of suspension
should not extend - 12 months from the original expiry date of the policy. The layup period
will be counted from the date of surrender of Certificate of Insurance.
(vi) Motor Trade Policies: Motor Trade policies are designed to extend the facility of
Insurance to Motor vehicle Manufacturer, dealer and repairer who deal with Motor vehicles
that remain in their custody as part of their trade. Trade policies are given to those who
are authorized to have own trade plates by Registered Transport Authority. This policy
takes care of damage to the vehicle, bodily injury to Third Party and third party death. This
insurance is unlike to the normal motor insurance policy given to the registered owner of
the vehicle.
(vii) Transit Risk Insurance: This policy is issued to manufacturer or dealers. This
policy takes care of transport risk during the period of transit from one place to another.
Usually the vehicles involved are un-registered and uninsured under Normal Motor policy.
5. Scope of Motor Insurance

1. Underwriters and insured mutually agree to the scope of the contract and other
terms and conditions such as:-
2. Insured perils;
3. Conditions to the contract to be observed by the insured and the insurer during the
currency of the policy;
4. The value for which insurance is done;
5. Period of the contract of Insurance;
6. Procedure to be followed in case of material alterations;
7. Rate of premium compatible with the risk covered;
8. Right of the insurers;
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9. Duties of the insured;

10. General exclusions (These exclusions cannot be deleted the breach of which will
render the contract void ab-initio);
11. Specific exceptions, which are outside the scope of the contract;
12. Procedures to be followed in the event of claim;
13. Termination of Contract.
5.1 Perils Insured In Motor Policy

Accidental external means the happening of something unexpected or unforeseen and it
excludes loss arising from natural causes within. The word external refers to outwardly
visible. It means that what is not internal.
1. Fire/Explosion/Self Ignition or Lightning;
2. Burglary, housebreaking or theft;
3. Riot and Strike;
4. Malicious*Act and terrorism damage;
5. Earthquake (Fire and shock damage);
6. Flood;
7. Whilst in transit by rail/road/inland water way/Lift or elevator or air;
8. Land slide/Rock slide.
9. Self-Ignition: It appears to include the damage or loss caused by the internal defect
of the care, which is the direct cause for fire.
*The term malicious damage as stated above is intended to include loss arising from the
malicious act of a third party and not the act of the insured. If it results from the insured,
the act becomes willful negligence or gross negligence. Example: Loss or damage to the
car due to overheating is not covered.
Accessories: The expression whilst thereon’ means like the accessories insured must
have been on the vehicle at the time of Insurance as well as at the time of claim.
Accessories are those items, which are not necessary for running of the vehicle, but which
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the vehicle is required to carry with it under Motor Vehicles Act. This will depend upon the
class of vehicle and its use. Example: Rear view mirror, crash guard.
Electrical/Electronic Items: Electrical/Electronic Items - for insurance purpose are items
that are fitted to the vehicle in addition to those provided by the manufacturer of the
vehicle including accessories. With regard to the details of perils for different type of
vehicles, the student may refer to the annexure and comparative charts. Which annexure?
If there are more than one annexure give Numbering
5.2 Exclusions
The company will not be liable to make payment in respect of
(i) Consequential loss, depreciation, wear and tear, mechanical and electrical
breakdown, failures or breakages
(ii) Damage to tyres and tubes (normally 50% is allowed if proved that the damage is
only due to the mishap)
(iii) Any accidental loss or damage suffered whilst the insured or any person driving with
the knowledge and consent of the insured is under the influence of intoxicating liquor
or drugs. (for that matter breach of any warranty which has a bearing on the mishap
will invalidate the claim).
5.3 Rating
5.1.1 Tariff for Motor Risks : Tariff for motor trade risks: Load transit risks tariff for motor
trade – road risk should be loaded. In other words, the extra premium must be charged for
any risks likely to happen during transit of cargo on motor vehicles. Tariff for motor trade:
For all internal risks, the tariff provides for 48 general regulations.
5.1.2 Liability only policy : According to the new Section 147(1) the liabilities incurred by
the user of the motor vehicle should be covered by insurance in order to satisfy the
requirements of Chapter XI of the 1988 Act. These liabilities are also referred as
Compulsory insurable risks. According to Chapter XI of 1988 Act, it is necessary for a
motor vehicle to be insured against user’s liability for death or bodily injury to third party.
The policy amount is fixed by the Act.
Illustration : A motorist while parking his vehicle unintentionally hit the compound wall
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resulting in third party liability. The ‘Liability only’ policy covers the risks mentioned in the
Motor Vehicles Act. This policy provides coverage even if the value of the property is high.
It means the compensation provided by the insurer may be upto the value of insurance,
which could be higher than the minimum amount, prescribed under the Act. This policy
normally covers risks under Fatal Accident Act 1855, and common law The package policy
covers all the risks under liability only policy and includes compensation for the damage to
the vehicle as well. Rates provided under the Tariff Act are only for Third Party premiums;
the rates are administered by IRDAI. For Own Damage cover, Tariff has been abolished.
Hence, each Insurance Company can have its own rates. Loading on tariff premium rates
upto 100% may be applied for adverse claims experience of the vehicle insured and
individual risk perception as per the insurer’s assessment. If the experience continues to
be adverse, a further loading upto 100% on the expiring premium may be applied. No
further loading shall apply.
5.4 Extension of Geographical Area

The Geographical Area of Motor Policies may be extended to include Nepal and Bhutan.
This can be done by charging a flat additional premium of Rs.500 per vehicle / 100 per
vehicle irrespective of the class of vehicle for package policy and liability policy
respectively. Such geographical extensions, however, specifically exclude cover for
damage to the vehicle/ injury to its occupants/ TP liability in respect of the vehicle during
air passage/ sea voyage for the purpose of ferrying the vehicle to the extended
Geographical Area.
5.5 Valued Policies

Under an Agreed Value Policy a specified sum agreed as the insured value of the vehicle
is paid as compensation in case of Total Loss/Constructive Total Loss of the vehicle
without any deduction for depreciation. The motor tariff permits the issue of such policies
only for vintage cars. A Vintage car is any car manufactured prior 31/12/1940 and duly
certified by The Vintage and Classic Car Club of India.
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5.6 Insured Declared Value (IDV) Definition (Sum Insured)

Insured Declared Value is the maximum Sum Assured fixed by the insurer which is
provided on theft or total loss of vehicle. Basically, IDV is the current market value of the
vehicle. If the vehicle suffers total loss, IDV is the compensation that the insurer will
provide to the policy holder. IDV is calculated as manufacturer’s listed selling price minus
depreciation. The registration and insurance cost are excluded from IDV. The IDV of the
accessories which are not factory fitted, are calculated separately at extra cost if
insurance is required for them.
The depreciation schedule is as follows:
The Insured’s declared Value ( IDV)) of the vehicle will be deemed to be the ‘SUM
INSURED’ for the purpose of this tariff and it will be fixed at the commencement of each
policy period for each insured vehicle.
IDV= (Manufacturer’s listed selling price- depreciation) + (Accessories that are not
included in listed selling price-depreciation) and excludes registration and
insurance costs.
The IDV of the vehicle is to be fixed on the basis of manufacturer’s listed selling price of
the brand and model as the vehicle proposed for insurance at the commencement of
insurance/renewal and adjusted for depreciation (as per schedule specified below).
Age of the Vehicle % of Depreciation for fixing IDV
Not exceeding 6 months 5%
Exceeding 6 months but not exceeding1 year 15%
Exceeding 1 year but not exceeding 2 years 20%
Exceeding 2 years but not exceeding 3 years 30%
Note: IDV of vehicles beyond 5 years of age and of obsolete models of the vehicles (i.e.
models which the manufacturers have discontinued to manufacture) is to be determined
on the basis of an understanding between the insurer and the insured.
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Illustration of Car Insurance Premium Calculation

Premium = Own Damage Premium – (No claim bonus + discounts) + Liability Premium as
Fixed by the IRDAI + Cost of Add-ons
Sum Insured - Insurable value

The value of the vehicle being insured is determined based on various factors such as:
1. Manufacturing cost
2. Profit margin of the manufacturer
3. Transportation charges
4. Tax and Duties
5. Cost of Insurance
6. Intermediary Commission
7. Suitable loading with regard to increase in value due to market fluctuations
8. Cost of accessories and other value addition
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9. Any extra cost, which may be material for valuation of risk, offered for Insurance.
The selection of value is usually the option of the insured and such value so fixed will be
the maximum limit of liability in the event of loss. It is also on the basis on which premium
is collected. This value is called sum insured which can be increased or reduced during
the currency of the policy. Sum insured is stipulated in the Motor Policy in the name of
“Insured’s Declared Value” (I.D.V.) in Motor Insurance.
5.7 Cover Note

A cover note is an unstamped document issued based on the details given in the proposal
form confirming the acceptance of the risk from the date and time of receiving the
consideration (premium). This document is issued immediately only under circumstances
where the issuance of the policy is not feasible. This cover note is a replica of the policy to
be issued. The validity of the cover note is 60 days, which can be further extended at the
option of the insurer, if necessary.
5.8 Policy Form

After a contract has been concluded between the proposer and the insurer, it is recorded
in a document called a policy. The policy is not the contract but only the evidence of it. In
the event of a dispute, it is the policy to which the attention of the court will be drawn
unless the insured brings the evidence to prove that there is a discrepancy between the
policy and the fact.
5.9 Endorsement
From time to time, it is necessary to make alterations in the wordings of a policy to take
note of changes in the material facts submitted earlier in substitution for one item to
another. It would be costly and time consuming to issue a new policy for every alteration.
Therefore, any changes to the original policy are noted by way of issuing an Endorsement.
5.10 Period of Insurance

Usually, the insurance is offered only for 12 months, as most of the insurance contracts
including accident and liability insurance are annual policies. When the liability of the
insurer commences under the contract of the policy, the policy is said to attach or in other
words the risk is said to attach or it begins to run from that time.
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5.11 Duties of the Insured at the Time of Taking Insurance

The following are the duties of the insured at the time of taking the insurance:
(i) The Insured should declare all the materials facts relevant to the risk for which
insurance is sought such as type of vehicle, purpose of usage, model of the vehicle,
age of the vehicle etc.
(ii) History of past claims.
(iii) Name of the previous insurers if any who have declined accepting the risk offered
for Insurance or cancelled the policy.
(iv) Maintenance of the vehicle in the most efficient manner as though he is uninsured.
(v) The Insured should bring to the notice of the Insurer facts of - any alterations
subsequent to the issuance of the policy, e.g. accessories insured should remain in
the vehicle during the entire period of insurance.
(vi) It is the - obligation - of the insured to declare any accidents that have taken place
whether material or not to this Insurance.
6. Motor Insurance Premium

The contract of insurance comes into force only when the consideration is paid by the
insured to insurer who promises to indemnify the insured in the event of claim. It is a
precondition that premium ought to be collected prior to the commencement of risk upon
which the promise of the insurer rests. The insurers can turn down the liability if
consideration is not paid prior to the occurrence of loss. The consideration so paid by the
insured is known as premium. The Insurance Act is very specific and emphatic that the
collection of premium in advance to the commencement of insurance contract is an
absolute necessity and any breach in this regard will be termed as violation of Act under
Section 64 VB, in turn, the insurers can reject the claim if loss arises. So, Section 64 VB
(Advance Payment of Premium) has to be complied with in each case.
Factors that determine the quantum of Premium
The amount of premium to be paid by the insured is depending upon various factors.
(a) IDV (Insured Declared Value) of the vehicle;
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(b) Additional accessories;

(c) Extra fittings like electronic and non electronic item;
(d) Type of vehicle;
(e) Age of vehicle/model of vehicle;
(f) Age and gender of the owner-driver
(g) Geographical Zone where the vehicle is plying;
(h) Cubic capacity/seating capacity/gross vehicle weight;
(i) Perils covered;
(j) Combination of risks like comprehensive cover, third party and fire or theft or fire
and theft;
(k) Past claims experience
(l) Fuel type
(m) Profession of the owner
(n) Voluntary deductible
(o) No Claim Bonus (NCB)
(p) Anti-theft device installation
The premium must be calculated in accordance with the premium computation tables
appearing in the tariff separately for different types of vehicles. Rate of premium is
different for accidental damages to the insured’s own vehicle and liability risk to third
party. The insured cannot choose to pay premium only for accidental damages and he has
to necessarily take third party liability with accidental damage to vehicle whereas, the risk
of third party liability can be separately taken and premium paid. Premium payable on a
policy is based on the value for which insurance is sought and must be calculated in
accordance with premium computation tables appearing in the tariff.
(i) Annual Premium : As motor policies are annual policies, the premium consideration
is collected for 365 days. It is not permissible to insure for more than one year under motor
insurance.
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(ii) Pro Rata Premium: Under some circumstances, depending on provisions made
available in the tariff, premium is charged in proportion to the number of days for which the
risk has been in force. Such premium is known as Pro rata Premium. Situations where pro
rata premium is charged are:-
(i) Due to the change of ownership of the vehicle, the insurance gets transferred to the
new owner. This may happen during the currency of the policy period and the new
owner may like to have the extension of policy period so that he gets an insurance
policy for not more than complete 12 months. The insured can get such extension of
policy with a suitable premium for additional period of insurance without letting the
insured to have a revised policy for a period more than 12 months.
(ii) Some insured desire to revise their policy period to coincide with the financial year
or assessment year
(iii) When the insured desires to enhance the value of vehicle during the currency of the
policy in order to cope with the market value.
(iv) Any additional extra items like electronic or non electronic items subsequently fitted
in the vehicle can be added to the value of the vehicle insured during the currency of
the policy with suitable additional premium
(v) Sometimes the insured may desire to re-opt the extraneous perils like earthquake,
flood, riot & strike during the currency of the policy which he had originally opted out
by enjoying reduced premium.
(iii) Short Period Premium : There are occasions where the insured needs insurance
for a period less than 365 days. Such facility is allowed but the insured has to pay the
premium on short period basis. The premium for short period is slightly higher than the
regular premium-rating factor. It means the policy for short period is more expensive than
normal annual policies. Situations under which short period premium is collected may be:-
(a) When the policy is issued for a period less than 12 months
(b) When the policy is cancelled at the request of the insured
(iv) Premium Rebates : The insurer recognizes the merits of claim-free clients and the
premium for renewal period is reduced by way of bonus. The bonus is rewarded on
premium for the value of the vehicle and not on premium for third party liability. Tables of
no claim bonus are provided in the tariff for different categories of vehicles.
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This discount goes with the insured and not with the vehicle i.e., if the vehicle is sold, the
new owner is not eligible for the no-claim bonus. However, the previous owner can
substitute the discount for any new vehicle, which he may purchase during three years
from the date of transfer. If the vehicle is sold to spouse or children or parents, the
discount passes on to such persons. Similarly, if a vehicle is used or operated by an
employee for an institution and the same is transferred to him at a later date, he can avail-
no claim discount.
For persons coming from abroad, the discount can be allowed provided he produces a
letter to the effect that he is eligible for the discount, within three years from the expiry of
the overseas policy. In case of renewals, the no-claim discount can be granted to the
insured only if he renews his policy within 90 days.
(v) Vehicles Used In Own Premises and Confined Sites : A reduction in premium is
allowed if the vehicle is not licensed for road use and used in own premises where public
have no access to. Similar discount is allowed for goods carrying vehicle, which need not
be registered, and which are used in confined sites where public have no access.
(vi) Vehicles Specially Designed for Handicapped Persons : A Discount in premium
for vehicles, which are specially designed for and used, by handicapped persons and
institutions engaged exclusively in the service for handicapped and mentally retarded, is
allowed, of course, as per the provisions of the MV Act.
(vii) Automobile Association Membership : If the insured is a member of a recognized
automobile association, a discount of 5% shall be granted subject to a maximum of
Rs.50/- for Two-wheelers and Rs.100/- for Private cars.
(viii) Voluntary Excess Discount : Some insured desire to avoid preferring insurance
claims to the extent, which can be borne by them within their financial limits. This is called
Insured bearing first portion of each and every claim arising out of accident. The premium
is reduced based on the quantum chosen by the insured as per tariff / guidelines.
(ix) Third Party Liability Premium Rates by IRDAI : It is important to note that liability
premium is fixed by the insurer. It is the minimum statutory premium to be paid as fixed by
IRDAI (Insurance Regulatory and Development Authority of India). The liability premium
amount depends on the engine power of the car. The premium increases with an increase
in cubic capacity. The third-party liability premium chart (for private cars) released by the
IRDAI for the financial year 2017-18 is as follows:
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MOTOR INSURANCE
Explanation of the Components that influence the premium of a comprehensive/package

policy:
(a) Insured Declared Value or IDV of the Vehicle : IDV is the maximum amount that
can be claimed for any loss or accident of the vehicle. It is one of the important
factors that greatly affect the premium.
IDV = Ex-showroom price of your car + cost of accessories (if any) – depreciation
value as per IRDAI. Depending on the age of the vehicle, the depreciation ranges
from 5% to 50% of the ex-showroom price.
(b) No Claim Bonus (NCB) : In order to reward policyholders for being a responsible
driver, insurance companies have come up with the concept of No Claim Bonus. A
policyholder is entitled for a NCB discount if they have not made a claim the
previous year. If there is a NCB component in the policy, one can save up to 50% on
the own damage (OD) premium.
(c) Discounts: There are some additional discounts that are offered under own damage
premium. Some of these discounts are as mentioned below:
(a) Installation of an anti-theft device like a car alarm can help to get a discount on
car insurance premium.
(b) Getting a membership in Automobile Association of India (AAI) is a great way
to avail a discount in premium.
(c) Opting for voluntary deductibles/excesses can lower the premium.
(d) Car insurers offer profession-based discounts to defence personnel,
government employees, and doctors.
(d) Loadings: Any electrical or electronic accessory that is fitted in the vehicle like
CD/DVD players, CNG or LPG units, but is not included in the manufacturer’s selling
price of the car is insured at an extra amount.
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(e) Age and gender of the car owner: Individuals below 25 years of age are
considered to be more risky drivers. Hence, insurance providers offer car insurance
at a higher premium for people in the age group of 18 years to 25 years.
(f) Make and model of the car: High-end cars such as Bentley and Audi are insured at
a higher cost when compared to more affordable vehicles like Santro and Alto.
Similarly, SUVs are charged higher insurance premiums than ordinary family
hatchbacks.
(g) Geographical location: Since the density of traffic is high in cities, the premium is
higher there. Moreover, the incidence of thefts and robberies are considered to be
high in urban areas. This directly impacts the premium of car insurance. For the
purpose of rating, the whole of India has been divided into the following zones
depending upon the location of the office of registration of the vehicle concerned.
(a) Private Cars/ Motorized Two Wheelers/ Commercial Vehicles rateable under
Section 4.C.1 and C.4.
• Zone A: Ahmedabad, Bangalore, Chennai, Hyderabad , Kolkata,
Mumbai, New Delhi and Pune.
• Zone B: Rest of India
(b) Commercial Vehicles excluding vehicles rateable under Section 4. C.1 and
C.4.
• Zone A: Chennai, Delhi / New Delhi, Kolkata, Mumbai
• Zone B: All other State Capitals
• Zone C: Rest of India
(h) Fuel Type : A CNG fitted car will be costlier to insure than diesel and petrol models.
Also, a diesel car will attract a higher insurance premium than a petrol car. This is
due to the following reasons:
(i) A diesel car is more expensive than a petrol car of the same model. Since the
premium for car insurance is directly proportional to the cost of the car, the
premium will be higher for the diesel variant.
(ii) It is more expensive to get a diesel car repaired post an accident, when
compared to a petrol car.
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(iii) Diesel cars have gained a lot of popularity in the recent years. When diesel
cars became as attractive as their petrol variants, the insurance premiums for
these vehicles also witnessed a hike.
(i) Year of manufacture : The older the car is, the lesser will be its IDV. This leads to a
lower insurance premium as well.
(j) Premium Calculation for Used and New Cars: Every car manufacturing company
uses its own set of parameters to calculate the premium for a policy. However, the
factors that are considered by most insurers are listed below:
(i) Premium calculator for used cars - To calculate the premium for used cars,
the following details are required:
— Type of car
— Fuel type
— Details of the existing car insurance policy
— Registration number of the car
— Details regarding change in ownership
— Claims for previous years, if applicable
(ii) Premium calculator for new cars - The details required for premium
calculation for insuring a new car are:
— The name of the car manufacturer
— The model of the vehicle
— Year of manufacture
— Personal details of the owner-driver
— State of registration of the vehicle
Illustrative example of NCB
No Claim Bonus is an easy way to progressively reduce premium. For example, the
following scenario as shown in the table NCB over the years reduces the premium
gradually:
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(k) Total loss: A vehicle is considered as a constructive total loss where the aggregate
cost of repairs exceeds 75% of IDV.
(l) Period of Insurance: This is generally for one year and can be extended for a few
months, if such extension is required for a specific purpose. Premium payable will be
on a prorata basis provided the extended policy on expiry is renewed for a further
period of twelve months.
(m) Premium Rates for Short Period Cover: Short Period Cover/Renewal may be
granted for periods less than twelve months at the following short period scale:
Period % of Annual premium rate

Not exceeding 1 month 20%
Exceeding 1 month but not exceeding 2 months 30%
Exceeding 2 months but not exceeding 3 months 40%
Exceeding 8 months Full annual premium/ rate
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Note: 1. Extension of short period covers/short period renewals, for any reason, can be
granted only by charging the premium for such extensions at the above
mentioned short period rates.
2. Short period covers/short period renewals for ‘Liability Only’ Policies are not
permissible.
Premium computation along with discounts allowed is to be shown clearly on the
policy.
(n) Payment of Premium: Full premium is required to be collected before
commencement of cover. It is not permissible to collect premium in installments.
Minimum Premium: The minimum premium applicable for vehicles specially
designed or modified for use of the blind, handicapped and mentally challenged
persons will be Rs.25/- per vehicle. For all other vehicles, the applicable minimum
premium per vehicle will be Rs.100/-.
7. Change of Vehicle
A vehicle insured under a policy can be substituted by another vehicle of the same class
for the balance period of the policy subject to adjustment of premium, if any, on pro-rata
basis from the date of substitution.
Where the vehicle so substituted is not a total loss, evidence in support of continuation of
insurance on the substituted vehicle is required to be submitted to the insurer before such
substitution can be carried out.
Vehicles subject to hire purchase agreements, vehicles subject to lease agreements and
vehicles subject to hypothecation: Motor policies are not issued in joint names. The
financial interests are only recorded by attaching/ invoking the respective endorsement
nos. in the name of the financier – Hire Purchase/ Hypothecation/ etc.
8. Cancellation of Insurance
(a) A policy may be cancelled by the insurer by sending to the insured seven days
notice of cancellation by recorded delivery to the insured’s last known address and
the insurer will refund to the insured the pro-rata premium for the balance period of
the policy.
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(b) A policy may be cancelled at the option of the insured with seven days’ notice of
cancellation and the insurer will be entitled to retain premium on short period scale
of rates for the period for which the cover has been in existence prior to the
cancellation of the policy. The balance premium, if any, is refundable to the insured.
(c) Refund of premium will be subject to: there being no claim under the policy, and the
retention of minimum premium as specified in the Tariff.
(d) A policy can be cancelled only after ensuring that the vehicle is insured elsewhere,
at least for Liability Only cover and after surrender of the original Certificate of
Insurance for cancellation.
(e) Insurer should inform the Regional Transport Authority (RTA) concerned by
recorded delivery about such cancellation of insurance.
9. Termination of Insurance
A contract of insurance can be terminated in the following circumstances
(a) At the option of the insurer
(b) At the option of the insured
(c) Due to existence of two (i.e. Double) insurances for the same vehicle.
If it comes to the knowledge of the insurer or the insured finds that there are two co
existing policies for the same vehicle for the same period, the one which was taken first
remains and the other - policy gets cancelled and the premium is refunded by retaining a
nominal amount towards administrative and documentation expenses. Retention of
minimum premium is necessary in the event of cancellation to take care of administrative
expenses.
Cancellation Options of Insurance Policies
1. At the option of the insurer 7 days’ notice by registered letter to the insured at his
last mentioned address. The insured is entitled to refund of premium for unexpired
period and the insurer retains the premium for expired period proportionately.
2. At the option of the insured 7 days’ notice and the insured is entitled to refund of
premium on the number of unexpired days and the insurer will retain the premium for
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MOTOR INSURANCE
the period during - which the risk was in force more than proportionately on short
period basis provided no claim has been preferred by the insured.
3. No cancellation is allowed if the ownership of the vehicle is transferred to the new
owner unless the evidence of from policy for the vehicle is produced.
10. Transfer of Policy

(a) In the Event of the Death of the Insured
On transfer of ownership, the ‘Liability Only’ cover, either under a ‘Liability Only’ policy or
under a Package policy, is deemed to have been transferred in favour of the person to
whom the motor vehicle is transferred with effect from the date of transfer. The transferee
shall apply within fourteen days from the date of transfer in writing under recorded delivery
to the insurer who has insured the vehicle, with the details of the registration of the
vehicle, the date of transfer of the vehicle, the previous owner of the vehicle and the
number and date of the insurance policy so that the insurer may make the necessary
changes in his record and issue fresh Certificate of Insurance. In case of Package
Policies, transfer of the “Own Damage” section of the policy in favour of the transferee,
shall be made by the insurer only on receipt of a specific request from the transferee along
with consent of the transferor. If the transferee is not entitled to the benefit of the No Claim
Bonus (NCB) shown on the policy, or is entitled to a lesser percentage of NCB than that
existing in the policy, recovery of the difference between the transferee’s entitlement, if
any, and that shown on the policy shall be made before effecting the transfer. A fresh
Proposal Form duly completed is to be obtained from the transferee in respect of both
Liability Only and Package Policies.
Transfer of Package Policy in the name of the transferee can be done only on getting
acceptable evidence of sale and a fresh proposal form duly filled and signed. The old
Certificate of Insurance for the vehicle, is required to be surrendered and a fee of Rs.50/-
is to be collected for issue of fresh Certificate in the name of the transferee. If for any
reason, the old Certificate of Insurance cannot be surrendered, a proper declaration to that
effect is to be taken from the transferee before a new Certificate of Insurance is issued.
The policy will lapse after 3 months from the date of death of the insured or until the expiry
of the policy whichever is earlier. Otherwise, the legal heirs can get the policy transferred
subject to their application with:-
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(i) Death certificate of the insured and legal heir ship certificate
(ii) Proof of title to the motor vehicle
(iii) Copy of the policy
The Insurance company reserves its rights to abide by any order of the court, with regard
to declaration about the legal heirs and ownership of the vehicle and the nominee will not
have any right to the order of the court.
(b) In Case of Change of Ownership

The policy benefits stand to accrue to the buyer of the vehicle once sale consideration is
paid and suitable endorsements made in the certificate or registration provided the
transfer of insurance from the original owner to the new owner is done within 15 days of
sale, as per Motor Vehicles Act; if not done the accidental benefit to the damage or loss of
the vehicle is forfeited on the 16th day itself but the Act is generous towards third party
liability.
(c) Double Insurance

When two policies are in existence on the same vehicle with identical cover, one of the
policies may be cancelled. Where one of the policies commences at a date later than the
other policy, the policy commencing later is to be cancelled by the insurer concerned.
If a vehicle is insured at any time with two different offices of the same insurer, 100%
refund of premium of one policy may be allowed by canceling the later of the two policies.
However, if the two policies are issued by two different insurers, the policy commencing
later is to be cancelled by the insurer concerned and pro-rata refund of premium thereon is
to be allowed.
If however, due to requirements of Banks/Financial Institutions, intimated to the insurer in
writing, the earlier dated policy is required to be cancelled, then refund of premium is to be
allowed after retaining premium at short period scale for the period the policy was in force
prior to cancellation.
In all such eventualities, the minimum premium as specified in the tariff is to be retained.
In either case, no refund of premium can be allowed for such cancellation if any claim has
arisen on either of the policies during the period when both the policies were in operation,
but prior to cancellation of one of the policies.
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MOTOR INSURANCE
11. Cancellation and Issuance of Fresh Certificate of

Insurance
Following any changes in the policy during its currency, affecting the information shown on
the Certificate of Insurance, the Certificate of Insurance is required to be returned to the
Insurer for cancellation and a fresh Certificate incorporating the changes is to be issued.
Information regarding change of number of Engine and/ or Chassis of the vehicle, is
required to be intimated to the insurer immediately for effecting necessary changes in the
policy, provided such changes are duly endorsed on the Registration Certificate. The
Certificate of Insurance is also required to be returned immediately for issuance of fresh
Certificate of Insurance incorporating the changes. Remittance of Rs. 50/- is required to be
made to the insurer for each issuance of fresh Certificate of Insurance.
12. Policy Renewal

Renewal Receipt : This document is issued in lieu of policy at renewal (but new certificate
is to be issued). The issue of receipt shows that insurer has received the renewal premium
and has the policy renewed for further one year. A fresh policy has to be taken if the
renewal is not under the same conditions as the old policy.
13. Additional Policies to be taken alongwith the Motor

Insurance (i.e. OD & TP)
Personal Accident Insurance: Insured can choose to take personal accident policies for
the occupants of the vehicle including owner and driver. The additional premium is being
charged based on PA table selection. It can be given for unnamed occupants too.
Premium for Increased liability against third party property or unlimited insurance for legal
liability is for consideration by the insured.
Commencement of Risk
The risk commences immediately on the issuance of insurance policy. The details of policy
and what it contains are given as under.
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14. Concession for Vehicles Laid Up

If a vehicle is laid up in garage and is not put to use for a continuous period of more than 2
months, the liability of the insurers under the liability risk section of the policy is
suspended for such period and a concession is given to the insured. The concession is
given in two forms and the insured can chose whichever he wants.
(a) Prorata refund of premium for such period. This refund is granted in the form of
credit and not as cash i.e., such refund can be adjusted against the premium for
subsequent renewal.
(b) The policy period can be extended after the expiry of the policy for a period equal to
the period of such layup.
Under Accidental Damage section the cover is suspended for the period during which the
vehicle is laid up in garage and not in use and -
1. Restricted cover for fire and/or theft is granted for the period of layup and a refund of
premium on pro rata basis is made after charging a premium for the restricted cover.
Again the refund is on credit basis and not cash.
2. As an alternative, the insured can extend the policy period after the expiry of the
policy for a period equal to the period of layup.
A notice in writing must be given to the insurers regarding the lay up and the certificate of
insurance must be surrendered. Such lay up of vehicle must not be meant for repairing the
vehicle. The period of suspension of cover shall not extend beyond 12 months from the
expiry date of the policy.
15. Forms of Losses

1. Direct loss and/or damage to the Insured vehicle resulting from accidental means
caused by insured peril proximately.
2. Indirect loss and/or damage (Third party Liability) Indirect loss and/or damage to the
insured by legal liability.
Direct Losses and or Damage: It refers to physical loss of the property i.e. vehicle by
way of theft or visible physical damage to the vehicle due to accident.
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MOTOR INSURANCE
Indirect Loss and or Damage: As a result of accident, the owner of the vehicle may be
made legally liable to compensate the third parties for their death and/or bodily injury
and/or property damage. Such compensation is called “Liability” arising out of use of
vehicle in public place. It means the insurers meet the legal liability payable by the insured
to a third party due to accident.
‘Third party’ means any person other than the Insured and the Insurer:
‘Liability’ means “The amount of financial compensation legally payable by the insured to
the third party”.
‘Public place’ according to Section 2(24) of the MV Act, is a road, street, way or other
place, whether thoroughfare or not, to which the public have a right of access and includes
any place or stand at which passengers are picked up or set down by a stage carriage”
Example: A Motor car sustains damages by hitting against a compound wall of another
person and in the process resulted in the death of a pedestrian. Before arrival of police on
the scene, the stereo is also stolen.
In the above case following liabilities - arise:
(a) Direct loss and/or damage: (i) Damage to vehicle; (ii) Loss of stereo.
(b) Indirect loss and/or damage of Third Party liability: (i) Death of the pedestrian;
(ii) Damage to compound wall.
15.1 Liability for Third Party: Limits

(a) Under Section II-1 (i) of the Package policy (Under Section I (i) of the Liability Only
Policy)- As per requirements of Motor Vehicles Act, 1988- Unlimited.
(b) Under Section II –1 (ii) of the Package policy (Under Section I(ii) of the Liability Only
Policy) - Rs. 7.5 lakhs
Or
Rs. 6,000/-, where the proposer / insured opts to limit the TPPD liability to the
statutory limit of Rs.6000/- (Endorsement IMT-20 is to be used).
From the past experience, a few instances of proximate causes are given as under
(a) Damages to vehicle whilst attempting to save a cyclist or pedestrian
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(b) Damages resulting from bursting of tyres

(c) Damages resulting from mechanical breakdown
(d) Damages to vehicle due to skidding in the heavy rain
(e) Small vehicles hit by over speeding heavy vehicles
(f) Vehicles damaged whilst in the parking place
(g) Accidents due to animals
(h) Damages due to poor visibility owing to fog and bad roads.
(i) Overturning by hitting trees or parapet or road dividers and other stationery objects
(j) Accident to vehicles due to pits on sides of the road by public Authorities.
15.2 Duties of the Insured

(i) Duty of the assured to do his best to avert/avoid or minimize loss. This duty arises
from the duty of good faith he owes to the insurers and more usually from the
express conditions of the policy.
(ii) If accident is caused by fire or collision or any external means, he must take such
measures as are reasonable to extinguish the fire or to prevent further loss by
removing the vehicle to nearby safer place.
(iii) He is not to interfere with the efforts of other persons engaging in helping to reduce
or minimize loss.
(iv) For that purpose he should take steps to remove the vehicle insured to a place of
safety unless he finds that all hopes to save it will be useless.
(v) If his failure to perform these duties is willful, it may be an evidence of fraud
disentitling him to recover anything on the policy.
(vi) It has become an absolute necessity that the insured complies with the conditions
imposed by the insurer, which are embodied in the policy form.
15.3 Duties of the Insured prior to the occurrence of loss

(a) He should take reasonable steps to safeguard the vehicle from any loss or damage
and act as if uninsured
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(b) The Insured should maintain the vehicle in the most efficient and roadworthy
condition.
(c) The company as at all times, shall be at liberty to inspect and examine the vehicle or
any part of the vehicle and also any driver or employee of the insured.
15.4 After the occurrence of accident

(a) It is the duty of the Insured to exercise care and concern in the event of accident
and also at the time of breakdown of the motor vehicle.
(b) The Insured should exercise due diligence and precautions to ensure that the
damaged vehicle is immediately attended to so that the aggravation of further loss
and deterioration to the damaged vehicle is prevented and avoided.
(c) Any aggravation of damages due to non-attendance, non repairing the damaged
vehicle or driving the vehicle without repairing the damages amounts to failing from
the duties of the insured. The insured is solely responsible for such lapses and will
be made to bear the loss or damage.
(d) Notice of loss to be given immediately to the insurance company.
(e) The insured should extend all assistance and furnish necessary information with
regard to the claim.
(f) All legal documents such as letters, writs or claims, summons received should be
immediately forwarded to the insurance company.
(g) Notice shall be given with regard to any prosecution, inquest or fatal injury to the
insurance company.
(h) Insured should lodge FIR with police authorities with regard to theft or criminal acts,
which may lead to claim.
(i) Insured should also co-operate with the insurance company in securing the
conviction of the offender.
15.5 Legal proceedings

(a) In case there is any contributory negligence with regard to third party claims, the
insured should not make any admission, offer or promise for payment of indemnify to
any third party without the consent of the insurance company.
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(b) If necessary, the insurance company will conduct the defense in settlement of
claim/legal proceedings/prosecution on behalf of the insured. The insured should
extend all assistance and co-operation to the insurance company.
15.6 Settlement of the claim at the option of the insurer

(a) Insurance company has the option to either allow the insured to repair the damaged
vehicle or reinstate the damaged parts or replace the motor vehicle or its
accessories. The payment may be made by cash.
(b) The insurance company will pay for the loss or damages and also - reasonable cost
of fitting such damaged parts (labour charges)
(c) Such payments shall not exceed the sum insured (which is - the estimated value of
the vehicle chosen by the insured at the time of taking the policy or renewal provided
the market value of the vehicle including accessories is not less than the estimated
value of the Insured.
15.7 Application of principle of contribution due to Double Insurance

in the event of claim
In case of double insurance, the insurance company will pay only its ratable proportion of
the loss or damage or any compensation or cost or expenses. In case the insured is
having more than one policy for the same vehicle with - different insurers each insurer will
pay only in proportion to its - Sum Insured.
15.8 Reference to Arbitration in respect of Dispute in admissible

claims with regard to quantum difference
Dispute regarding quantum of loss or damage where the insurers admit liability, - shall be
referred to Arbitration. Arbitration proceedings are discussed in details in the next Chapter.
15.9 Time Limit for filing Suit in the Court of Law

If the Insured fails to prefer any claim within twelve calendar months from the date of
rejection of liability in the Court of Law, the insured loses the rights of remedy.
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15.10 Observance and fulfillment of terms and conditions of the

policy
Since the policy terms and conditions are given in the policy based on the true information
and details given by the insured to the best of their knowledge the insured is bound to
comply with the same; and such compliance shall be the condition precedent to any
admissible liability under the policy. The contract of insurance of is subject to implied and
express conditions, which expect the insured to observe the conditions precedent and
conditions subsequent.
16. Common Exclusions that are applicable to all types of

vehicle in the event of claim
(a) Geographical Area: If the vehicle sustains damages or the vehicle is lost and if any
liability is incurred, that should have been only due to an accident that takes place
within India.
(b) Contractual liability is excluded
(c) No insurance claim is payable if
(i) The insured violates the condition of limitations as to use
(ii) If the vehicle is driven by any person other than the driver whose name, if any,
is specified in the policy
(d) The insurers will pay only for the resultant damages or loss - consequent to the
accident and not for consequential loss that may arise due to the non usage of the
vehicle, like
(i) Rent for alternate car
(ii) Loss of earning whilst the vehicle is in the garage for accidental repairs.
(e) No liability arising directly and indirectly or contributed by ionizing radiations, or
contamination by radioactivity from any nuclear fuel or nuclear waste from the
combustion of nuclear fuel.
(f) Damage caused by nuclear weapons/ material is not admissible
(g) No claim due to war, warlike operations
(h) Acts of terrorism are - excluded.
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17. Role of a Surveyor

Surveyors are being authorized and placed in different categories depending on their
professional qualifications and special competence gained by experience. Once they are
empanelled, their services are being utilized by insurance companies operating in India in
different fields of working. They play a very vital role in the insurance field not only prior to
the acceptance of risk but also after the occurrence of loss. Insurance companies are
utilizing the services of surveyors for pre inspection of major risks and for - the
assessment of insurance liabilities. The remuneration/fees depends on the quantum of
assessed admissible liabilities of insurers.
Any Association or group or a firm or an individual can become surveyors provided they
have competence in the field like Chemical Engineering, Automobile Engineering and
Chartered Accountancy etc.
What is expected of surveyors?
1. They should develop their product knowledge or insurance based on their
specialization and keep on updating the changes.
2. They should be highly competent in handling the assignments given by insurers and
be helpful both to their insurer and the insured.
3. They should be neutral, unbiased and free from prejudice in their approach towards
the customers while handling the claims
4. Their attitude should be polite and their decision - firm in respect of the
assessments.
5. They should exercise due diligence, care while assessing the Quantum of liability
and in the process the concern towards the interest of the policy holders should not
be lost.
6. The duties of the surveyor should be discharged scruplously and the honesty and
integrity should be maintained at the highest degree.
7. The surveyor should remember that he is independent and his role is - indispensable
to ensure that the promises of both parties are fulfilled.
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17.1 Functions of Surveyors in Motor Insurance

(a) The job of the surveyor begins as soon as the allotment of survey is done by
Insurance companies. He should collect the necessary work allotment for each job
along with claim papers such as claim intimation letter of the insured, Estimate of the
repairers submitted by the insured and copy of the relevant policy .
(b) The surveyors should immediately reach the spot of accident and advise the insured
to remove the damaged vehicle to the safe place or reputed - workshop.
(c) He should assist the insured, if necessary to lodge the FIR and produce the vehicle
to the RTO authorities.
(d) He should take necessary photographs of the damaged vehicle
(e) He should ascertain the actual cause of accident and the extent to which parts are
damaged.
(f) His primary duty is to estimate on his own the likely expenditure towards the cost of
Labour (Removing the dent, painting etc.) and cost of parts to be replaced, if
required.
(g) The surveyor should negotiate with the repairers and accurately decide the quantum
of liability without letting the repairers to manipulate the cost of repairs by inflating
the bills and also estimating the parts for replacement, which are repairable at a
minimum cost.
(h) The surveyors should justify that the cause of the loss is due to insured peril and the
extent of damage is in conformity with the nature of accident that took place.
(i) The Surveyor should conduct the survey at the repairers’ workshop immediately and
permit the repairers to dismantle the vehicle in the presence very carefully to find out
the external and internal damages, if any.
(j) There should not be any communication gap between the surveyor and the repairer
as well as surveyor and the insurer.
(k) The surveyor should keep the insurers informed about the developments of the
claim periodically and keep the insured posted about what he has discussed with the
repairers with regard the accidental repair works to be carried out.
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(l) He may have to verify the bills of the parts to ensure the avoidance of inflated bills
by the repairers.
(m) The surveyor should finalize his report with regard to the admissible liability in
respect of cost of repairs, Labour charges, replacement of parts and the value of
salvage. He should ensure that the report is concluded after re inspecting the
repaired vehicle so as to confirm that the repairers have actually carried out
replacement of new parts and other repair works as agreed by repairers.
(n) The report should be submitted with his due recommendations confirming the
genuineness of the claim, the authenticity of proximate cause (cause of loss), and
verification of vehicular records.
(o) His report should be submitted at the earliest so that the insured does not suffer
under any circumstances for want of financial assistance.
17.2 Duties of the Insurer

1. Verification and Recording of claim: It is the foremost duty of the insurer
immediately when a claim is reported to verify
(a) Whether the vehicle is insured or not
(b) Whether the premium is paid in advance before date and time of accident
(c) Whether the policy is in force or not . This is to ensure that the loss falls within
the policy period.
(d) Whether the loss and/or damage is caused by an Internal Peril as described in
the policy.
Once he is satisfied on the above aspects, the insurer will proceed to register the
claim and issue a claim form to the insured.
2. Appointment of Surveyor: On obtaining the completed claim form from the insured
along with the “Estimate of repairs” the insurer appoints the surveyor to assess the
nature, cause and extent of loss and/or damage. The surveyor is appointed based
on competence, expertise and experience in the field in which he is to undertake the
survey preferably an Automobile Engineer.
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3. Collection of Documents: The insurer then collects vehicular records depending

upon the type of vehicle lost and/or damaged due to an accident. It is mandatory on
the part of the insurers to fill the “Supplementary to the claim form” statement the
particulars extracted after verifying the original vehicular records such as
Registration Certificate, Driving License, Permit, Trip sheet etc. depending upon the
type of vehicle for which claim is lodged. He collects reports from external agencies
such as - First Information Report and Fire Brigade Report depending upon the
circumstances of the accident and/or loss.
4. Liaison: The insurer should liaison with the insured informing him to co-operate with
the surveyor to submit the documents required by the surveyor in order to release
his survey report and at the same time keep in touch with the surveyor to submit his
report after satisfying himself with all aspects of the claim. The position of the claim,
their requirements and developments are clearly communicated to both the insured
and the surveyor.
5. Compliance: The insurer will ensure that the insured has complied with all the
conditions under the policy and performed - his duties prudently as if he is
uninsured.
6. Valuation: The insurer obtains the survey report and evaluates his liability taking
into account the survey report and bills submitted by the insured. He will see all
aspects of the claim with regard to depreciation applied by the surveyor, excess and
more importantly the Salvage value of the damaged parts/vehicle. After fully
satisfying himself about the genuineness reasonableness and compliance with terms
and conditions of the policy the claim is processed and recommended for settlement.
7. Updating of Records: Once the claim is approved for payment - by the competent
authority, the claim is settled and proper entries are made in appropriate registers.
18. Motor Insurance Claims

Claims arise when:
• The insured’s vehicle is damaged or any loss incurred
• Any legal liability is incurred for death of or bodily injury or damage to the property of
a third party caused due to the usage of insured vehicle.
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• Under many circumstances, the insurance company may opt to make over the
damaged vehicle if the claim on repair liability is found to be on the higher side,
uneconomical as compared to the market value under this basis.
• The insurer may have to incur additional expenditure like garage charges; cost of
disposal in the form of advertisement, auction charges and/or sales charges and
total insured value may be paid, if it is less than the market value just prior to the
loss. In case the vehicle is lost by theft, the market value of similar vehicle, same
type and model or sum insured, whichever is less, is paid.
18.1 Rights and Duties of parties when claim arises

(a) Duties of the Insured: When there is a claim in respect of a motor accident, it is the
duty of the insured to intimate the insurer about the accident as soon as possible.
He must also furnish the information required by the insurer such as names and
addresses of the witnesses of the accident etc.
• The insured should not make any admission of liability or promise of payment
without the insurers consent
• The insured must attend the damaged vehicle and simultaneously take utmost
care that the damages or losses are made good before usage of such a
damaged vehicle
• Any repair to the damaged vehicle can be undertaken by the insured within the
stated amount. But the repair charges must be immediately intimated to the
insurer. The insurer can also check about the repairs carried out to satisfy
himself that the cost of repair is reimbursable.
(b) Duties of the Insurer: It is the duty of the insurer to gather the relevant facts about
the accident from the insured in order to indemnify the insured. The insurer through
a form sent to insured collects the relevant information required. The insurer may
gather information through other means if the information furnished is not complete.
(c) Rights of the insurer:
• The insurer may settle or defend the claim for his own benefit and the insured
is required to cooperate and give necessary information
• The insurer has the option either to repair, reinstate the vehicle or replace any
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of the parts or pay in cash the amount of loss or damage not exceeding the
declared value or the value at the time of loss which-ever is less
• The insurer is entitled for subrogation and in case of double insurance he
cannot contribute more than the rateable proportion of loss
• If the insurer disputes the amount of claim the matter should be arbitrated
within 12 months.
18.2 Claims Settlement Process in Motor Insurance

Claims under motor insurance for own damage are settled in three phases:
• Preliminary scrutiny
• Assessment of loss
• Settlement
I. Preliminary Scrutiny
The preliminary scrutiny involves certain procedure such as:
(a) (i) The insured gives a notice of loss to the insurer
(ii) The insurer checks whether the policy is in force
(iii) Checks whether the loss falls within the scope of policy
(iv) Checks whether the claim form is issued and surveyor is appointed.
(b) A detailed estimate of the repairs is to be submitted by the insured as prepared by
the repairer. The surveyor inspects the damages and scrutinises the repairs
estimate. The insurers normally accept such estimates prepared by the repairer but
another estimate may also be asked for.
II. Assessment of loss
The loss is assessed by the automobile surveyors assigned. They are given a copy of the
policy, claim form and final repairer estimate. They inspect the damaged vehicle, discuss
the cost of repair or replacement with the repairer and based on this the survey report is
submitted.
A surveyor is not appointed in case of any minor damages. The survey (upto Rs.20,000) is
handled by the engineers or the insurance officials themselves.
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III. Settlement
Claims are settled on the basis of the survey report. The report is examined and
accordingly the settlement is made. The practice followed is that the repairer gets a letter
from the insurer and is paid only after the repairs are made. A voucher to this effect is
given by the insured that he is satisfied with the repairs.
The insured can also make the payments for repairs directly. In such cases the insured is
later reimbursed.
18.3 Claims settlement procedure in respect of third party claim.

In respect of a notice regarding a third party claim to the insurer the following steps are
taken:
• Make an entry of notice received from (MACT) the third party regarding damages in
claims register. (Normally for TP death / injury, claims are only through MACT
whether out-of-court or Lok Adalat or after the award. For property damage, third
party can also directly make a claim from the - insurer)
• Appointment of advocate by the company
• Send a letter to MACT for obtaining details of the claim
• Call for copy of panchnama report or accident and the police report. Obtain a copy
of ‘own damage’ claim from the insured if there is one. Obtain information regarding
the liability of the insured
• Estimate the quantum of damages
• Obtain legal opinion in the case
• Motor accidents claims tribunal will decide the case if no settlement is worked out by
the parties by mutual agreement.
18.4 Claims payment

The payment of claim to the third party is based on the position relating to the following.
• No fault liability
• Law of negligence and nuisance (is the insured legally liable to the third party?)
• Motor Vehicles Act (is the insurer liable to indemnify the insured?).
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(a) Law of negligence and nuisance: As per the terms of the policy the insurer has to
indemnify the insured. If the insured’s conduct is negligent or amounts to nuisance, he is
liable to pay the third party. Negligence refers to breach of duty. Negligence arises when
the driver:
• Indulges in dangerous and reckless driving without any concern for the safety of
pedestrians
• Breaks traffic rules and regulations
• Is careless while driving
• Uses a defective vehicle
(These are not grounds for absolving the insurer from their liability)
(b) Knock-for-Knock agreement: This is applicable to a situation where there is a
collision involving two vehicles. The insurers of two parties involved in this case come to a
settlement that there is no need to go into the question as to whose negligence caused the
accident and agree to indemnify their respective insured’s against loss. The subrogation
right too is not exercised. On the contrary each insured is indemnified as per the policy
conditions by the insurers. The benefits of this agreement being
• It avoids litigation
• Insured is benefited through a quick settlement
• Each insurer compensates his insured directly
• Insurers save on legal costs, which ultimately results in reduction in premium rates.
18.5 Methods of claim settlement

Types of losses
(a) Partial loss
(b) Total loss
Partial loss: These are possible when:-
(i) Accidental damage to the vehicle
(ii) Theft/loss of accessories or parts of the vehicle
(iii) Additional expenses like towing and spot repairs.
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When a vehicle sustains damages in an accident and the insured incurs expenditure in
order to repair the damaged parts of the vehicle in addition to the towing charges to the
repairer’s workshop which is less than the insured value of the vehicle under the policy,
the loss or damages fall under the partial loss.
Example: Cost of repairs comprising of the following:
(a) Cost of parts replaced;
(b) Labour charges towards painting and replacing the damaged parts;
(c) Cost of removal from the Accident spot to the repairer’s workshop.
Total Loss: There is a total loss when the insured vehicle is stolen by somebody or the
vehicle is so damaged that it cannot be repaired without incurring expenditure more than
the sum insured or the vehicle is so damaged that the damaged value of the vehicle be as
of no value, such losses fall under Total loss.
The insurance company practices different modes of claims settlement depending upon
the nature of claim, extent of repairs and the market value of the vehicle on the date of
accident.
For total loss insured’s declared value (IDV) is considered as-
• IDV = SI
• IDV = (Manufacturer’s listed SP) - (Depreciation as per GR 8)
• Fixed at commencement of each policy period
• IDV for Side Car and/or Accessories also to be fixed likewise
• Not subject to change during policy period
Sometimes loss may be settled on constructive total loss (CTL) basis -
• If {Cost of Retrieval + Cost of Repair}* > 75% of IDV
* Subject to terms and conditions of policy
• Maximum Liability ≯{IDV – Value of Wreck}
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18.6 Modes of Settlement

(a) Repair basis
(b) Total loss basis
(c) Cash loss/salvage less loss basis.
(a) Repair basis: The surveyor ascertains the total internal and external physical
damages to the vehicle and identifies the nature of damages, cause of accident and then
determines the extent of damages.
Once the surveyor is satisfied with the genuineness of the claim taking into account the
cause of accident, the perils insured, he arrives at the cost of repairs, cost of replacement
of parts and the salvage value. He then discusses and negotiates with the repairer to
arrive at a consensus and authorizes the repairers to carry out the repair work relevant to
the accident.
Under this repair basis, the insured should bear a portion of the repair cost for
depreciation which is based on the age of the vehicle finding place in the policy. The
surveyor suggests the settlement of claim on repair basis only when he is satisfied that the
quantum involved is economical in comparison with that of market value or - sum insured,
whichever is less.
The insured is required to submit the relevant bills for cost of labour, - cost of parts and
cost of removal from the spot of accident to the repairer’s workshop. On submission of
bills and surrendering of salvages to the insurer the claim will be processed and settled.
The settlement of claim under repair basis fall under partial loss as the repair liability of
the insurer less than the value insured.
(b) Total loss basis: Under many circumstances, the insurance company may opt to
make over the damaged vehicle if the claim on repair liability is found to be on the higher
side, uneconomical as compared to the market value under this basis.
The insurer may have to incur additional expenditure like garage charges; cost of disposal
in the form of advertisement, auction charges and/or sales charges and total insured value
may be paid, if it is less than the market value just prior to the loss. In case the vehicle is
lost by theft, the market value of similar vehicle, same type and model or sum insured,
whichever is less, is paid.
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(c) Cash loss or salvage less loss basis: This is a kind of settlement when the insured
chooses to retain the damaged vehicle and insists for immediate payment based on the
cost of repairs. The insurance company ascertains the resale value of the damaged
vehicle (on as in where in condition) and pays the difference between the market value of
similar undamaged vehicle as on date of accident and the market value of the damaged
vehicle. Such repair cost is restricted to 75% of the admissible claim on repair basis in
respect of cash loss basis.
The insurance company chooses one of the above three modes of settlement whichever is
more economical:-
Example
Maruti Swift Desire Model 2012 met with an accident
Sum insured of the vehicle is Rs.5, 00,000/-
The market value on the date of accident is Rs.4, 50,000/-
Rs.4, 00,000/-
The cost of repairs
[Cost of labour + Replacement cost – Salvage]
(a) Cost of labour is - Rs.50000
(b) Replacement of parts Rs.375000
Less salvage: Rs.25000
The resale value of the damage vehicle is Rs.2, 00,000/-
Settlement of Claim on Repair Basis
1. Repair basis: Rs.3, 75,000/-
2. Total loss basis:
Market value Rs. 4, 50,000/-
Less Resale value of the
Damaged vehicle Rs.2, 00,000/-
Add Advertisement expenses Rs.5, 000/-
Add Garage expenses Rs.10,000/-
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Net Liability Rs. 2, 65,000/-

3. Cash Loss basis
Market value Rs. 4, 50,000/-
Less: Resale value of
The damaged vehicle Rs. 2, 00,000/-
Net Liability Rs. 2, 50,000/-
Cash loss settlement is more economical than the other two modes of settlement which is
Rs.3, 75,000/- and Rs. 2, 65,000/-. Under cash loss settlement the amount is Rs.
2,50,000/- which is almost 75 per cent less than the repair liability (i.e. 75% of 3,75,000/- =
Rs. 2,81,250/-).
In case the insurance company settles the claim on total loss basis and takes over the
damaged vehicle for disposal, the resale value of the damaged vehicle on date of damage
may not be the same on the date of settlement, because the damaged vehicle may further
deteriorate in kind and value.
It is noteworthy to mention that there is a special clause known as “Excess” clause; it
means that the amount will be specified in the policy and any claim in excess of that
amount will be the liability of the insurers, which may be voluntarily chosen by the insured
or imposed by the insurers compulsorily. In respect of the above referred claim, if the
excess is Rs. 10,000/- net liability will be reduced to the extent as though Rs. 10,000/- is
the insured’s first bearing portion.
19. Vehicular Records

A. Requirements of documents in the event of claim in respect of Two Wheeler
(motor cycle/scooter/mopeds)/private cars
(i) Registration certificate: It is a certificate issued by the competent authority
confirming ownership of the vehicle in whose name the vehicle stands registered. The
ownership of the vehicle lies with the person whose name has been mentioned in the RC
book. The vehicle should bear the registration number both in front and back of the vehicle
and the Regional Transport Authority is the competent body to issue the Registration
certificate. The Registration certificate will carry in it the name of the Registered owner
and vehicle particulars such as Registration Number, Engine Number, Chassis Number,
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Make, Model, Color of the vehicle, Cubic Capacity, carrying capacity etc. Any financial
interest in the form of Hire purchase or Hypothecation will be endorsed in the R C book.
(ii) Driving license: Driving License means License issued by the Competent Authority
namely Regional Transport Authority authorizing the person specified therein otherwise
than as a learner to drive a specified class of motor vehicle. The Drivers License contains
particulars such as Name of the Driver his address, age, validity period of license and the
class of vehicle he is entitled to drive.A Driver should hold a valid Driving License at the
time of accident. A valid license means “Any person holding a permanent Driving License
Other than Learners License) in force and is not disqualified from holding such license.
Driving License is required in all claims involved in accident except for the following
circumstances:-
1. For parked vehicles
2. Theft or Burglary of the vehicle
(iii) Taxation book: It is mandatory for all vehicles plying on the public place to pay the
prescribed Road tax to State Government. The Road tax can be paid on quarterly half
years or Annual of life time which is entered in the RC book of the respective motor
vehicle. A claim is admissible only if Road tax is paid in full as on the date of accident.
Certificate of Insurance in force is a must for RTO authorities to accept tax. In case of
stolen vehicle the payment of road tax may be waived. This tax is paid on all the vehicles
including two-wheelers and cars. The tax is levied on all private and commercial vehicles.
Road Tax is paid when the registration of the vehicle takes place. It is paid either on a
yearly basis or once in a lifetime. This payment depends on the various criteria of the state
governments. However, if the owner of the car uses it in some other state, i.e. not in the
state where the vehicle is registered and the owner has paid the road tax for the lifetime,
then in this case, the person has to pay the road tax again in the new state.
B. Documents required in the event of claim for Commercial vehicles
1. Registration Certificate
2. Driving license
3. Taxation book
4. Fitness certificate
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5. Permit
6. Trip sheet
7. Weigh slip/load challan
8. First information report (FIR)
(a) Fitness certificate: Fitness certificate is a certificate issued by Regional Transport
Authority confirming that the Vehicle is in Road worthy condition to ply on the public
place.
CFX form - cancellation of fitness: When a commercial vehicle meets with an
accident, the Motor Vehicle Inspector inspects the vehicle on the spot and issues a
CFX (Cancellation of Fitness) report which means the fitness of the vehicle is
suspended temporarily till the repairs to the vehicle is carried out by the owner of the
vehicle. Once the vehicle is repaired the vehicle is to be shown to the RTO
Authorities and Fitness Certificate will be revalidated.
(b) Permit: Permit is a document issued by a Competent Authority specifying the
boundaries or limits up to which the vehicle is authorized to ply in a public place and
also the nature of goods it can carry. The permit contains details such as Name and
address of the holder of the permit, Area of operation, goods permitted to be carried,
and validity period of permit.
Example: The area of operation can be limited by the type of permit whether
National permit or State permit, public carrier permit or private carrier permit, or
stage carrier permit or contact carriage etc.
Separate permit is issued for vehicle carrying inflammable materials.
(c) Trip sheet: It is a document to be prepared for every trip undertaken by the vehicle
whether it is Goods Carrying or Passenger Carrying Vehicle. It is a Log book stating
the particulars of goods carried or passengers travelled according to the type of
vehicle. Trip sheet has to be closed on daily basis and also on trip to trip basis.
(d) Claim form: Claim form is issued by the insurer to the Insured immediately when a
claim is reported. Issuance of claim form does not mean acceptance of Liability. The
claim form should be duly filled in by the insured in all respects. The claim form
contains details such as Insured particulars, vehicle particulars, Details of the
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driver’, Place, time, cause, nature and extent of damages, Details of third parties
involved in the accident, witness and also whether the accident was reported to
Police. The details required in the claim form are vital in deciding whether there is
liability for the insurers and hence it has to be filled in, clearly, legibly and in a
descriptive manner to the extent possible
(e) Estimate: The insured should provide a detailed quotation as to the number of parts
to be replaced or repaired, along with the cost and Labour charges from the repairer
to whom the vehicle is to be entrusted for repair. This forms the basis for arranging
survey.
C. Documents Required for Theft Claims
1. First Information Report: First Information Report is the report given by the Police
Authorities based on the statement given by the Insured or his representative
immediately after the occurrence of the theft. The case is registered in CR Diary
under Indian Penal Code and the report given is the FIR which is the main proof of
the occurrence of theft.
2. Non-Traceable Certificate: When the vehicle is not traced after a reasonable period
of reporting the theft, the Police Authorities issue Non-Traceable certificate in the
prescribed format stating that the vehicle is undetectable.
3. Final Investigation Report: The police authorities will finally prepare a Final
Investigation Report stating that the vehicle is un-detectable obtaining a certified
copy of the order passed by the Court accepting the report. The Insured should
produce a copy of the Final Investigation Report to the insurer during the settlement
of the claim.
4. Letter of Subrogation: The insurer establishes his right by getting the rights of the
insured transferred to him by executing a bond in non-judicial stamp paper called
Letter of Subrogation. The letter has to be executed by the insured immediately on
acceptance of liability by the insurer. This Letter of Subrogation is normally executed
for theft claims after payment of the claim to the Insured where the Insurer has the
right over the vehicle stolen when recovered at a later date. Though for accidental
damage claims the insurer has a Subrogation Right to sue and get reimbursement
from the negligent party, it is not enforced due to the presence of Knock for Knock
Agreement.
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Original Vehicular documents along with all the keys pertaining to the vehicle have to be
surrendered.
20. Arbitration
Arbitration shall be conducted under and in accordance with the provision of the Amended
Arbitration and Conciliation Act, 1996.
Only when a claim is admitted: In case -of any dispute or difference of opinion between
the insured and the insurers as to the quantum of claim to be paid under the policy, the
matter can be referred to Arbitration. Such facility is available only in the - case of
admissible liability.
Rejected claim cannot be referred to Arbitration: In case the insurance company has
disputed or - has not admitted the liability in respect of any policy issued due to technical
reasons, the matter of dispute shall not be referred - to arbitration.
Arbitration Proceedings: The difference as to the quantum of admissible claim shall be
referred to the sole arbitrator who will be appointed in writing by both the parties. If they
cannot agree upon a single arbitrator within 30 days, the matter will be referred to a panel
of three arbitrators comprising of two arbitrators, one appointed by each party to the
dispute or difference. The third arbitrator has to be appointed by the - two arbitrators and
thereafter arbitration shall be conducted under the Act.
Award by Arbitrators: The right of action or suit upon the Insurance policy can be taken
only when the award by such arbitrators with regard to the quantum of loss or damage is
obtained; it means it is a condition precedent that the award should be obtained first and
then only right of action or suit upon the Insurance policy shall lie.
In case of repudiated claim: When a suit in the court of law is not filed within twelve
calendar months from the date of insurance company denying - the liability to the insured,
it is considered for all purposes that the claim is deemed to have been abandoned or given
up by the Insured, in which case no amount is recoverable by the insured from the
Insurance company thereafter.
Relevance of material facts in the event of claims: It has become an absolute necessity
that the insured declares all information that is needed by the insurer in the proposal form
and that - influence the admissibility of - the claim.
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Examinees should definitely understand the relevance of material facts. It is open to the
Insurance Company to allege and prove that the policy give rise to a claim which was
obtained by non-disclosure of relevant material facts or by representation of a fact which
was false in some material and consequently the contract of Insurance becomes void ab-
initio.
If the policy was obtained by fraud it - becomes void from the inception. A plea under this
clause cannot be disallowed on the ground that in spite of the alleged misrepresentation,
the policy was not cancelled by the insurers.
The following are considered to be material facts which warrant special attention:
• Avoid - misstatement of age of the vehicle
• Warranty that the vehicle would be driven by a person who has not been convicted
of motoring offences.
• Previous refusals of other insurers to insure the vehicle
• Allegation that the policy was obtained after the accident in collusion with other
persons.
21. Motor Accident Claims Tribunal (MACT) Matters

Motor Accidents Claims Tribunal
Motor Accident Claims Tribunal was set up with the object of providing less expensive and
quicker settlement of third party claims to the victims of motor vehicle accidents. The
Tribunal is a substitute of civil courts and has all the powers of a civil court for the purpose
of taking evidence. The provisions relating to claims Tribunal, procedure, awards, powers,
compensation and appeals are contained in sections 169 to 176 of Motor Vehicles Act,
1988.A motor Tribunal is established in areas notified in the official gazette by the State
Government. These Tribunals have no jurisdiction of civil courts.
The claims Tribunal adjudicates upon claims preferred by injured parties for compensation
in case of accidents causing bodily injury and loss or damage to third party due to the use
of motor vehicle. The victim in case of compensation under section 166 of the Motor
Vehicles Act, 1988 has an option to claim either under Motor Vehicles Act or under
Workmen’s Compensation Act but not under both.
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Procedure for- filing a claim before the Tribunal

An application for compensation can be filed in an MACT (Motor Accidents Claims
Tribunal) any time after the accident without any time limit. The injured person can himself
file an application or in case of a deceased person any of the legal representatives or any
authorised agent of the victim can file the application. If the injured or the deceased
person has insurance for his vehicle, the insurer will be a party to the proceedings.
The Tribunal is empowered to make an award for determining the compensation payable
and stating the amount payable to the concerned person by the insurer or owner or driver
of the offending vehicle.
In case of damages: The damages awarded by Tribunal are of two types – special and
general damages. This distinction in damages helps the Tribunal in determining whether
the damages awarded are correct or invalid. The Tribunal is also empowered to direct
interest payments. There can be no appeal against the Tribunal’s order if the amount
awarded is less than Rs. 2000. But any other appeal to the High Court should be made
within 90 days (from the order copy is made ready by the Tribunal). The High Court can
condone delay in - the filing the appeal if the delay is supported with reasonable cause.
According to the provisions of section 173 of the Motor Vehicles Act, 1988 no appeal will
be considered by the High court from a person who has to pay any amount in terms of an
award, unless the said party liable for payment pays a sum of Rs. 25,000 or 50% of the
amount awarded whichever is less.
Mandatory Third Party Motor Insurance Regulations

The Insurance Laws (Amendment) Ordinance, 2014 introduced section 32D regarding the
percentage of third party motor insurance that needs to be underwritten by each insurer.
The text of this newly introduced section is as follows:
“32D. Every insurer carrying on general insurance business shall, after the
commencement of the Insurance Laws (Amendment) Ordinance, 2014, underwrite
such minimum percentage of insurance business in third party risks of motor
vehicles as may be specified by the regulations:
Provided that the Authority may, by regulations, exempt any insurer who is primarily
engaged in the business of health, re-insurance, agriculture, export credit guarantee, from
the application of this section.".
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Obligation of insurer in respect of Motor Third Party Insurance

Business
The Motor Vehicles Act, 1988 provides for compulsory motor third party insurance for
vehicles plying on the road. Earlier there was no provision either in the MV Act or the
Insurance Act regarding the specific obligations of an insurer towards underwriting the
motor third party risks.
Under such circumstances, the Authority in order to ensure that there are no supply side
constraints in the market had adopted initiatives like creation of Motor TP pool (closed
now), Declined Risk Pool (currently in existence) besides taking regulatory action where
necessary. Also, it was prescribed that no insurer shall refuse Motor Third party cover to
any individual/entity who approaches them.
It is expected that the obligation of the insurers to underwrite Motor TP risks determined
on the basis of a broad approach taking into consideration several relevant factors would
ensure equitable distribution of this responsibility.
Taking into account the experience gained so far and factoring in various parameters like
Total Market Share of the insurer and insurer’s market share of Motor Insurance, the
obligations of insurers to underwrite Motor TP risks are proposed to be mandated.
Third Party claims are usually adjudicated by the Motor Accident Claims Tribunal (MACT).
The MACT is a statutory body set up under Section 110 of the Motor Vehicles Act,. The
claimant has to move the Tribunal within a period of 6 months from the accident.
Summons received from the Tribunal should be accepted and defense has to be entered
on time. It is not necessary that the Third Party claim should be settled only after the
MACT gives its award. A compromise may be a solution for settlement. To defend a claim
in MACT or to negotiate a claim for a compromise settlement we have to collect a large
number of facts. In getting information in the actual negotiation the Investigator can play a
very useful role as a part of his duties.
MAC Tribunals are not conferred with - any extraordinary power than what is vested with
the courts under law of torts. The job of the MACT is only to expedite speedy settlement of
third party claims. Of course, the settlement of claim under MACT is subject to the terms
and conditions of the Insurance contract and provisions of the M.V. Act.
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MOTOR INSURANCE
Lok Adalat: Lok means “People” and ‘Adalat’ means “Court”. Lok Adalat is formed for
quick justice and speedy disposal of claims for Road accident victims whose cases are
pending in MACT or before civil courts.
With relevance to Motor Insurance Lok Adalat plays a significant role in dealing with cases
pertaining victims of road accident spending before Motor Accidents Claims tribunal.
Cases are taken up at Lok Adalat only if at least one hearing is over in MACT or civil
Court. The Insurance Company before taking up the cases before Lok Adalat will have to
ensure that the negligence of the Motorist is evident and all documents in support of the
claim are in order because the claim placed before the Lok Adalat cannot be withdrawn.
The decision of the Lok Adalat does no have a legal binding on both the parties and need
not be accepted by either of the parties. But in principle it is accepted as effective system
to negotiate and arrive at a Amicable settlement acceptable to both the parties.
Once a - settlement is effected it is binding on both the parties and is generally acceptable
by the Tribunal. Thus Lok Adalat has helped in clearing a lot of cases pending before
MACT thereby helping the petitioner in getting a reasonable compensation and also helps
Insurance Company to uphold their image as a provider of social security.
Liability to Third Parties

1. The Liability should arise, due to an accident caused by the use of Insured vehicle
anywhere in India.
2. The Insurance company will indemnify the Insured - all sums including claimant’s
cost and expenses for which the Insured should become legally liable to pay-
(a) In respect of death of a person or bodily injury to any person and
(b) Damage to any property of any third party
3. When the Insured incurs any cost and expenses with the consent of the Insurers, the
same will be paid by them.
4. The Insurance Company will indemnify any liability that may arise due to the driver,
provided the driver observes and fulfils the terms and condition of the policy and
also the exception as if he is uninsured.
5. The company may at its option.
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(a) Arrange for representation any inquest or take inquiry in respect of any death
for which the insurance company will indemnify the insured.
(b) Insurance company will take any proceeding to any court of law for any
alleged offence relating to any event that falls under the subject of indemnity
under the policy.
Types of Compensation
1. General Damages
2. Special Damages
1. General Damages: General Damages are damages awarded by the court of
Tribunal for pain, suffering reduced earning capacity, inconvenience and loss of life.
The General damages will depend upon the state of injury, the Medical examination, the
X-ray test Medical evidence, pain in leg, leg gets swollen when the injured walks, unable
to do heavy work, slight deformity in the legs for the whole life.
2. Special Damages: Special Damages is awarded to the Insured who is hospitalized
and medical expenses that are incurred and for financial loss of income because of
absence of someone to replace the injured to carry on business or loss of income due to
absence from duty this kind of damages will not prevent much difficulty in assessing
damages. Remaining without salary amount to special damages, Loss of maintenance
expenses if injured, earning at the time of accident will also fall under the head special
damages.
In the case of death: In order to ascertain the quantum of damages in case of death the
following criteria should be considered by the Tribunal:-
(a) Age and the health of the deceased when the accident was caused
(b) The status of the deceased, his earning capacity and his contribution to the family
(c) The loss caused to the family by his death
(d) The damage he suffers from pain and suffering and duration of the same of the
same,
(e) Whether he died immediately or after the expiry of some days
(f) Loss of expectancy of life.
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MOTOR INSURANCE
Components of an award:
(a) The award contains the just compensation made by the tribunal
(b) Specifies the person to whom the compensation to be paid
(c) It specifies the amount, which shall be paid by the driver of the vehicle or owner,
insurer, involved in the accident or by all or any of them as the case may be.
Now, as per the mandate given in the Insurance Act, 1938 as amended by The Insurance
Laws (Amendment) Ordinance, 2014, the Authority had initiated framing of regulations
prescribing the obligations of the insurers in meeting the Motor TP coverage needs of the
country. Text of the Regulations appears hereunder
Insurance Regulatory and Development Authority of India (Obligation of Insurer in
Respect of Motor Third Party Insurance Business) Regulations, 2015
In exercise of the powers conferred by section 114A of the Insurance Act, 1938 (4 of
1938), as amended from time to time, read with sections 14 and 26 of the Insurance
Regulatory and Development Authority Act, 1999 (41 of 1999) and Section 32D of
Insurance Act, 1938, as amended from time to time, the Authority in consultation with the
Insurance Advisory Committee, hereby makes the following regulations, namely:-
Short Title and Commencement of the Regulations
(1) (a) These Regulations may be called the Insurance Regulatory and Development
Authority of India (Obligation of Insurer in respect of Motor Third Party
Insurance Business) Regulations, 2015
(b) These shall come into force on the date of their publication in the Official
Gazette
Definitions
(2) In these regulations, unless the context otherwise requires, -
(a) "Act" means the Insurance Act, 1938 (4 of 1938), as amended from time to
time;
(b) “Authority” means the Insurance Regulatory and Development Authority of
India established under the provisions of Section 3 of the Insurance
Regulatory and Development Authority Act, 1999 (41 of 1999)
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(c) “Insurer” means the insurance companies registered with the IRDAI and
licensed to underwrite direct motor insurance business in India
(d) “Motor Third Party Insurance Business” consists of the motor third party
insurance business in respect of both, the liability only policies as well as the
package policies issued in motor portfolio
(e) “New Insurer” means an insurer which has started its business operations
during the immediate preceding financial year of the financial year for which
obligations in respect of motor third party insurance business are to be fixed
Obligations of the Insurers
(3) The Obligation of an Insurer in respect to Motor Third Party insurance business for a
Financial
Year (X) should be arrived as below:
(i) Total ‘Gross Direct Premium Income(GDPI)’ under all lines of business of all
insurers in the immediate preceding financial year = A
(ii) Total GDPI under motor insurance business of all insurers in the immediate
preceding financial year = B
(iii) Insurer’s GDPI under all lines of business in the immediate preceding financial
year = C
(iv) Insurer’s GDPI under motor insurance business in the immediate preceding
financial year = D
(v) Total GDPI under motor third party insurance business of all insurers during
the immediate preceding financial year = E
(vi) Obligation of the Insurer to be met in a financial year
X = [C/A +D/B] x E x 90
2 100
Exceptions
(4) The new insurer writing motor insurance business licensed to underwrite motor
insurance for the first time shall be exempted from the application of the obligatory
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MOTOR INSURANCE
requirement during first two financial years of its operations including the financial
year in which its operations are started.
(5) Such insurer shall also be excluded from the calculations for determining the
minimum obligatory requirements for other existing insurers for such period till which
the minimum obligatory requirements are not applicable to that insurer.
Submissions
(6) Every insurer shall submit the financial returns to the IRDAI for every quarter of the
financial year within forty five days of the end of the quarter as per the Schedule –
MTP–A
Underwriting of Motor Third Party Risk
(7) The Regulations (3) and (4) stipulate just the minimum obligation of the insurer in
respect of motor third party insurance business. Notwithstanding this, at no instance
the insurer shall refuse to underwrite the “liability only” motor policy covering motor
third party insurance risk coming to its office (s).
Highlights of the Motor Vehicles Act (Amendment) 2015
The Motor Vehicles (Amendment) Bill, 2015 received Presidential Assent on 11th March
2015. It amends the Motor Vehicles 1988 Act. Road Transport and Highways Minister Nitin
Gadkari while moving the Bill said that the Bill - would not only benefit the poor but it will
give a boost to ‘Make in India’ initiative of Prime Minister Narendra Modi as battery moving
vehicle will be manufactured indeginously by a Pune based Company. Now, the drivers
can ply e-rickshaw legally in Delhi. Intelligent speed adaptation, driver alert control and
eye drowsiness detectors distance closure rate detection and green box monitoring, are
some of the features proposed in the Bill that seeks to prevent at least 2 lakh road
accident deaths in next five years through hefty penalties and jail-terms.
The new Act aims at "Providing safe, efficient, cost effective and faster transport across
the country. The Act lays emphasis on E-governance to bring in transparency in the
transport sector. Some of the other features include
• unified vehicle registration system,
• single National Road Transport & Multinational Coordination Authority and
• Goods Transport and National Freight Policy.
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It encompasses provisions for safety of vehicles, including implementation of safety

equipment of motor vehicles. The Bill has been drafted in sync with the best practises of
six advanced nations -- US, Canada, Singapore, Japan, Germany and the UK.
It aims to ensure electronic detection and centralised offences information to identify
repeat-offenders. The Bill proposes constitution of Highway Traffic Regulation and
Protection Force constituted and maintained by the State Governments for the purpose of
effective policing and enforcement of traffic regulations on highways. The Bill proposes a
Motor Accident Fund for the purpose of providing compulsory insurance cover to all road
users in the territory of India. Several provisions of the Motor Vehicles Act of 1988,
especially those related to penalties for violations, have not been found to be effective in
checking road accidents. The Act was last amended in 2001. Besides fines for driving
related violations, the Bill also proposes a fine of 5 lakh per vehicle and imprisonment for
faulty manufacturing design. The Bill hopes to bring down fatalities in road accidents by 2
lakh in the first 5 years. Gadkari also added that the Ministry is committed to contributing
at least 2 per cent to the GDP from the sector. "Three lakh persons are crippled annually
in 5 lakh road accidents, while another 1.5 lakh lose their lives. The government proposes
to set up 5,000centres across the country for issuing driving licenses based on
computerised tests.
Some of the highlights of the new amended Act are given below:
• The Bill is aimed at bringing down fatalities in road accidents by two lakh in the first
five years in a scenario where India reports around 5 lakh road accidents annually.
• The Bill provides for simplified single-window automated driving licence systems
including unified biometric systems to avoid licence duplication.
• Among various measures to ensure road safety, the draft provides for wearing of
belt by driver and passenger. "A person is guilty of an offence if such person does
not wear a seat belt, as a driver or passenger, when driving or riding in a motor
vehicle on a road," it said. Also, the draft makes it mandatory for bus and other
passengers to wear seat belts.
• In case of children below 8 years it says, "except as provided by regulations, a
parent or guardian of the child, or in the absence of such parent or guardian, the
driver of the motor vehicle must not without reasonable excuse allow a child below
the age of eight years to occupy the front seat of a motor vehicle when the vehicle is
in motion."
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MOTOR INSURANCE
• The Bill provides for up to 5,000 penalty for violation of provisions related to wearing
seat belts while in case of head gears it is 2,500.
• Seeking to come down heavily on traffic offenders, it proposes penalty of up to 3
lakh along with a minimum 7-year imprisonment for death of a child in certain
circumstances, besides huge fines for driving violations.
• It also proposes a fine of 5 lakh per vehicle as well as imprisonment for faulty
manufacturing design, besides cancellation of licences for rash and negligent
driving.
• The Bill, unveiled by Road Transport and Highways Ministry for seeking suggestion
from stakeholders, proposes penalty of up to 1 lakh or imprisonment for six months
which may extend to one year or both in case of using vehicle in unsafe conditions.
• First offence for drunken driving will attract Rs.25,000 fine, or imprisonment for a
term not exceeding 3 months, or with both and a six-month license suspension."
• "Second offence within three years will result in Rs. 50,000 penalty or imprisonment
for up to one year or both and a one year licence suspension.
• "Any subsequent offence shall result in the cancellation of the licence, and
impounding of the vehicle which may extend for 30 days," draft Road Transport &
Safety Bill 2014 said.
• If school bus drivers are caught driving drunk, Rs. 50,000 fine will be imposed with
imprisonment for three years while "immediate cancellation" of licence will take
place in case of drivers in the age-group of 18 to 25 years involved in such
incidences.
• Causing death of a child in certain circumstances will result in Rs.3 lakh fine, and
imprisonment for a term not less than 7 years while violating traffic signal three
times will result in 15,000 fine, licence cancellation for a month and a compulsory
refresher training, it said.
• It also provides for graded point system for imposing fines.
• The new 'golden hour' policy will provide immediate relief to accident victims and will
help save lakhs of lives. The Golden Hour policy provides for treatment to road
accident victims within one hour.22. Role of Ombudsman in Motor Insurance
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The hardships and expensive legal recourse available to individuals in the event of delay
in or dispute of quantum of settlement of a claim prompted IRDA to establish an
Independent Arbitrator - known as Ombudsman. Ombudsman was established in
November 1999 by IRDA to arbitrate insurance related disputes for quick, low cost and
prompt settlement of claims at the cost of Insurance companies. Prior to this the only
options available to people was to go to the Consumer Forum or Civil Court to settle their
differences. The Ombudsman now has representation in 12 different notified jurisdictions
throughout the country. Here the process is very simple. Any Insurance related complaint
can be filed in the notified jurisdiction. Ombudsman entertains complaints only on
individual life or non life policies, as long as it is non commercial in nature up to an extent
of Rs. 20 lacs.
As an arbitrator, the Ombudsman has to take unbiased and independent decision to
ensure that the common man receives fair and just compensation from the insurance
company.
A complaint to the Ombudsman could bemade as under :
1. A letter in writing stating the facts of the case along with documentary proof.
2. Complaint - should be filed within 1 year from the date of repudiation of claim by the
insurer
3. Ombudsman will not interfere if the insured has already approached the consumer
forum or filed suit in Court of Law
4. Complaint should be filed within the jurisdiction of the insured.
Role of Ombudsman
1. On receiving the complaint, if Ombudsman finds a prima facie case, response is
sought from the insurer within 14 days.
2. If on receiving the petitioner’s claim, the circumstances of the case, documentary
evidence and cross examination reveal that the claim of the petitioner is fraudulent
in nature, the claim is immediately dismissed.
3. Settlement is done in 3 ways.
(a) Settlement on reference
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MOTOR INSURANCE
(b) Settlement following mediation

(c) Settlement through mediation and award
Settlement through mediation, when the insurer contests the complainant’s claim: The
Ombudsman investigates the complaint and gives suitable guidelines for settlement within
a month.
After acceptance, a copy is sent to both the parties. The parties must confirm acceptance
within 15 days. The Ombudsman directs the insurer to settle the claim within 15 days. If
the directive is not accepted by the insurer, the Ombudsmen can declare an award, which
should be abided by the insurers.
Conciliation process in Motor TP Claims

(a) Identify - suitable cases
(b) Admission of liability (section 64) VB/DL/Permit/FIR/Investigation confirming
accident/ Income/ Dependency / Factor PM Report
(c) Medical Certificate for disability
(d) Age Proof
(e) Advocate’s recommendation
(f) Moving court for conciliation
(g) Offer to the claimant
(h) ‘Jaldh Rahat’ only in injury case.
Underwriting considerations for - passenger carrying commercial vehicles
(a) Model
(b) Carrying capacity
(c) Permit route
(d) Fleet
(e) Past claim experience
(f) Terrain (Geographical area) where plying
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(g) Age/ experience of drivers/ conductors

(h) Private/ Public
(i) Road worthiness of vehicle/ Inspection
(j) PA for passengers
(k) Other Insurance from the same insured
(l) Voluntary excess
(m) Own workshops/ access to quality workshops
(n) Member of association/ safety equipments.
(o) Owner & driver’s name.
23. Recent Regulatory Changes in Motor Insurance

The Indian Insurance regulator, the Insurance Regulatory and Development Authority of
India (IRDAI) has recently brought about changes in the regulations governing motor
insurance in India. Under the Motor Vehicles Act 1988, insurance cover for third party
liability is mandatory for all motor vehicles at the time of purchase. However, until recently,
this third party liability insurance had a mandatory term of one year, and was to be
renewed by the policyholder on a yearly basis.
Recently, the Supreme Court of India directed in S Rajaseekaran v Union of India, that a
long term motor insurance should be introduced and made mandatory at the point of sale
and registration. Following the issuance of these directions, the IRDAI has extended the
term of the statutory third party liability insurance to three and five years for private cars
and two wheelers, respectively, with respect to new vehicles sold from 1st September
2018. Indian General Insurers were directed to file these products under the File & Use
Procedure with the Authority before 15th September 2018 which was later extended to
15th October 2018, on the basis of representations received from the General Insurers.
A. Long Term Motor Insurance Cover:
Earlier, the insurance cover for motor vehicles was offered in the form of "Third Party
Liability" and "Package Policy", where a Package Policy provided a more comprehensive
cover, including own damage of the insured vehicle, in addition to the third party liability
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MOTOR INSURANCE
offered under the Act Only insurance. The mandatory term for the third party liability
component of these policies has now been increased to five and three years respectively
for two wheelers and private cars.
Apart from the Act Only policy and the long term package policy, effective 1st September
2018, policyholders may also be offered a "Bundled Policy", where a one year own
damage component is bundled with a five year or a three year third party liability cover, as
applicable, for two wheelers and private cars respectively. Per the directions of the IRDAI,
General Insurers are now required to offer the following motor insurance products at the
time of purchase of a new vehicle, for a three or five year term:
(a) Long term Act only policy;
(b) Long term Package policy;
(c) Bundled Policy (with a 1 year component for Own Damage).
General Insurers may also offer motor insurance add-on covers with the foregoing for a
period co-terminus with that of the package product, i.e., three year or five years as the
case may be. Insurers have also been directed to take cognizance of the movement of IDV
over time for all relevant purposes including underwriting, pricing and settlement of claims.
In line with the earlier directions issued by the IRDAI, General Insurers are required to
ensure that the mandatory five year or three year third party liability cover is available
through online channels, and also continue liaising with police authorities to enable
issuance, renewal and easy availability. General Insurers have also been instructed to
advertise the long term motor insurance available pursuant to the Supreme Court's
directive in S Rajaseekaran vs. Union of India and Ors.
B. Premium Rates:
The IRDAI prescribes the premium rates for third party motor insurance, and the same are
usually revised on an annual basis and published on the IRDAI's website. Since the term
of third party insurance covers has been extended beyond a one year period, the IRDAI
has introduced a new premium rate structure for the 3 year and 5 year third party liability
insurance, where the premium for the entire term would be collected at the point of sale
itself.
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Vehicle Category Existing Long Term

Premium Rates Premium Rates
(Rs.) (Rs.)
FOR PRIVATE CARS
Not exceeding 1000 cc 1,850 5,286
Exceeding 1000 cc but not exceeding 1500 cc 2,863 9,534
Exceeding 1500 cc 7,890 24,305
FOR TWO WHEELERS
Not exceeding 75 cc 427 1,045
Exceeding 75 cc but not exceeding 150 cc 720 3,285
Exceeding 150 cc but not exceeding 350 cc 985 5,453
Exceeding 350 cc 2,323 13,034
However, the premium collected shall be recognised on a yearly basis, where the premium
for that particular year is to be treated as income, and the remaining as "Premium deposit"
or "Advance Premium".
C. Cancellation of Policy:
Pursuant to the directions of the IRDAI, no third party liability insurance can be cancelled
by either the Insured or the Insurer, except on the grounds of a) Double Insurance; b) the
Insured Vehicle not being in use anymore as a result of Total Loss or Constructive Total
Loss; or, c) the vehicle having been sold and/or transferred.
The IRDAI, however, has not prescribed the manner or basis for calculating the applicable
refund to the Insured in case of cancellation of policy, and Insurers have largely continued
to follow the short period scales for refund of balance premium.
D. No Claim Bonus:
No Claim Bonus (NCB) is a discount on the own damage component for each preceding
claim free year, generally ranging from 20% to 50% of the premium, which is offered by
the Insurer at the end of each policy year. Per the directions of the IRDAI, for long term
motor insurance covers, the NCB shall be applicable only at the end of the policy term, ie,
three years for private cars and five years for two wheelers.
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MOTOR INSURANCE
E. Commission Structure:
The IRDAI has subsequently introduced a new structure for the commission/remuneration
payable, rewards, and the MISP's distribution fees for long term motor insurance policies4.
Payment of commission/remuneration for long term motor insurance shall be paid in the
financial year premium is booked by the Insurer, and shall be restricted to the gross
written premium recognised for that year.
No commission/remuneration or rewards are payable to insurance agents/insurance
intermediaries for the distribution of the Act Only long term policies. For bundled covers,
commission is 15% of the OD premium for new private cars, 17.5% for new two wheelers,
and NIL for the TP portion. For package policies, commission has been capped per year
as a reducing percentage of the total premium collected. The distribution fees payable to
MISPs is marginally higher than the commission/remuneration payable to insurance
agents/insurance intermediaries.
F. Enhancement of Capital Sum Insured:
Pursuant to the decision of the High Court of Madras in United lndia lnsurance Co Ltd v R
Rekha, the IRDAI has effectively amended General Regulation 36 of the India Motor Tariff
2002 which prescribed the sum insured and applicable premium for the compulsory
personal accident cover for owner-drivers under the liability only and package policies.
Further, with the introduction of long term motor insurance policies, General Insurers are
now required to provide compulsory personal accident cover under Bundled Policies as
well.
The IRDAI has now increased the minimum capital sum insured for motorised two
wheelers from Rs.1 lakh and private cars from Rs.2 lakhs, to a capital sum insured of
Rs.15 lakh for the single year policies, at a premium of Rs.750 per annum. However, for
long term motor insurance policies, General Insurers have been permitted to set the
premium in terms of their existing pricing approach.
Circular on "Implementation of the Directions of the Hon'ble Supreme Court of India in the
matter of WP No 295/2012 of Shri S Rajaseekaranvs Union of India and Ors.” of 28th
August 2018.
G. Compulsory Personal Accident (CPA)
Effective January 1, 2019, IRDAI has unbundled the Compulsory Personal Accident
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(CPA) cover and permitted the issuance of a stand-alone policies. This move can reduce
the cost of ownership of a vehicle. Here's how this can happen.
As a policyholder, the premium of Rs 750 per annum for annual CPA cover for both cars
and two-wheelers was to be paid. Now, effectively, this is the amount of savings if one
already has a stand alone personal accident cover.
Effective January 1, on expiry of a bundled CPA cover, it may be replaced with a stand-
alone CPA cover and the same may be taken from any registered general insurer. Since a
general personal accident cover also includes cover against motor accidents, if an owner-
driver already has a 24 hour personal accident cover against death and permanent
disability (total and partial) for CSI of at least Rs.15 lakh, there is no need for a separate
CPA cover to be taken.
On October 9, 2018 Irdai issued a circular stating that it is the choice of the owner-driver
to opt for a one-year CPA or long-term CPA and insurers cannot compel owner-drivers to
go in for long-term package policy or long-term PAC policy. Irdai has directed insurers to
ensure that they necessarily offer the choice of one-year CPA to an owner-driver.
H. Unbundled CPA
Effective 1st January, 2019, stand-alone Compulsory Personal Accident cover for Owner-
Driver may be issued. Keeping in view the date of implementation, as an interim measure,
insurers may price the product in accordance with their general pricing philosophy, based
on actuarial principles for the risk in question. Should the Authority find the pricing
approach in variance from their general pricing philosophy/approach and not in line with
actuarial principles, suitable direction may be issued by the Authority.
The product shall be filed with the Authority in terms of the Product Filing Guidelines dated
18th February, 2016 on or before 15th January, 2019 failing which the insurer shall not be
allowed to sell the product as permitted in 4(i) above beyond that date.
4(i) above may be followed till such time the duly filed product is approved by the
Authority. On approval, the product shall be sold on the lines it has been approved
Accordingly, effective 1st January, 2019, on expiry of a Bundled CPA cover, it may be
replaced with a stand-alone CPA cover and the same may be taken from any registered
insurer transacting general insurance business. Coverage under the stand-alone CPA will
extend to all the vehicles owned by the owner-driver under the same policy. In other
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words, the cover under the stand-alone CPA policy would be valid when the owner-driver
drives any of the vehicles he/she owns. The duration of the stand-alone CPA cover would
be one year. The coverage under the stand-alone CPA would continue to be that
stipulated under GR 36 A of the erstwhile India Motor Tariff, namely, Death and
Permanent Disability (Total and Partial).
Since a general Personal Accident cover also includes cover against motor accidents, if an
owner-driver already has a 24 hour Personal Accident cover against Death and Permanent
Disability (Total and Partial) for CSI of at least Rs.15 lacs, there is no need for a separate
CPA cover to be taken
24. Innovative add – on Motor Insurance Covers

1. ‘NIL DEPRECIATION’ & ‘INVOICE PROTECTION’
Motor Insurance Policies
The general insurers recently introduced a zero depreciation cover in insurance parlance,
which is brought in the current auto insurance market as add-on cover for private cars or
two wheelers, in this second phase of de-tariffing in India.
This means a Depreciation cover can be availed to get 100% depreciation covered. 100%
repayment on the depreciated parts at the time of claim settlement in addition to repairing
costs of fiber glass, rubber, tyres, batteries, air bags, nylon, and plastic parts provided the
vehicle is covered up to 5 years from the date of registration. Here the company shall pay
the depreciation amount deducted on the value of the parts replaced for upto two
admissible claims per year under Section I of the motor policy.
DETAILS ABOUT NIL (I ZERO) DEPRECIATION ADD-ON COVERAGE
Anil (i.e. zero) depreciation cover ensures that in case of an accident, you will receive the
full claim without any deduction for depreciation on the value of the parts replaced.
Illustrative Example
Ajay Shah a deputy general manager working in a Mumbai-based firm, was upset with his
insurance company when he learnt that he had to spent Rs. 45,000 from his pocket when
he incurred total expenses of Rs. 1.5 lakh towards repairs for his car. Ajay had bought a
standard motor policy hence he got the claim after deduction for depreciation. Instead of
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paying the entire amount of Rs. 1.5 lakh towards the claim, the insurer paid him 30% less
i.e. Rs. 1,05,000. Ajay could have saved Rs. 45,000, if he had opted for a ‘zero
depreciation policy’ as allowed by Indian non-life insurers.
Depreciation means decrease in the value of an asset due to use. ‘Nil depreciation’ or
‘zero depreciation’ policies are gaining popularity with increasing awareness among
vehicle owners in India. These policies offer full claim without deduction for depreciation
on the value of parts replaced. This cover extends to the repairing costs of fiber glass,
rubber parts and plastic. In standard motor policy, rate of depreciation ranges from 0% to
40% depending on the age of vehicle and the type of material, thereby making you shell
out some money from your pocket. In the case of a zero depreciation policy, no
depreciation is charged, thus a 100% re-imbursement on replaced or depreciated parts
can be availed leading to optimum benefit under the cover.
The IRDAI (Insurance Regulatory and Development Authority of India) allowed these add-
on covers for the new entrant private players to make their entry into the Indian market
about two years ago. Some private insurers which provide these kinds of depreciation
cover include Tata AIG General, Bajaj Allianz, Bharti AXA General, ICICI Lombard
General, Reliance General, HDFC Ergo General, etc. Public sector insurance companies
have also launched this add-on cover under their motor policies.
Nil (or Zero) depreciation cover is usually available on new cars/ two wheelers and mostly
do not cover cars/ two wheelers that are more than three years old (normally, PSU
Insurers allow up to five years for the cars which are already in their books). The premium
is slightly higher than that in a standard motor policy. Also certain companies place a
restriction on the number of claims that can be made - without depreciation during a policy
period. For instance: Bharti AXA General pays two claims in a policy period without
deduction of depreciation.
Besides providing nil (i.e. zero) depreciation as add-on, some insurers also ensure that the
policyholder does not lose his no-claim bonus.
What is not covered?
There are few conditions which are not covered under the zero depreciation policy.
1. Wear and tear;
2. Damage to uninsured items like accessories and bi-fuel/gas kit, tyres, etc.;
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3. Damage due to uninsured peril;

4. Damage due to mechanical breakdown.
The tenure of zero depreciation policy is normally one year and it has to be renewed
annually. You can buy depreciation cover online from most of the insurers along with your
comprehensive package car or two wheeler insurance policies.
As the term implies, zero (i.e. nil) depreciation cover promises comprehensive coverage
for your own car or two wheelers without factoring in for depreciation. If your car/two
wheeler is damaged following a collision, for instance, and you file a claim, the insurer will
cover the entire cost of replacement of your old car’s total loss to allow you to have a
brand new one from the dealer’s showroom.
The most obvious difference is that a nil depreciation cover promises full settlement
coverage; depreciation will not make a dent here. On the other hand, standard
comprehensive cover i.e., a plan that does not offer nil depreciation will make estimations
based on the 'current value' of your vehicle. 'Current value' factors in the depreciation on
your vehicle.
Consequently, if your car is involved in an accident, your standard policy will foot the bill
after subtracting for depreciation whereas the policy with nil depreciation will stand for the
entire bill regardless of the current value of your car. Clearly, the nil depreciation add-on
(i.e. simply as the rider concept) has its advantages over standard coverage. But every
good thing has its costs. To begin with, a policy that offers zero depreciation will cost - 15-
20 % more than your standard no-frills policy. This means that you are paying a
substantially higher premium to ensure not having to chip in during claim settlement in the
future. In other words, you are already paying towards those future costs. To customers
seeking affordable insurance, this could be a deal breaker. On the other hand, the
prospect of zero depreciation will attract customers who do not mind the higher annual
rates because it promises peace of mind.
Sometimes in this Zero or Nil Depreciation Cover the insurers may limit the number of
claims that you can make annually. This is necessary because the customers might
otherwise file claims for every little dent, simply because they do not have to foot any of
the costs. In this Indian market of flourishing health insurance, the insurers introduced co-
pay for the same reason – i.e. to ensure that their customers do not go overboard in filing
claims. Furthermore, the nil depreciation riders as the add-on to the motor insurance
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package policy simply apply only to new cars, with the age limit being five years, in
general. If your vehicle is older, it is not eligible for this benefit. Moreover, it may not be
cost-efficient to shell out higher premiums on a five-year-old vehicle. If your car is brand
new, a nil depreciation rider is a worthwhile investment. Many opine that nil depreciation
works only for new drivers because they are more likely to damage their car leading to
total loss. However, even the most careful drivers are involved in accidents, often because
the other person was careless. Hence, nil depreciation as an add-on cover in your motor
package policy is a good buy provided the extra premium does not pinch your pocket.
In Indian market at present - Nil Depreciation is an add-on car insurance cover which
offers full settlement without any write-off for depreciation as opposed to normal car
insurance. This type of coverage offers a full claim policy for a premium amount which is
relatively higher than a normal car insurance policy. This type of coverage is usually opted
for mid and top-segment expensive and luxury cars, reason being that most people prefer
a superior cover to obtain optimum benefits.
2. Nil depreciation cover as an add-on with two wheelers and private car policy
by PSUs
Since ‘Nil’ Depreciation add-on cover that had been approved by IRDAI, was selectively
granted for individual proposals from each of insurers’ Corporate Office initially. As per the
initial initiative during October, 2011 to January, 2012 this add-on cover was allowed to the
PSU Insurance Companies - by simply applying the loading of premium (to be applied on
the Basic OD premium in respect of Private Cars and Two Wheelers, subject to approval
by the Competent Authorities) as under :
Sr. No. Age of the vehicle Loading on basic
Own damage rate
1. New vehicle 10-15%
2. Less than two years 20 to 25%
3. Between two and three years 30 to 35%
4. Between three and five years 35 to 40%
But in view of the rising number of proposals for the said add-on cover and in
consideration of the feedback on high market demand received from various ROs, the
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Competent Authority delegated the authority for approval for this add-on cover to Regional
in-Charges to grant such cover who may in turn delegate the same to an officer not below
the rank of Manager in RO. As the cover gained extensive popularity, in order to concede
the ever increasing demand for the cover, finally the authority for granting this add-on has
been delegated upon the Operating Offices (OOs) but the concerned offices shall consider
granting the said cover absolutely in line with the IRDAI approval. Operating office in-
Charge, if required, may further delegate the authority for granting cover to an officer in
the rank of Assistant Manager, who may act on behalf of OO-in-Charge for that purpose
meriting this nil depreciation cover absolutely remaining within the norms of underwriting &
specific stipulations, comply with the regulator’s directives and obviously applying the
following loading of premium on basic OD premium:
Sr. Age of the vehicle Loading on basic
No. Own damage rate
1) New vehicle 15%
2) Less than two years 25%
3) Between two and three years 35%
4) Between three and five years 40%
This add-on may be utilized as a new marketing tool to widen the market share in these
classes of vehicles. However proposals of this add-on for vehicles under various auto tie-
up arrangements need to be referred to Corporate Office with recommendation of
respective RO for approval by the concerned Competent Authority of Corporate Office.
The other salient features - like, deductibles, underwriting guidelines, endorsement
wordings as approved for the use and granting cover by the regulator namely IRDAI, the
coverage under the add-on cover are given in brief in the following paragraphs.
Features of the Nil Depreciation Policy
Deductibles to be applied for this cover
(a) For Private Car: 5% of claim amount subject to a minimum of Rs. 500 & maximum of
Rs.2,500.
(b) For Two wheelers: 5% of claim amount subject to a minimum of Rs.250 & maximum
of Rs.1000.
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Underwriting guidelines
1. It is advisable to grant the cover to new vehicles at the time of purchase only and
continued during each renewal by charging - appropriate loading as per tables
above.
2. No midterm cover to be granted.
3. In case cover by an existing insured is sought, it may be granted subject to
inspection at the time of renewal and the insured being entitled to ‘No claim bonus’.
4. In respect of insurances under Tie up arrangements decision regarding granting of
cover and other terms and procedures will be decided by the - Head office.
Endorsement wordings
In consideration of payment of additional premium as indicated in the Schedule it is hereby
agreed and understood that indemnification in respect of Partial loss claims shall be done
without application of Depreciation as mentioned in Section 1 of the policy.
However claims payable in accordance with this endorsement will be subject to a
Deductible of 5% of the claim amount subject to a minimum of Rs.*……………..and
Maximum of Rs.*……………… in addition to the deductible stated in the Schedule.(* here
the underwriter needs to insert appropriate amount depending upon the class of vehicle for
this add-on cover).
Norms for Granting Cover
A. For Individual Insured:
(i) Cover may be granted to all new cars/two wheelers for the 1st year policy and the
same add on may be continued in the subsequent policy periods;
(ii) Cover may be considered for all existing policies on renewal if enjoying NCB but
subject to inspection of the vehicle and the cover may be granted on subsequent
renewals.
B. For Fleets: The Nil Depreciation Add on may be granted to a fleet if the average
ICR of the fleet for the last 3 years is within 60%
C. For Corporates with a fleet of cars/two wheelers: Same as ‘B’ above.
D. Dealers: Same as ‘A’.
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E. Tie-Ups: All proposals under Tie Up arrangement to be referred to HO with specific

recommendation of controlling RO.
3. Invoice Protection Add-On Coverage
Say, your customer’s car is declared a write-off due to an accident, may be due to fire or
theft. Now imagine them discovering that their insurance company pay-out will not match
the original price they paid for their car. This is a scenario faced by many motorists today.
Even if they are not liable, they are almost certain to find a shortfall between the amount
they receive from their motor insurance provider and the price they originally paid. The
shortfall could be a significant sum depending on the rate of depreciation of your
customer’s vehicle.
Who will protect them against this financial loss?
Who will ensure they get back to the amount they originally paid for the car?
For peace of mind and for the protection your customer’s vehicle needs, consider the
cover - How this add-on cover works?
Let’s say your customer paid Rs. 18,50,000/- for their car and it is unfortunately stolen and
not recovered. The motor insurance provider then declares it a total loss and they value
their car at Rs. 12,00,000/- using current market conditions. This add-on cover may
involve a payout of Rs. 6,50,000/- to ensure your customer receives the total - amount
originally paid for their car - it’s as simple as that.
Significant benefits
Benefits under this add-on cover may be -
(a) Designed to protect the purchase price of your customer’s vehicle for up to 36
months.
(b) Provide financial protection if the customer has paid for their vehicle outright.
(c) May pay the difference between the amount paid out by the motor insurance
provider and the invoice price of the vehicle.
Normally no one should - insure his/her car not only for Motor Third Party (TP) cover but
should also go for an adequate cover for loss or damage to his/her vehicle itself under
Motor ‘Own damage’ (OD) cover i.e. opting for Comprehensive Package Policy to ensure
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that they may guard their money-purses from paying for any damage or loss if their
vehicles sustain any bodily damage. But if your car, your prized possession, is stolen and
is never recovered, or is damaged beyond repair due to an accident, the arrangement
from insurer may be less than the current ex-showroom price of the same model as
payment is always as per the Insured’s Declared Value (IDV)in terms of GR.8. Insured’s
Declared Value (IDV) of All India Motor Tariff, which is still the basis of loss settlement, is
only at net of depreciation. He/she is then left out for taking the option to choose to remain
without a Car plus the further expenses of buying a new Car at a higher price.
‘Invoice Protection’ add-on cover of your personal vehicles / two wheelers, has arrived in
Indian General Insurance Sector as an add-on to both the Private Car Package Policy and
Two Wheeler Package Policy, and in the ‘Own damage auto insurance segment in India’
to relieve you out of such oppressive situations as it will complement your vehicle’s
Package Insurance and provide reassurance and financial support you need to get back
on the road in a vehicle of the same value that you possessed before total loss of the
vehicle occurred.
The Insured’s Declared Value (IDV) of the vehicle will be deemed to be the ‘sum insured’
for the purpose of Motor Tariff and it will be fixed at the commencement of each policy
period for each insured vehicle. The IDV of the vehicle is to be fixed on the basis of
manufacturer’s listed selling price of the brand and model as the vehicle proposed for
insurance at the commencement of insurance /renewal and adjusted for depreciation (as
per Schedule given below). The IDV of the side car(s) and / or accessories, if any, fitted to
the vehicle but not included in the manufacturer’s listed selling price of the vehicle is also
likewise to be fixed. The Schedule of age-wise depreciation as shown below is applicable
for the purpose of Total Loss/ Constructive Total Loss (TL/ CTL) claims only. A vehicle will
be considered to be a CTL, where the aggregate cost of retrieval and / or repair of the
vehicle subject to terms and conditions of the policy exceed 75% of the IDV.
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As per motor tariff the Schedule of depreciation for arriving at the IDV is as under :
Age of the vehicle% of depreciation for fixing IDV

Not exceeding 6 months 05%
Exceeding 6 months but not exceeding 1 year 15%
Exceeding 1 year but not exceeding 2 years 20%
Note: IDV of vehicles beyond 5 years of age and of obsolete models of the vehicles (i.e.
models which the manufacturers have discontinued to manufacture) is to be determined
on the basis of an understanding between the insurer and the insured. For the purpose of
TL/CTL claim settlement, this IDV will not change during the currency of the policy period
in question. It is clearly understood that the liability of the insurer shall in no case exceed
the IDV as specified in the policy schedule less the value of the wreck, in ‘as is where is’
condition. In the case of a Total Loss/ Constructive Total Loss/ Total Theft of your car,
‘Invoice Protect’ add-on cover pays the difference between Current Invoice Value of your
car and the IDV. Additionally, the sum of first time Registration Charges, Motor Own
Damage Premium paid and Road Tax incurred with respect to the insured vehicle, subject
to a maximum of 10% of Current Invoice Price, is also payable.
How taking this add-on covers work ?
Suppose your Car’s Current Invoice Price: Rs.10, 00,000 and the age of the Car is 1 year
6 months – then the ‘Depreciation’ charged is 20% of that invoice price. Obviously the sum
Insured to be considered as Insured’s Declared Value (IDV) being only 80% of Rs. 10,
00,000, i.e. Rs. 8, 00,000, thereby creating a gap between current invoice price along with
Registration Charges, Motor Own Damage Premium paid and Road Tax incurred with
respect to the insured vehicle up to 10% of Current Invoice Price being paid under this
add-on cover allowed in Own Damage Section of the motor policy. Without this ‘INVOICE
PROTECT’ add-on, normal payout is Rs. 8, 00,000/- but with this add-on as ‘INVOICE
PROTECT’ in motor package policy, the payout will invariably be the Current Invoice Price
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of Vehicle i.e. Rs.10, 00,000/-, the current invoice price of the vehicle i.e. the price at
which you may buy the new vehicle from the show room. The only eligibility is that the
Vehicle must be insured with the same insurer under Private Car Package Policy. Here the
benefit may be recognized in the considering the claim payable under the ‘INVOICE
PROTECT’ add-on cover of Private Car or Two wheeler Package Policies and the
following additional aspects are covered by this add-on exclusively:
1. The difference between the ‘Current price of vehicle’ and IDV;
2. The sum of first time Registration charges, Motor Own Damage Premium and Road
Tax incurred with respect to the insured vehicle, subject to a maximum of 10% of
Current Invoice Price.
Invoice Protect, is relatively new add-on cover allowed in Motor Package Policy for
Two Wheelers and Private Cars. The requisite approval has been given by the
Indian Regulator, IRDA, during June, 2014 – approval is given as a two distinct add-
on product for two different segments as below:
(a) Invoice Protect (Add-on to Two Wheeler Package Policy) &
(b) Invoice Protect (Add-on to Private Car Package Policy).
3. Invoice Protect (Two Wheelers And Private Cars)-Salent Features:
(a) No mid term cover can be allowed.
(b) This add on cover will cease to exist on transfer of ownership of vehicle.
(c) No claims bonus is not to be allowed on the premium under this add-on.
(d) Vehicle insured with other companies can be covered under policy and add-on
cover, subject to inspection of the vehicle
(e) Documentary proof of registration charges and/or road tax paid, must be
submitted to claim for these two components.
(f) Cover shall be granted to vehicles of up to 5 years of age .
(g) Permission of RO required after 3 years.
(h) Cover should not be granted to imported/obsolete vehicles.
(i) The policy period under this add-on cover should coincide with that of the
package policy.
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Duration of the add-on of ‘nil depreciation’ As per the above approval this ‘Invoice
Protection’ add-on will be concurrently effective along with the original package policy as a
full annual contract. The policy period of this add-on need to coincide with that of Private
Car or Two Wheeler Package Policy. Exclusions of this add-on part of the Motor Own
Damage Policy now need to be considered i.e. the insurance company shall not be liable
to make any payment in respect of the following situations:
(a) A total loss/ constructive total loss/ total theft claim that is not admissible under the
Package Policy ;
(b) Total loss of just accessories and not the vehicle.
(c) Any facilitation charges paid to any broker/ dealer / intermediary in respect of the
vehicle registered.
(d) Any other exclusion as per the Package policy.
Premium rate of this add on cover
Premium Rate of this “Invoice Protect” add-on cover of Private Car or Two Wheeler
Package Policy may vary based on two important parameters and those are (i) the IDV of
the concerned vehicle and also (ii) on the age of the vehicle.
Premium Rates to be applied for this Invoice Protect (Add-on cover to be taken along with
the Private Car Package Policy- as approved by IRDA in respect of …………….. (name
the company) is given hereunder for the bnefit of the interested persons:
Age Premium Rate as a % of IDV plus (+) Service tax
(As per Service tax rules) to be paid separately
0 0.08%
1 0.30%
2 0.42%
3 0.59%
4 0.67%
Buying this add-on
When you are interested for this add-on cover, please note that the same can be availed
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as an extension (i.e. only along with the Main Policy – either Private Car Package Policy
or Two Wheeler Package Policy . The policy can be bought from any of the following -
1. The operating offices of General Insurers;
2. Agents of the insurer ;
3. Private car dealers;
4. Insurer’s tie-up partners.
For availing the add-on cover under Package (for Private Cars or Two Wheelers) Motor
Policies the insured need to submit the completed and signed proposal form and
documentary proof of the following:
(a) Copy of document evidencing payment of Registration Charges and
(b) Copy of the document evidencing payment of the Road Tax
to the concerned office where from you have taken your Motor Policy (through the same
operating offices of insurers, or to your scheduled agent, along with the requisite
additional premium required to be paid (or during the renewal along with original premium
for the basic cover).
If Any Claim arises
There is no other additional requirement/duty/responsibility for availing this add-on cover.
As normally, whatever has to be done in a policy without this add-on cover, the same has
to be done in the event of any claim to avail this benefit with “NIL DEPRECIATION” or
“INVOICE PROTECT” cover (as add-on to Private Car/ Two Wheelers Package Policy).
Claim Intimation is a must. In the event of a claim, the concerned insured should
immediately inform the Company about the accident/ theft in writing and give all possible
information.
Documents to be submitted
Policy being exactly similar to any other Motor (OD) Claims, here also the related Claim
form is to be submitted supported with the following documents:
(a) Certificate of Insurance and the original insurance policy
(b) Duly filled and signed Claim Form;
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(c) Copy of document evidencing payment of Registration Charges , if not submitted at

the time of buying;
(d) Copy of document evidencing payment of Road Tax , if not submitted at the time of
buying;
(e) Copy of Road Tax Refund challan, if any.
In case the vehicle is stolen, in addition to the above, the following should also be
submitted:
(f) Certified Copy of FIR (First Information Report);
(g) Final Police Report;
(h) Letter of indemnity and subrogation.
Basic Underwriting Considerations / Guide Lines For Invoice Protect Add-On
In the event of a total loss or constructive total loss or total theft of the insured vehicle,
under a Private Car Package Policy, the insured is indemnified for Insured’s Declared
Value (IDV). The IDV of the vehicle and accessories (if fitted to the vehicle) is fixed on the
basis of the manufacturer’s listed selling price of the brand and model as the vehicle
insured at the commencement of insurance/renewal and adjusted for depreciation as
discussed earlier. A total loss accident not only renders policyholders without a vehicle,
but also adds to their expense of buying another, as the claim paid under the Policy is on
a depreciated value (IDV) of the vehicle. Hence, a gap between IDV and the
manufacturer’s selling price remains. To plug this gap, it is proposed to introduce an add-
on to the Private Car Package Policy. Today Motor insurance package policy on 0 %
depreciation is availablein the market, which removes the mentioned problem,
Basically ‘Invoice Protect’ as add-on, fills a gap as required by the vehicle owner. Under
‘Invoice Protect’ add-on covers the difference between the ‘Current Invoice Price’ of the
Insured Vehicle and the IDV (Insured’s declared value as the sum insured) as arrived in
the policy in normal condition. In addition to the above, the cover also pays the sum of first
time Registration Charges, Motor Own Damage Premium paid and Road Tax incurred with
respect to the insured vehicle, subject to a maximum 10% of Current Invoice Price.
As per our earlier illustration the situation is quite clear as reiterated below:
Say, the Insured Declared Value (IDV): Rs. 8, 00,000;
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If the Current Invoice Price: Rs. 10,00,000;

Then, payout under Private Car Package Policy on total loss: Rs. 8,00,000;
Additional payout made by the insurer, under this ‘Nil Depreciation or ‘Invoice Protect’
add-on is the extra amount of Rs. 2,00,000.
Salient Features of The Invoice Protection Add-On on Motor OD :

1. Coverage: Subject to terms, definitions, exclusions, and conditions contained
herein, it is hereby understood and agreed that the Company shall pay, in the event of a
Total Loss or Constructive Total Loss or Total Theft of the insured vehicle, during the
policy period, resulting in a valid and admissible claim under Section I (Loss of or Damage
to the Vehicle Insured) of Private Car Package Policy, the following:
2. Difference between the Current Invoice Price of the Insured Vehicle and Insured’s
Declared Value.
3. First time Registration Charges, Motor Own Damage Premium paid and Road Tax
incurred with respect to the insured vehicle, their sum subject to a maximum of 10% of
Current Invoice Price.
4. Definitions as per the policy document
4.1. Constructive Total Loss (CTL) of the insured vehicle occurs when the aggregate cost
of retrieval and / or repair of the vehicle, subject to terms and conditions of the
Policy exceed 75% of the IDV of the vehicle.
4.2. Cover means ‘Invoice Protect’ (Add-on to Private Car Package Policy) to pay the
current invoice price of lost car.
4.3. Current Invoice Price means the manufacturer’s listed selling price of the brand and
model as the vehicle insured at the commencement of insurance/renewal without
any adjustment for depreciation and shall include the cost of accessories, if any,
fitted to the vehicle. The current invoice price shall not include cost of anti rust
painting and polishing of the insured vehicle.
4.4. Insured’s Declared Value (IDV) of the insured vehicle shall be deemed to be the sum
insured for the purpose of the Policy which is fixed at the commencement of each
policy period for the insured vehicle. The IDV of the vehicle (and accessories, if any,
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fitted to the vehicle) is to be fixed on the basis of the manufacturer’s listed selling
price of the brand and model as the vehicle insured at the commencement of
insurance/renewal and adjusted for depreciation (as per schedule in the Section I of
Private Car Package Policy).
4.5. Motor Own Damage Premium means the premium paid under Section I (loss of or
damage to the vehicle insured) of Private Car Package Policy.
4.6. Policy means the Private Car Package/ Two Wheelers Package Policy.
4.7. Policy period means the period commencing from the inception date and terminating
at midnight on the expiry date as mentioned in the schedule.
4.8. Schedule means a document forming part of the policy, containing details including
name of the insured person, description of the insured vehicle, IDV, premium paid
and the policy period.
4.9. Underwriting considerations:
4.9.1. Vehicle to be insured with the Company under Private Car Package Policy.
4.9.2. Vehicle up to 5 years of age to be insured.
4.9.3. Obsolete models not to be insured.
4.9.4. Vehicle to be of indigenous make no imported cars comes within this
purview.
4.9.5. Vehicle insured with other companies may be covered under Policy and
Cover, subject to inspection of the vehicle before insurance is allowed &
effective.
4.9.6. Cover for SUVs and similar type of vehicles may be allowed only to
professionals, companies, etc.
4.9.7. Policy to be continuously renewed. In case of a break, the Policy and Cover
may be considered subject to inspection. If Vehicle not insured with a the
current insurer earlier but now requiring a shifting of cover from the erstwhile
insurer, vehicle must be inspected before issuance of policy.
4.9.8. Policy and Cover to be underwritten in the same office.
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4.9.9. Policy period under the Policy and Cover to be identical. Midterm cover not
to be allowed.
4.9.10. Proposals of vehicles beyond 3 years of age, to be referred to the Regional
Offices for approval.
4.9.11. Cover to cease in case of transfer of ownership.
4.9.12. Cancellation of the Cover should follow the Cancellation Clause of the
Policy.
4.9.13. No Claims discount not to be allowed on the Premium under this add-on.
4.10. Premium Rates: Premium rates depend on the age of the vehicle normally
expressed as a percentage of IDV. The approved rate for issuance of this add-on
cover on the Package Policy, as offered by my employer, may be considered as
below:
Age Premium Rate as a % of IDV plus (+)
Service tax: as per Service Tax Act.
0 0.08%
1 0.30%
2 0.42%
3 0.59%
4 0.67%
COVER APPLIES SIMILARLY ALSO TO THE TWO-WHEELERS:
Similarly you as the insured may need to consider that your two-wheelers not just for Third
Party cover but also for loss or damage to your vehicle to ensure that you shield your
pocket from paying for any damage or loss. But if your two-wheeler, your prized
possession, is stolen and never recovered, or is damaged beyond repair due to an
accident, the settlement from insurance would be less than the current ex-showroom price
of the same model as payment is on the Insured’s Declared Value (IDV), which is net of
depreciation. You would be left without a Two-Wheeler plus the additional expenses of
buying a new Two-Wheeler at a higher price. ‘Nil Depreciation’ or ‘Invoice Protect’, is
offered as an add-on to our Two Wheeler Package Policy, will ease you out of such sticky
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situations as it will complement your vehicle’s Package Insurance and provide the
reassurance and financial support you need to get back on the road in a vehicle of same
value. So the calculation referred earlier for Private car may be applicable in too. Say,
your Two Wheeler’s Current Invoice Price: Rs.1, 00,000 and the age of the Two Wheeler:
1 year 6 months – so here also the depreciation charged is 20%. Therefore, the ‘Insured’s
Declared Value (IDV)’ will be actually 80% of Rs.10, 00,000, i.e., say, Rs.80, 000/- and
without “Invoice Protection Add-on, payout is Rs.80, 000/-. With this ‘Invoice Protect’ add-
on being availed, the pay-out is the Current Invoice Price of the concerned insured two
wheelers, i.e. Rs.1, 00,000/-
The eligibility, terms & conditions, benefits, duration, exclusions, claim documentation &
claim servicing of this section as the add-on in the Two Wheeler Package Policy, is
absolutely same as applicable to that add-on as offered for the Private car and discussed
&described earlier in details. Premium Rates for the ‘Invoice Protect’ add-on cover as
allowed in the Two Wheelers’ Package Policy: Premium payable will depend on the IDV
and age of the two wheelers and the approved rate of premium of mu own company is
also given here for the ready reference of the reader as detailed below:
Age Premium Rate as a % of IDV of two wheeler plus (+) Service tax (As
per Service tax rules) to be paid separately
0 0.28%
1 0.46%
2 0.61%
3 0.66%
4 0.94%
RECOVERY OF LOST VEHICLE
If the insured vehicle (in both cases of insurance of Private cars and the two wheelers with
this add-on cover of the concerned package policy) is recovered subsequently the Insured
shall have the option to repay the claim amount already paid and retain the recovered
vehicle. If the vehicle is found damage, the Insured shall be indemnified against loss of or
damage. The Insured should be advised to obtain a recovery memo from the Police and to
get the vehicle surveyed at the Police Station before taking delivery.
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SPECIMEN POLICY WORDINGS FOR THE TWO ADD-ON COVERS RECENTLY

INTRODUCED:
(1) Policy Wordings for Zero Depreciation Cover- Private Cars:
Considering the scope of Cover-
In consideration of the payment of an additional premium mentioned in the policy schedule
it is hereby understood and agreed that the ………Company shall pay the Depreciation
amount deducted on the value of the parts replaced for up to 2 admissible claims (For the
purpose of this Cover the expression ‘admissible claim’ shall mean an event or series of
events arising out of one cause in connection with the vehicle insured in respect of which
indemnity is provided under this policy) under Section I of the policy, provided that the
vehicle insured is :-
(a) Repaired at any of Insurance Company’s authorized Garage.
(b) Vehicle is not more than 5 years old from the date of registration or date of purchase
whichever is earlier at the commencement of the policy period.
(2) Policy Wordings for Invoice Price Cover-Private Cars:
Considering the scope of Cover-
In consideration of the payment of an additional premium as stated in the Schedule, it is
understood and agreed that the ………Company agrees to pay the “shortfall amount”
between the amount received under Section I of the policy and the price as per the
purchase invoice OR the current replacement value of vehicle if the same make model is
available, whichever is less in the event of a Total loss/ Constructive Total Loss (CTL) or
Total Theft of the vehicle.
The said “shortfall amount” also stands to cover the Road tax and first time registration
charges incurred on the insured vehicle.
Maximum liability to the company is limited to the sum insured stated in the policy
schedule.
Special Conditions applicable to this benefit-
(a) The vehicle is not more than 2 years old* on the date of commencement of the
policy period.
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(b) The Total loss/ Constructive Total Loss (CTL) or Total Theft of the vehicle should be
admissible under Section I of the policy.
(c) Insured should be the first registered owner of the vehicle.
(d) Vehicle insured should be indigenous.
(e) The bank/finance company whose interest is endorsed in the policy shall agree in
writing.
SUMMARY
• Motor insurance is an insurance contract which protects the vehicle and as well as
the driver being a contract like any other contract has to satisfy the requirements of
a valid contract as laid down in the Indian Contract Act 1872.
• The Motor Vehicles Act was passed to mainly safeguard the interests of pedestrians.
The current Act is MV Act 1988. According to the Act, a vehicle cannot be used in a
public place without insuring the third party liability.
• Motor Third Party Insurance (known as TP Policy / Liability only policy / Act Policy)
is compulsory under law. It is designed to protect the interest of third parties.
• The Motor Vehicles Act, 1988 (59 of 1988) is a Central legislation through which the
road transport is regulated in the country.
• By the Motor Vehicles (Amendment) Act, 1994, inter alia, amendments were made
for make special provisions under sections 66 & 67 so as to provide that vehicles
operating on eco–friendly fuels shall be exempted from the requirements of permits
and also the owners of such vehicles shall have the discretion to fix fares and
freights for carriage of passengers and goods.
• As per the Motor Vehicles Act for the purpose of insurance the vehicles are
classified into three broad categories such as Private cars, Motor cycles and
Commercial vehicles.
• A Motor Insurance Policy is a stamped document, which forms the evidence of
contract of Insurance. In the event of dispute, the terms and conditions embodied in
the policy are referred to in the court of law.
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• The contract of motor insurance comes into force only when the consideration is
paid by the insured to insurer who promises to indemnify the insured in the event of
claim.
• It is a precondition that premium ought to be collected prior to the commencement of
risk upon which the promise of the insurer rests.
• Motor losses can be a direct loss and/or damage to the Insured vehicle resulting
from accidental means caused by insured peril proximately.
• Indirect loss and/or damage (Third party Liability) Indirect loss and/or damage to the
insured by legal liability
• A Claim arises when the insured’s vehicle is damaged or any loss incurredor Any
legal liability is incurred for death of or bodily injury or damage to the property of a
third party caused due to the usage of insured vehicle.
• Motor Accident Claims Tribunal was set up with the object of providing less
expensive and quicker settlement of third party claims to the victims of motor vehicle
accidents. The Tribunal is a substitute of civil courts and has all the powers of a civil
court for the purpose of taking evidence.
• Under many circumstances, the insurance company may opt to make over the
damaged vehicle if the claim on repair liability is found to be on the higher side,
uneconomical as compared to the market value under this basis.
• ‘Nil’ Depreciation add-on cover had been approved by IRDAI, was selectively
granted for individual proposals from each of insurers’ Corporate Office initially.
• Invoice protect insurance policy is designed to protect the purchase price of
customer’s vehicle for up to 36 months and to provide financial protection if the
customer has paid for their vehicle outright.
REVISION QUESTIONS
SECTION – A
1. Under the Motor Vehicles Act, a public place is
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(a) A place owned by a public limited company.

(b) A place where public meetings are held.
(c) A place where any member of public has a general right of access.
(d) A place where the public grievances are heard.
2. TP pool is formed to share the profit or loss of Motor TP business of all
general Insurers in the following classes of business:
(a) Motor TP Claims and premium of Private Cars.
(b) Motor TP Claims and premium of 2 wheelers.
(c) Motor TP Claims and premium of Commercial Vehicles.
(d) Motor TP Claims and Premium of All Class Motor Business.
3. In Motor TP claims even if did not take place under sec 170 of Motor Vehicle
act in lower courts, we can go on appeal on quantum.
(a) True
(b) False
(c) Joint appeal with insured
(d) We can appeal directly to Supreme Court.
4. The risk of overturning as a tool trade is covered in respect of - dumpers
under
(a) A standard commercial Goods carrying vehicle B policy.
(b) A standard miscellaneous type of vehicles B policy.
(c) A standard miscellaneous type of vehicles A policy at an additional premium.
5. The concept of No fault liability as envisaged in MV Act 1939 is reflected in
(a) Section 163 (b) Section 149
(c) Section 140 (d) None of the above
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6. Constitution of Motor Vehicle Claims tribunal falls within the jurisdiction of

(a) Central Government (b) State Government
(c) Supreme Court (d) District Courts
7. Compensation payable in case of death under the relevant section of ‘No Fault
Liability’ is
(a) Rs. 25,000 (b) Rs. 12,500
(c) Rs. 30,000 (d) None of the above
8. Solatium Fund is established for
(a) Accident cases (b) Death cases
(c) Injury (d) Hit and run cases
9. As per M.V. Act, 1938 following injuries are treated as simple injuries
(a) Fracture of wrist (b) Dislocation of bone
(c) Scar on the face (d) Loss of vision
10. Which of the following statement about multimodal transporter is not true
(a) MTO is to be registered
(b) He is responsible for the transportation of the consignment
(c) Liability of MTO is unlimited
(d) He is not responsible for arranging insurance of the consignment
11. The concept of Lok Adalat was mooted by
(a) Dr. S.N. Bhagwati (b) Mr. P.N. Bhagwati
(c) Mr. Lok Naik (d) Mr. P.N. Adlakhar
12. Which of the following documents is not relevant to bodily injury claims for
processing third party claims under motor policies?
(a) Coroner’s report (b) Driving Licence
(c) Police Report (d) Medical Certificate
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MOTOR INSURANCE
13. Application for compensation under Solatium scheme has to be made to:
(a) Corporate office of an insurance company
(b) Claims enquiry officer nominated by State Government
(c) Nominated divisional office of the insurance company
(d) Claims Settlement Commissioner nominated by the State Government.
14. The MACT awards Rs. 40000 to a claimant petitioner for simple injuries.
Insurance Company wants to go on appeal to High Court. The minimum
deposit under Sec 173 is to be made at the MACT for appealing in this case is
(a) Rs 10000/- (b) Rs 25000/-
(c) Rs 20000/- (d) Rs 40000/-
15. The - MACT awards Rs 9000 for a pedestrian who meets with an accident.
Insurance Company wants to go on appeal as the injury was very minor. The
option available is
(a) Go on appeal on normal course
(b) File a writ in High Court
(c) File an SLP in the Supreme Court
(d) Company has to satisfy the award
16. Owner of the vehicle residing at Kanpur had taken a Motor TP Policy from
Delhi. The vehicle meets with an accident at Kolkata injuring a person, who
had retired from services and resides at Guahati. He had very simple injuries.
From - where he can move the MACT :
(a) Anywhere in India (b) Kolkata/Gauhati
(c) Gauhati/Kanpur/Kolkata (d) Gauhati/Kanpur/Kolkata/Delhi
17. A married person dies in a road a accident. His wife files a case in MACT Pune,
whereas his parents file the case at Mumbai. What is the correct step to be
taken to handle the situation out of the following:
(a) Wait till the Court decides in one case and then go for appeal.
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(b) Go the High Court for stay in both the cases in the initial stages itself.
(c) Wait till one case is decided and bring this fact to the other court for dismissal
of the pending case.
(d) Take effective steps in both the courts by filing certified petition copies ,FIR
sets to transfer the case to either of the courts for clubbing together.
18. Sec 163A of MV Act 1988 relates to
(a) No fault Liability (b) Hit and run case
(c) Structured Compensation (d) Insurer’s defense
19 Insurers’ defense available under which of the following sections of the MV
Act
(a) Section 140 and 147 (b) Section 149(2) and 170
(c) Sections 165 and 166 (d) None of the above.
20. Motor Vehicle’s Act 1939 was amended in
(a) 1960 and 1999 (b) 1988 and 1994
(c) 1995 and 2002 (d) None of the above
21. Motor Vehicle’s (Amendment) Act 1994 was enacted mainly for the purpose of
(a) Doing away with the provisions of previous Acts
(b) Protecting the loss arising out of the use/carrying of hazardous goods
(c) Improving upon the provisions of previous Acts.
(d) All the above
22. For registration of vehicles, submission of which of the following isa must:
(a) Policy schedule
(b) Policy schedule and certificate of insurance
(c) Original certificate of insurance
(d) Proof of sale
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MOTOR INSURANCE
23. Grace period for filing of an appeal before High Court in MACT cases is
(a) 180 days (b) 90 days
(c) 120 days (d) No grace period at all
24. Under which section of MV Act, an insurer can defend the liability before
MACT
(a) Section 163 (b) Section 170
(c) Section 149 (2) (d) Section 166
25. If a brand new vehicle meets with an accident on the first day of insurance
cover what percentage of depreciation the vehicle’s fibre part attracts
(a) 50% (b) As per percentage table
(c) 30% (d) Nil
26. CNG/LPG fuel kit attached vehicles can be insured provided the insured
submits:
(a) Invoice copy (b) Declaration in proposal form
(c) Proof of endorsement in the RC (d) Physical verification of unit
27 The most essential document required for filing of an appeal before High Court
in MACT cases is-
(a) Award deposit receipt
(b) Petition filed before the lower court
(c) Lower court’s order obtained under Section 170 of MV Act
(d) Insurer’s Vakalat
28. Under which section of MV Act 1988, no person shall allow any other person to
use a vehicle in a public place unless the vehicle is covered by an insurance
policy complying with the requirements of the ACT
(a) Section146 (b) Section147
(c) Section148 (d) Section149
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29. Section 161 (3) of MV Act pertains to

(a) Structured compensation (b) No fault liability
(c) Hit and run compensation (d) None of the above
30. Of the following exclusions under the Motor Policy, which one does not appear
under general exclusions of the policy?
(a) Driving without a valid driving license
(b) Driving under the influence of intoxication
(c) Geographical area
(d) Breach of limitations as to use clause
31. Under the motor comprehensive policy, towing charges in respect of a
damaged vehicle include the cost of –
(a) Protecting the vehicle
(b) Removing it to the nearest repairers
(c) Re-delivery to the insured
(d) All the above
32. A motorcar with manufacturing date 12/04/1939 is
(a) An obsolete car (b) Is a vehicle not insurable
(c) Is a car classified as classic (d) None of the above
33. A vehicle which is not road worthy can be ideally offered the following covers
(a) Burglary policy
(b) Motor policy covering fire
(c) Motor policy covering theft
(d) Motor policy covering fire/theft as per GR 45
34. From passenger bus covered under Motor package policy parked in the garage
at night extra horn, tyres and decorative fittings were stolen. The claim is
payable:
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MOTOR INSURANCE
(a) In full (b) Only 50%

(c) Payable on Non-standard basis (d) Not payable
35. Premium from the following classes of vehicles goes to the Motor insurance
pool:
(a) Total premium collected on private cars& 2 wheelers
(b) OD premium and liability premium collected on commercial vehicles.
(c) Liability and PA premium collected on Commercial vehicles.
(d) Total premium collected from Goods carrying vehicles.
36. Important documents required to processing the Motor Third Party claim
include:
(a) Copy of FIR/ charge sheet
(b) Name and address of the person injured/ killed in accident.
(c) Certified copies of injury/post mortem report.
(d) All the above
37. What is the trump card for the success of the TP Pool
(a) 10% commission on the Premium
(b) Distribution of Premium and liabilities amongst insurers.
(c) Commitment of insurers to serve insuring public
(d) All the above
38. In a MACT Claim, in case of a death of a married male with dependent Father
and Brother, the applicable multiplier as per the Schedule of M.V. Act, will be-
(a) Multiplier applicable to the deceased as per his age
(b) Multiplier applicable to the father of the deceased as per his age
(c) Multiplier applicable to the brother of the deceased as per his age.
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39. Under the motor tariff, “Miscellaneous Vehicles” do not include

(a) Motorised rickshaws
(b) Mobile dispensaries
(c) Ambulance
(d) Hearses ( vehicles meant to carry dead bodies)
40. The liability of the owner of the motor vehicle to pay compensation for death
claims for no fault on his part under the Motor Vehicles Act, 1988 is
(a) Rs. 50000 (b) Rs. 10000
(c) Rs. 25000 (d) Unlimited
Answers
1. (c) 2. (c) 3. (b) 4. (d) 5. (c) 6. (c) 7. (d) 8. (d) 9. (c) 10. (d)
11. (b) 12. (a) 13. (d) 14. (c) 15. (d) 16. (c) 17. (d) 18. (c) 19. (b) 20. (b)
21. (b) 22. (c) 23. (b) 24. (c) 25. (a) 26. (c) 27. (c) 28. (a) 29. (c) 30. (a)
31. (d) 32. (d) 33. (d) 34. (d) 35. (c) 36. (d) 37. (a) 38. (a) 39. (a) 40. (a)
SECTION – B
1. Discuss the nature and scope of the Motor Insurance cover.
Ans: A policy of motor vehicle insurance is, in the ordinary course, a combined insurance.
It insures the damage to the motor vehicle and its accessories, assumes the liability
for damage for property, death of or injury to, the assured himself or spouse and it
also insures the motor vehicle against the risk of liability for injury to, or death of
third parties caused by the driver’s negligence.
2. What are the different types of policies available and what is the limit of
indemnity under those policies?
Ans: The terms of the policies define the nature and extent of the indemnity provided by
the policy. There are two types of policies namely:
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MOTOR INSURANCE
(i) The third party liability policy

(ii) A comprehensive policy
The third party liability insurance is compulsory under the Motor Vehicles Act. It is
often said that “a motor car policy is a unique combination of several types of
General Insurance”.
For example, a private motor car comprehensive policy indemnifies the assured
against loss or damage to the insured car by accidental external means, by fire, self
ignition, external explosion, lightning, frost, burglary, house-breaking or theft, and by
malicious acts.
Thus it is clear that the insurer is liable to make good the loss of a motor car to the
owner of the car, for, loss of car means loss to the owner of the car.
3. Mention the conditions in a motor vehicle policy which make the insurer liable.
Ans: Some of the conditions in a motor vehicle policy to make the insurer liable are:
(a) The insured will maintain the vehicle in a good state of repair and efficient
condition;
(b) He shall take all reasonable steps and precautions to avoid accidents and
engage competent and sober drivers;
(c) He shall take all reasonable steps to safeguard the car from loss or damage.
4. Explain the following:
(a) Knock for knock agreements
(b) No fault liability
Ans: Knock for knock agreements are agreements between the insurers, to avoid
confusions and complications at the time of settlement of claims. Suppose there are
more than one - insurances on the same vehicle, the insurers are liable to pay only a
rateable proportion.
Similarly, when two motorists, insured under comprehensive policies, are involved in
a motor accident, both may be liable. Both cases involve doctrines of subrogation
and contribution involving costs and prolonged litigation. To avoid this complication,
insurers enter into agreements known as ‘knock for knock’.
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It is an agreement between both the insurers that irrespective of whoever was

responsible for the accident, - each insurer will indemnify his insured in respect of
the damage to the vehicle insured by it and will not enforce subrogation rights
provided the liability is covered under the policy.
On similar lines, third party sharing agreements are entered into under which each
will share equally the third party costs and damages.
No Fault liability - also known as liability without fault is to make the owner of the
vehicle liable unconditionally. This clause states that where death or permanent
disablement of any person has resulted from an accident arising out of the use of a
motor vehicle or motor vehicles, the - owner/ owners of the vehicles shall, jointly and
severally, be liable to pay compensation provided in the Act in respect of such death
or disablement, which is generally Rs. 25,000 in case of death and Rs.12,000 in
case of permanent disablement.
This section of the Act makes the liability absolute; whether at fault or no fault, the
owner of the vehicle is made liable to pay this amount. Further, the liability is also
made joint and several whereby the assured may demand from any one or some or
all of them where there are more than one vehicle owner involved. The payment of
compensation is made certain, expedient and expeditious by dispensing with the
necessity of proving any fault on the part of the payer and by providing immunity
debarring any defences against the receiver of the compensation.
5. Discuss the nature and scope of the third party or compulsory insurance of
the motor vehicles.
Ans: In law of torts, if a person negligently drives his vehicle and causes injury or death to
a third party the driver whose negligence caused the damage is liable to the third
party. Under the vicarious liability clause of the common law, the owner on behalf of
the driver is liable to the third party.
The object of this type of policy is to protect the insured against his liability to third
parties arising out of an accident caused by the use of a motor vehicle on a public
road and it is also made compulsory. The persons required to be insured are:
(a) those who - use the vehicle except as a passenger, i.e. a driver.
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MOTOR INSURANCE
(b) the person causes or allows any other person to use the vehicle, other than an
owner, one who is in possession of the vehicle under a contract of loan or
hiring.
6. Mention the provisions and conditions to be adhered to, under the Motor
Vehicles Act in respect of third party insurance.
Ans: The Motor Vehicles Act has made it statutory and obligatory for a third party
insurance cover to be taken by every owner of a vehicle. The Act specifically states
that no person shall use except as a passenger or cause or allow any other person
to use a motor vehicle in a public place, unless there is in force in relation to the use
of the vehicle by that person or other person, as the case may be, a policy of
insurance complying with the requirements of the Act. Thus, third party insurance is
a must for running a motor vehicle in a public place. The following are some of the
important provisions to be adhered to in case of third party insurance:
(i) It applies to any r person other than a passenger;
(ii) What is prohibited is the user by himself or allowing another person to use;
(iii) Such use should be - of a motor vehicle;
(iv) Such vehicles should be used in a public place;
(v) The using or causing of use by the other person should be without a policy of
insurance.
(vi) The policy of insurance should comply with the provisions of the Act.
7. Is there a statutory contract between an Insurer and Driver?
Ans: According to section 147 (5) of the Motor Vehicles Act, a person issuing a policy of
insurance under this section, shall be liable to indemnify the person or classes of
persons specified in the policy in respect of any liability which the policy purports to
cover in the case of that person or those classes of persons. In fact by virtue of the
provision of this section the insurer is liable to indemnify any specified class of
driver, but is not thereby liable to the injured third party himself.
This section gives statutory recognition to the practice of extensions of the policy.
The effect of this provision is to create a contract, between the insurers and any
driver of the vehicle who is of a class covered by the policy.
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A satisfactory form of policy therefore not only covers the liability of the
policyholder while driving his own car but also extends to indemnify:
(a) The policy holder while driving another’s car;
(b) Other persons while driving the policy holder’s car.
In fact, it is a second statutory contract, which runs subsidiary to the main contract,
and it stands or falls with the main contract. If the owner sells away his vehicle, his
contract comes to an end and along with it the second contract also disappears.
8. Discuss the effect of the following on claims:
(a) Insolvency
(b) Death
Ans: Insolvency: Under the provisions of section 154, the Act protects the rights of the
third party against insolvency of the assured. The broad effect of the section is that
all rights and liabilities arising between the insured and the insurers in the case of
compulsory motor insurance shall remain unaffected, not withstanding that a third
party has been given larger rights against the insurers than the assured himself had.
Death of parties: The general principle of action personalis moritur cum persona
does not apply to accidents under this Act. Under the provisions of the Act, if the
death of a person in whose favour a certificate of insurance had been issued, occurs
after happening of an event which has given rise to a claim under the provisions of
Chapter …….(give Chapter number), shall not be a bar to the survival of any cause
of action arising out of the said event against his estate or against the insurer.
From this the following rules may be laid down:
(i) Where the owner of the motor vehicles dies in the accident and the injured
party is alive, the injured third party can make his claim against the estate of
the deceased owner unless he died before the accident.
(ii) Where the third party dies as a result of the accident his legal representative
can make a claim for the compensation before the appropriate tribunal.
(iii) Where the owner of the vehicle and the third party die in the accident, the
estate of the deceased owner will be liable to the estate of the dead third
party.
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MOTOR INSURANCE
(iv) Where the third party is not dead in the accident, he can himself make a claim
within six months of the accident; in such a case it does not matter whether
the owner is alive or dead in the accident.
9. What is the liability of the insurer in case of Hit and Run motor accident
cases?
Ans: A ‘hit and run’ motor accident means an accident arising out of the use of a motor
vehicle or vehicles the identity whereof cannot be ascertained inspite of reasonable
efforts for the purpose. According to the Central Government instructions to the GIC,
the insurer has to pay compensation in such hit and run cases to third parties as
under :
(a) Fixed sum of Rs.8500 in case of death of third party.
(b) In respect of grievous hurt a fixed sum of Rs. 2000.
Before this provision, where the wrongdoer is not identified, which is very common in
a case where a vehicle driver hits a poor pedestrian, though the victim has a
statutory right to get compensation, he is denied on the ground that his respondent
is unidentified. It is just, that in such cases GIC should provide full compensation for
such victims.
10. What are the underwriting considerations / parameters for u/w passenger
carrying commercial vehicles?
• Vehicle Model
• Carrying capacity
• Permit route
• Fleet
• Past claim experience
• Terrain(Geographical area) where plying
• Age/ experience of drivers/ conductors
• Private/ Public
• Road worthiness of vehicle/ Inspection
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• PA for passengers
• Other Insurance from the same insured
• Voluntary excess
• Own workshops/ access to quality workshops
• Member of association/ safety equipment.
• Owner & driver same.
SECTION – C
Case Studies
1. Should an insurance claim be paid to insured or financer?
Inder Singh Chauhan had purchased a bus by taking a loan from Swami Financers.
The bus was being used as a private service vehicle, and not as a public transport. It
was insured under a comprehensive insurance policy issued by United India
Insurance. The bus met with an accident, for which insurance was claimed. The
insurance company appointed its surveyor, who assessed the loss at Rs 1,26,500.
However, the company deducted Rs 33,125 from the assessed amount, on the
ground that the driver did not have an endorsement on his licence to drive a
transport vehicle. Even this amount was not paid to Chauhan, but was directly paid
to the financer. Aggrieved, Chauhan filed a consumer complaint which ultimately
reached the National Commission. It was held that once a person had a licence to
drive a heavy goods carriage vehicle, it would mean that he/she was entitled to drive
a transport vehicle, including a public service vehicle. Accordingly, the insurance
company was directed to pay the balance amount, along with 12 per cent interest
and costs of Rs 5,000.The Commission also ruled that the practice adopted by
insurance companies of directly paying to the financer, without informing the insured
or without his consent, cannot be justified. If the insurance policy is taken in the
name of the vehicle purchaser, there is no question of paying the amount
straightaway to the financier. [United India Insurance Co Ltd v/s Inder Singh
Chauhan – IV (2006) CPJ 15 (NC)]
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2. Claim for theft of car - on the ground that car could not have been taken
without the use of the programmed key.
Mrs. Pooja’s teenage son arrived home one afternoon and said her car was missing
from the spot where she always left it, just outside her house. Not long afterwards
the car was discovered just a short distance away. It was badly damaged and
appeared to have been driven off the road and to have caught fire. The insurer
turned down Mrs Pooja's claim. It said its loss adjusters had noted that the car could
only have been operated by someone using an "intelligent" (programmed) key. The
key had not been left in the car and Mrs Pooja had not reported that either of her
two keys had been lost or stolen. When asked to produce the keys, she had at first
been able to find only one of them, although she later found the other key. Mrs
Pooja challenged the insurer's insistence that the car could only have been taken by
someone who had the programmed key. In response, the insurer cited a report from
motor vehicle security experts, which it said supported its view.The insurer also
suggested that the only other way in which the car could have been moved was by
means of a transporter or tow-truck. Either of these would have caused the car's
alarm to sound, alerting Mrs Pooja to the theft. But in any case, as far as the insurer
was concerned, the fact that the car had been driven off the road immediately before
the fire indicated that a key must have been used. Complaint rejected: Mrs Pooja
was extremely distressed by the firm's stance and by its implication that she - or
someone in her family - had taken the car and caused the accident. She produced
evidence from the original dealer to support her argument that the car's security
could be by-passed, and that the car could be operated without the use of the
programmed key. It was clear that the incident had caused Mrs Pooja much distress.
However, the technical evidence Mrs D produced, supplied by the original dealer,
was of a very general nature. It did not make any specific reference to the make and
model of Mrs Pooja's car. By contrast, the technical evidence produced by the
insurer referred very specifically to the exact make and model that Mrs Pooja had
owned. After taking into account the particular circumstances of the case and the
possible alternative explanations for what had happened, it can be concluded, on a
balance of probabilities, that the firm had sufficient reasons to refuse to pay the
claim.
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3. Motor Insurance – theft claim turned down because policyholder failed to

disclose relevant information.
Mr Ganesh‘s claim for the theft of his car was turned down by the insurer. The
insurer said Mr Ganesh failed to disclose relevant information when he applied for
his policy. He had not mentioned a claim he made three years earlier for car theft.
He had also failed to disclose an earlier accident claim, made the year before he
took out this particular policy.The insurer said that if he had provided all relevant
information, the premium would have been approximately Rs. 1,000 higher than the
amount he had been charged.
Claimed allowed partly: Mr Ganesh did not dispute that he had failed to provide the
information in question. He said the earlier theft had simply slipped from his mind
when he was filling in the application form, and he had "not particularly concentrated
on the issue of past claims" when he was seeking a quote. He argued that his claim
should be paid in full, as he did not consider he had done anything wrong. He said
he would have been happy to pay the additional Rs.1,000 if he had been asked to
do so, and he suggested the firm should deduct this sum from his current claim.
After seeking clarification from both parties, it can be observed that Mr Ganesh's
failure to disclose relevant information was unlikely to have been an "accidental" or
"casual" oversight, which might in some circumstances have meant that the insurer
should still meet the claim. Equally, there is no evidence to suggest that Mr Ganesh
had been dishonest in failing to provide the required information. But he did appear
to have been very careless, even when he was told that the insurer was entitled to
turn down the claim, even though there was no reason to doubt the car had been
stolen. As the insurer had not acted correctly when, after deciding not to meet the
claim, it retained Mr Ganesh's insurance premium, , it should return this sum to him,
together with interest.
4. Car repaired after accident – second accident involving the same car- Claim –
allowability
After Mr B's car was damaged in a road traffic accident, his insurer accepted his
claim under his comprehensive motor insurance policy. One of the insurer's
approved repairers carried out the necessary remedial work and Mr B signed off the
work as having been satisfactorily completed. Four months later, Mr B was involved
in another road traffic accident. He later said that as there was only minor damage
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to his car, he had not contacted his insurer but had simply gone ahead and arranged
the repairs. Mr B said that, while repairing the car, the garage had spotted some
damage to the boot that did not seem to have been caused by the most recent
accident. So he told the insurer the original repairers must have failed to complete
the job properly. The insurer arranged for a different garage to inspect the reported
damage. It also asked the engineer who had inspected the car after the first accident
to review his report and the photographs taken at the time. As a result of its findings,
the insurer refused Mr B's request that it should pay for the repair of the boot as part
of the original claim. It said there was nothing to connect this damage to the original
accident.
Claim not allowed: After looking at all the evidence, it was found that there was
nothing to support Mr B's view that his car's boot had been damaged in the original
accident. And there had been any "negligent act or omission" on the part of the
repairers who had carried out the remedial work after the first accident. The insurer
had not been required to disprove Mr B's allegations. However, by instructing
independent experts and seeking clarification from the original inspecting engineer,
it had gone to some lengths to try to establish whether it was liable for the damaged
boot. Although it had declined to consider the damaged boot as an outstanding
issue from the original claim, the insurer had offered to deal with it as a new claim,
subject to a new policy excess. This was a fair and reasonable offer and hence
rejection of the claim cannot be faulted.
5. Theft of car- owner only producing the spare key – Claim rejected Miss L's car was
stolen from the driveway of her home while she was inside the house. She neither
saw nor heard the sound of the car being driven away. When she put in a claim to
the firm, the insurer asked her to send it her car keys. However, she was only able
to produce the spare ignition key. Taking this as evidence that the key had been in
(or on) the car when it was stolen, the firm rejected Miss L's claim. It said that by
failing to "exercise reasonable care in safeguarding her car" she had breached a
general condition of her policy. Miss L objected to this. She said that the key had
definitely not been in the car when it was stolen. She had lost the key a month
earlier and had been using the spare. She was adamant that she had not been
"careless", as the firm had suggested.
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Claim rejected: It is clear that with Miss L that she had not been "reckless".
Someone is reckless if they recognize a risk, but deliberately "court" it. Miss L had
not done this, so the firm was wrong to say that she had breached the "reasonable
care" condition. However, the firm's policy also contained a specific (and very
comprehensive) clause that excluded claims for cars stolen when the keys were left
in them. The firm had specifically highlighted this clause when it sold Miss L the
policy. And as the insurer was not satisfied with Miss L's explanation that she had
lost the original car key, it must be concluded on balance that it was likely that she
had left the key in, or on, the car. Since, the circumstances of this theft did fall within
the scope of that exclusion, she could be said to have "left" the keys in the car
because she had gone into the house, and was too far from the car to be able to
prevent it being stolen. In addition, the fact that the car was parked so close to the
road meant it was relatively vulnerable to an opportunistic thief. Therefore rejection
of the the complaint is justified. Owner leaving the car just to with key in it just to
reach the letterbox across the road –Someone driving away the car - Claim upheld.
6. Mr A parked his car opposite a letterbox and jumped out to post a letter, leaving the
key in the ignition. While he was crossing the road to reach the letterbox, someone
stole his car. Mr A was horrified when the firm rejected his claim on the ground of its
"keys in car" exclusion clause. He said that the firm had never told him the policy
included such a clause. Claim upheld: By turning his back on the car and walking
away from it, Mr A had fallen foul of the "keys in car" clause in the policy. In legal
terms, he had left the car "unattended" - in other words he was not close enough to
the car to make prevention of the theft likely, as established in Starfire Diamond
Rings Ltd v Angel, (reported in 1962 in Volume 3 of the Lloyd's Law Reports, page
217); and in Hayward v Norwich Union Insurance Ltd, (reported in 2001 in the Road
Traffic Reports, page 530). Mr A accepted that he had left the car unattended. But
he claimed that none of the policy documents that the firm had sent him (such as the
policy schedule and certificate) referred to the "keys in car" exclusion. The firm had
set out the exclusion in the policy booklet but had done nothing to draw Mr A's
attention to it when it sold him the policy, as it should have done in accordance with
industry guidelines. It is natural that Mr A had been prejudiced by the firm's failure to
highlight the clause. If the firm had clearly referred to the clause on the policy
certificate or schedule, Mr A might well have acted differently. It is also observed
that Mr A had not acted "recklessly". Applying the test of "recklessness" as set out
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in Sofi v Prudential Assurance (1993) - he had not even recognised that there was a
risk, let alone deliberately courted it. Therefore, it it can be said that the firm has to
pay Mr A's claim.
7. Owner leaving car with ignition on fir a brief moment - theft of such car- Claim for
loss rejected. Mr H drove to the council-run tip to get rid of an old carpet. While he
was disposing of the carpet, someone stole his car. He had left the keys in the
ignition and, although he hadn't walked far from the car, he did not hear or see
anything suspicious. He only realised that his car was gone when he turned back
towards where he had left it. The firm turned down Mr H's claim because he had left
his keys in the car. The claim was rejected. Rejection of the claim: The firm's
decision not to pay the claim was based on CCTV footage that it obtained from the
council. This showed Mr H walking away from his car with the carpet. It also
appeared that he had left the car's engine running. The insurer is justified in turning
down the claim on the grounds of its "keys in car" exclusion. Mr H had turned his
back on the car after leaving it in a public place and he was completely oblivious to
the theft until after it had happened. He had walked far way from his car, so he was
unlikely to have been able to prevent the theft. In this instance, Mr. H had no excuse
for not being aware of the policy exclusion. The firm had highlighted it very clearly
on the policy certificate, a document that every motorist is required to have by law.
Therefore, rejection is justified.
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CHAPTER – 5
ENGINEERING INSURANCE
1. Introduction
2. Origin of Engineering Insurance
3. Application of Basic Principles of Insurance to Engineering Insurance Policies
4. Types of Engineering Policies
5. Insights into Select Engineering Policies
6. Engineering Insurance Claims
7. Summary
8. Revision Questions
After the completion of the chapter, the student should be able to
• Explain the need and importance of Engineering Insurance Polices
• Describe the origin and evolution of Engineering Insurance
• Explain the different types of Engineering Policies.
• Examine the scope and coverage of construction and Engineering phase
policies
1. Introduction
Rapid industrialization has led to increasing use of machines in industry. The major thrust
is now on the infrastructure development, which in turn is contributing to the socio-
economic development. Infrastructure comprises projects ranging from
• Airports to bridges
• Dams to tunnels to off-shore structures
• Refineries to reservoirs
• Pipelines to power stations
• Factories to hospitals
All these involve huge capital, human resources, and technical expertise. However, these
projects are exposed to
• Physical losses involving accidental breakdown, repair, replacement, loss of
production,
• Financial losses in terms of loss of income,
• Third – party liability affecting a number of parties such as owner, financial
institutions and the turnkey contractor.
Basically, General Insurance can broadly be divided into two categories –
(1) Commercial Insurance and
(2) Personal Insurance
Whilst Personal Insurance takes care of the insurance requirements of the individual, the
Commercial branch of insurance takes care of the needs of industrial and business
houses – Examples of Commercial Insurance are, Fire Insurance covering Building, Plant
& Machinery, Consequential loss insurance and the group insurance schemes that come
under the broad title ‘Engineering Insurance’.
2. Origin of Engineering Insurance (EI)

The origin of EI dates back to the early part of the Industrial Revolution in the UK, where
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frequent explosions of steam boilers involved loss of life and property. Coupled with the
twin objectives-Inspection & Insurance – the first Engineering Insurance Co.- named “The
Steam Boiler Assurance Company” was formed in 1858 in U.K. In India Engineering
Insurance started with Machinery Insurance in 1953.In India the New India Assurance
Company was the first company to introduce Engineering Department followed by the
Oriental Insurance Co. In the eastern region a syndicate of five companies, some British
and some Indian, was formed to transact this class of business.
Engineering insurance also involves technical expertise in the areas of risk management
with special focus on issues like Risk inspection, Risk improvement, Rating and
Underwriting.
Engineering Insurance schemes primarily aim at protecting business houses from
eventualities that could give rise to a loss and disrupt their day-to-day functioning. Such
losses arise due to the failure of machineries, explosion of boilers and breakdown of
computers and sophisticated electronic equipment. A major breakdown due to mechanical
failure could also result in consequential loss of profits. All these risks can be covered
under various engineering policies.
In addition to the above, Engineering Insurance covers are available at the time of putting
up of a factory or even during an expansion. The engineering policy basically insures
equipment like boilers and pressure plants, engine plants, electrical plants, lifting
machineries, computers and other miscellaneous plants. These insurance covers are the
Storage-cum-erection policies for industrial risks, the Contractors all risk policy for civil
works and the Contractors plant & machinery policy, which takes care of the Contractors
Insurance requirements.
The Advance Loss of Profits policy is a sophisticated insurance cover, which takes care of
losses arising out of delay in completion of a project well beyond the stipulated period
where the delay is caused by an insured peril.
3. Application of Basic Principles of Insurance to

Engineering Insurance Policies
The basic principles of insurance are applicable to engineering insurance also. The
proposer of an engineering insurance should disclose all material information relating to
the Plant / equipment to be insured. This disclosure is in accordance with the Principle of
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Utmost Good Faith. Every engineering insurance policy must follow this principle to have
a legal effect.
The Principle of Insurable Interest is also applicable in different ways. A civil engineer
has insurable interest in his works since he is responsible for damages, if any, caused to a
construction work. A firm which erects a plant or machinery has insurable interest in their
working.
The Principle of Indemnity stipulates that the contractor or the person who gets insured
should be in the same financial position as immediately before the loss. In the case of an
engineering insurance policy covering machinery, the measure of indemnity is usually the
replacement value at the place and date of loss or damage, less an appropriate allowance
towards depreciation. If the machinery can be repaired, the repairing cost represents the
measure of indemnity.
Engineering insurance follows the Principle of Subrogation. For example, engineering
equipment which is insured is destroyed by fire caused by the negligence of a third party.
The insurer who indemnified the insured is entitled to the insured’s right of recovery
against the third party. If the engineering equipment is covered under several insurance
policies, each the insurance company should be liable only for the rateable proportion of
such loss.
In accordance with the Principle of Proximate Cause, the loss suffered due to the
damage of a plant or equipment shall be indemnified only if that damage is covered by the
policy.
4. Types of Engineering Insurance Policies

All Engineering insurance policies take into consideration all the risk exposures of
industrial establishments and have suitable policies to cover these loss exposures at two
stages, namely:
4.1 Construction Phase Insurance policies

• Contractors All Risk policy (CAR)
• Erection All Risks insurance policy (EAR) or (SCE)
• Marine- cum-Erection Insurance policy (MCE)
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• Contract Works insurance policy (CW)

• Advance Loss of Profits policy (ALOP)
• Delay in start up insurance policy (DSU)
4.2 Operational Phase Insurance Policies

• Machinery insurance (MI)/ Machinery Breakdown insurance policy (MB)
• Boiler and Pressure Plant insurance policy (BPP)
• Machinery Loss of profits policy (MLOP)
• Contractor’s Plant and Machinery insurance policy (CPM)
• Civil Engineering Completed Risks insurance policy (CECR)
• Electronic Equipment insurance policy (EEI)
• Deterioration of Stocks insurance policy (DOS)
While the construction phase policies are issued for the period of the project i.e. period or
‘one time’ policies, the operational insurance’s are annual policies renewable at expiry.
(Normally, one time policies of MCE / MCSCE are converted into annual policies of Fire
insurance – P & M – after completion and commencement of the project)
All engineering policies provide cover on “All Risks” basis subject to general and special
exclusions, if any loss is the result of
• Willful negligence
• Cessation of work
• War and kindred perils and nuclear risks
4.3 Perils covered under construction phase

The constructional phase insurance policies cover any loss or damage to property if
caused due to the following perils namely,
• Fire, lightning, explosion
• Flood, inundation
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• Windstorm of any kind

• Earthquake, landslide, subsidence etc. theft and burglary
• Accidental damage, bad workmanship, lack of skill, negligence, malicious damage
• or human error
• Collapse, impact damage
• Act of terrorism
4.4 Exclusions
No liability under the policy is covered in respect of the following:
• Amount of loss shown as excess
• Loss discovered at the time of inventory
• Normal wear and tear, rusting, etc.
• Cost of correction of any error during construction unless resulting in physical
damage
• Files, drawings, currency, cheques
• Packing materials
• Penalties and fines
• Loss or damage due to faulty design
• Cost of repair or replacement of defective material or workmanship
• Vehicles licensed for general use, or waterborne vessels or equipment mounted on
such vessels
4.5 Sum Insured and Period of cover under constructional phase

The sum insured required by the policy is to be equal to the Estimated Completed Erected
Value of the contract works inclusive of landed cost of materials, wages, construction
costs, freight, customs duties, and items supplied by the principal. The period of cover
shall commence from the commencement of work or unloading of the property insured at
site, whichever is earlier. The cover expires when the completed part is taken over, or put
in service.
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4.6 Perils covered by Operational Insurance Policies

Insurable property includes:
• Boilers
• Electrical equipment – generators, switchgears, transformers etc.
• Mechanical plants – engines, turbines etc.
• Lifting equipment – cranes, conveyors, lifts etc.
These policies covers unforeseen and sudden physical damage by any cause to the
insured property:
• While it is at work or at rest
• While being dismantled or cleaned or overhauled
• During cleaning or overhauling operations when being shifted within the premises
During subsequent erection.
The loss events could be:
• Electrical – short circuits, failure of insulation, etc.
• Mechanical – faulty material, design, casting, maladjustments, abnormal stress,
explosion, etc.
• External – entry of foreign bodies, impact, collision etc.
4.7 Exclusions
These policies do not cover any loss or damage caused due to the following perils:
• Fire and special perils
• War and civil wars
• Nuclear risks
• Experimental loss due to over loading or tests
4.8 Sum Insured and Basis of Indemnification under operational phase

Sum insured of each item should represent its current new replacement value including
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cost to site, custom duties, and all installation costs. The basis of Indemnification is
Restoration of the costs incurred or the Market value in case of total loss.
5. Insights into Select Engineering Policies

5.1 Storage-Cum-Erection Insurance Policy
Successful commissioning of any project according to schedule necessarily calls for a
sound planning on various fronts and competent execution. A public authority or a private
corporation commissioning a project will have to reckon with various risks to which the
project may be exposed and these risks have to be managed. Broadly, these risks are
either ‘speculative’ or ‘pure’. The Storage-cum-erection insurance makes an attempt to
take care of the ‘pure’ or physical risks connected with such activity. The construction of a
factory involves preparation of site, laying of foundation and other incidental civil works
and erection of plant and machinery. Erected plant and machinery have to be tested for
proper mechanical functioning and later under load conditions and thereafter
commissioned for commercial activity.
Industrial projects generally take a long time to complete extending from 2 to 5 years and
throughout this period the materials connected with the project are continuously exposed
to various types of risks like fire, explosion, storm, flood, earthquake, subsidence,
rockslides, theft, pilferage etc. The aggregate value of the plant and machinery and
materials at site gradually build up from the time of arrival at site of the first consignment
and reaches its peak when the plant is ready for its test run. During the period of testing,
the value of risk is maximum and during hot / load testing, the degree of exposure is the
highest. The sum insured under a Storage cum erection policy should be the anticipated
completed value of the project.
A big project generally involves several parties. The principal who conceives and
ultimately owns the project, the contractor who executes the project along with the sub-
contractors who assist him, the manufacturers of machinery who may sometimes directly
undertake to erect the machinery and the financiers who advance monies for the project.
• Parties to the contract
A project may be a turnkey contract or separate works contract directly with various
contractors on manufacturers. The contract wording will determine who is responsible for
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loss/damage caused to property which ultimately go into the project. It is necessary to

realize that each of the parties to the project has a stake in the successful completion of
the project. It is open to each of the parties to take out separate insurance covers to take
care of their share of exposure. However, it is far more efficient to arrange for one policy
covering the entire project in the joint names of principal/contractor, subcontractor,
manufacturer and financier for their respective interest.
• Scope of cover
A Storage-cum-erection policy gives a combined and continuous cover, which can take
care of the risks exposure of all the parties to the contract. It eliminates gap in cover. The
SCE policy is also called the Erection All Risks cover and as the name suggests it is an
omnibus cover against all risks.
5.2 Erection All Risks Insurance Policy

Under erection all risk insurance the company indemnifies the insured against sudden and
unforeseen physical loss of or damage to the property insured in the manner and to the
extent provided.
• General Exclusions
The company will not indemnify the insured in respect of loss, damage or liability directly
or indirectly caused by or arising out of or aggravated by –
(a) War, invasion, act of foreign enemy, hostilities or war like operations etc.
(b) Nuclear reaction, nuclear radiation or radioactive contamination.
(c) Willful act or willful negligence of the insured or of his responsible representative
(d) Cessation of work whether total or partial.
• Period of Cover
If any specific date is not mentioned in the schedule, the liability of the company shall
commence with the unloading of the materials (specified in the schedule) on the site and
shall continue until immediately after the first test operation or test loading is concluded
(whichever is earlier). But in no case the period shall extend beyond four weeks once the
trial running has been done or completion (readiness) of work has been declared by the
contractor, whichever is earlier.
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If there are several machines or parts in the plant, the liability of the company for the
parts/machines ceases, as they are declared ready.
If the actual erection period is shorter than the period indicated in the schedule, no refund
of premium shall be allowed, unless specifically provided by insurers.
In the case of second-hand/used property, the insurance hereunder shall cease
immediately on the commencement of the testing.
At the latest, the insurance shall expire on the date specified in the schedule but if the
work of erection and test operations included in the insurance is not completed within the
time specified hereunder, the company may extend the period of insurance but the insured
shall pay to the company additional premium at agreed rates. Premium can be paid in
quarterly installments in advance.
• General Conditions
All the conditions are same as specified for boiler and explosion insurance policies (as the
name itself suggests, they are “general conditions”). Two points worth mentioning here
are:
(A) Just like boiler and explosion policy, the insured is required to notify the company in
the event of any occurrence that might give rise to a claim under this policy. Upon
notification being given to the company under this condition, the insured may carry
out the repair or replacement of any minor damage not exceeding Rs. 7,500.
(B) This insurance may be terminated at the request of the insured at any time in which
case the insurers will refund appropriate premium amount subject to the following
conditions.
(i) Claims experience under the policy as on date of cancellation should be less
than 60 % of reworked premium.
(ii) The unexpired period is not less than 3 months or 25% of the policy period,
whichever is less.
(iii) Testing period should not have commenced.
This insurance may also at any time be terminated at the option of the insurer with 15
days notice to that effect being given to the insured in which case the insurers shall be
liable to repay on demand a ratable proportion of the premium for the unexpired term from
the date of cancellation.
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The various sections of the policy are given hereunder.

SECTION I – MATERIAL DAMAGE
The company would reimburse any loss caused to the items specified in the schedule. The
compensation would not exceed the limits specified in the schedule, both for individual
items as well as total sum.
The company will also reimburse the insured for the cost of clearance and removal of
debris following upon any event giving rise to an admissible claim under this policy but not
exceeding in all the sum (if any) set opposite thereto in the schedule.
EXCLUSION TO SECTION – I
The company, shall not, however, be liable for:-
(a) The first amount of the loss arising out of each and every occurrence shown as
excess in the schedule.
(b) Loss discovered only at the time of taking an inventory.
(c) Normal wear and tear, gradual deterioration due to atmospheric conditions or
otherwise, rust, scratching of painted or polished surfaces or breakage of glass.
(d) Loss or damage due to faulty design, defective material or casting, bad
workmanship other than faults in erection.
This exclusion shall be limited to the items immediately affected and shall not be
deemed to exclude loss or damage to other insured items resulting from such
excluded perils.
(e) The cost necessary for rectification or correction of any error during erection unless
resulting in physical loss or damage.
(f) Loss of or damage to files, drawings, accounts, bills, currency, stamps, deeds,
evidence of debt, notes, securities cheques, packing materials such as cases,
boxes, crates.
(g) Any damage or penalties on account of the Insured’s non- fulfilment of the terms of
delivery or completion under his contract of erection or of any obligations assumed
there under including consequential loss of any kind or description or for any
aesthetic defects or operational deficiencies.
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PROVISIONS APPLYING TO SECTION – I

There are six memos attached to Section I explaining the provisions applying to it
regarding sum insured, premium adjustment, basis of loss settlement, construction plant
and machinery, surrounding property, major perils/acts of god claims.
MEMO 1 – SUM INSURED
The sum of insurance stated in the schedule couldn’t be less than the completely erected
value of the property inclusive of freights, customs duty, erection cost.
(Sum of insurance stated in the policy) > (Completely erected value of the property)
+ Freights
+ Customs duty
+ Erection cost
Any change in sum due to rise or fall in the level of wages or prices can be incorporated
with the knowledge of the company.
If it is found that the sum insured (representing the completely erected value of the
property and/or of particular items involved) is less than the amount required to be insured
the amount recoverable by the insured under the policy shall be reduced in such
proportion as the sum insured bears to the amount required to be insured.
MEMO 2 – PREMIUM ADJUSTMENT
After the completion of the project, the difference in premium (what should have been
charged and what is charged) due to difference in estimated and actual cost will be
adjusted on the basis of the actual values to be declared by the insured in respect of
freight and handling charges, customs dues and costs of erection. Any increase or
decrease in prime cost of plant and equipment shall not be the subject matter of premium
adjustment.
MEMO 3 – BASIS OF LOSS SETTLEMENT
In the event of any loss or damage the basis of any settlement under this policy shall be -
(a) In the case of damage which can be repaired, the cost of repairs necessary to
restore the items to their condition immediately before the occurrence of the damage
less salvage
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(b) In the case of a total loss the actual value of the items immediately before the
occurrence of the loss less salvage
If the costs involved in the latter were lower than those in the former, the company would
replace the item instead of repairing it.
The cost of any provisional repairs will be borne by the company if such repairs constitute
part of the final repairs and do not increase the total repair expenses.
The cost of any alterations, additions and/or improvements shall not be recoverable under
this policy.
The cover can be extended on payment of additional premium to include charges for
overtime, work on holidays, express freight (including air freight), which are not covered by
this insurance, unless agreed upon at an additional premium.
MEMO 4 – CONSTRUCTION PLANT AND MACHINERY
Loss of/or damage to construction plant and machinery excludes loss or damage directly
caused by its own explosion or its own mechanical or electrical breakdown or
derangement.
MEMO 5 – SURROUNDING PROPERTY
The loss to the surrounding property belonging to/or held in care, custody or control of the
Principal(s) or the Contractor (s) shall only be covered if
- Occurring directly due to the erection, construction or testing of the items insured
under Section – I
- Happening during the period of cover, and
- Provided that a separate sum therefor has been entered in the Schedule
This cover does not apply to construction/erection machinery, plants and equipment.
MEMO 6 – MAJOR PERILS/ACTS OF GOD CLAIMS
The Major Perils/Acts of God claims shall mean the claims arising out of:-
(a) Earthquake - Fire and shock
(b) Landslide/ rockslide/ subsidence,
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(c) Flood/inundation
(d) Storm/ tempest/ hurricane/ typhoon/ cyclone/ lightning or other atmospheric
disturbances.
SECTION II – THIRD PARTY LIABILITY
The company will indemnify the insured against –
(a) Legal liability for accidental loss or damage caused to property of other persons
including property held in trust by/or under custody of the Insured for which he is
responsible excluding any such property used in connection with erection thereon
(b) Legal liability (liability under contract excepted) for fatal or non-fatal injury to any
person other than the insured’s own employees or workmen or employees of the
owner of the works or premises or other firms connected with any other erection
work thereon, or members of the insured’s family or of any of the aforesaid; directly
consequent upon or solely due to the erection of any property described in the
schedule.
Provided that the total liability of the company during the period of insurance under this
clause shall not exceed the limits of indemnity set opposite thereto in the schedule.
In respect of a claim for compensation to which the indemnity provided herein applies, the
company will, in addition, indemnify the insured against:-
(a) All cost and expenses of litigation recovered by any claimant from the insured
(b) All costs and expenses incurred with the written consent of the company.
The exclusions contained in paragraphs (d), (f) & (g) in Section I of this policy shall apply
to this section also.
EXCLUSIONS TO SECTION II
The company will not indemnify the insured in respect of:
1. The excess stated in the Schedule to be borne by the insured in any one occurrence
related to property damage.
2. Expenditure incurred in doing or redoing or making good or repairing or replacing
anything covered or coverable under Section I of this policy.
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3. Liability consequent upon–

(a) Bodily injury to/or illness of employees or workmen of the Contractor(s) or the
Principal(s) or any other firm connected with the project which or part of which
is insured under Section I, or members of their families;
(b) Loss of/or damage to property belonging to or held in care, custody or control
of the Contractor(s), the Principal(s) or any other firm connected with the
project which or part of which is insured under Section I, or an employee or
workman of one of the aforesaid;
(c) Any accident caused by vehicles licensed for general road use or by
waterborne vessels or aircraft;
(d) Any agreement by the insured to pay any sum by way of indemnity or
otherwise unless such liability would have attached also in the absence of
such agreement.
CONDITIONS APPLYING TO SECTION–II
1. The insured should not make any admission, offer or promise or payment to settle
the claim without the consent of the company. On the other hand, company can do
so and the insured is required to fully cooperate with the company in its action.
2. The total amount insured decreases with each compensation made.
GENERAL CONDITIONS
The tariff applies to “erection all risks/storage cum erection insurance’’ with sum insured
up to Rs.100 crores. For policies of sums exceeding Rs.100 crores but below Rs.1500
crores, separate guidelines were issued on 1st January, 2001. The jurisdiction of the tariff
is the whole of India. (All are detariffed and these specifics may only be indicative at the
most as each insurer is free to have its own rates and conditions).
The tariff contains the rules and regulations of erection all risks insurance in combination
with marine insurance. Additional rates are fixed for covering earthquake perils, fire
protection, express freight (air freight excluded, air freight only, dismantling charges and
overtime rates of wages).
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5.3 Contractors All Risks Insurance

The Contractors All Risks Cover is similar to the Erection All Risk Insurance. This policy
can be extended to the following kinds of work:
1. All Civil Engineering works, including massive dams.
2. Housing Developments, Industrial Buildings, Offices or Flats.
3. Water Treatment Plants, Canals, Roads.
4. Bridges, Tunnels, Docks.
5. Cooling Towers, Storage Tanks, Dams, Reservoirs, Piers – In short, for all kinds of
civil construction work, including Residential and Office Buildings, and Factories and
Civil Engineers Power Plants, Projects, Tunnels, Water Supply and Drainage
System, Harbours, Roads, Railways and Airport Canals. The policy can be issued in
the name of; (a) Principal or (b) The Contractors engaged in the Project, including
Sub-contractors.
5.4 Contractor’s Plant & Machinery Insurance Policy

This is a comprehensive policy available against unforeseen and sudden physical damage
to the property by any cause, which has not been specifically excluded.
This applies to the insured plant and machinery whether at work or at rest, while being
dismantled, or in the course of such operations themselves or while being shifted, re-
erected etc., while such items are at the erection site.
The sum insured should be equal to the cost of replacement of insured property by a new
property of the same kind and capacity.
• Basis of Indemnity
Actual value plus freight, customs duty etc., will be paid in case of total loss. In case of
damage, necessary repair charges including dismantling and re-erection will be admitted.
• Rating
The rates and excess are governed by tariff. For risks exceeding Rs.5 crores, reference to
TAC is necessary.
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• Extensions
Extensions are available on payment of additional premia for third party liability cover,
owner’s surrounding property and removal of debris, inclusive of express freight, holiday
wages, overtime pay, air freight etc.
5.5 Boiler and Pressure Plant Insurance Policy

The boiler and pressure plant insurance is an important policy that fills in the loophole
of the fire and allied perils insurance. Boilers and pressure vessels are commonly used in
production plants like cotton mill, paper mill, petrochemical plant, etc. Even though the
boilers are regularly inspected, still there are certain defects that go undetected. In such
cases the explosion of the boiler would cause huge damage. Not only the boiler but also
the surrounding property, which when damaged can cause huge losses. Hence it is always
prudent on the part of the producer to go for boiler and pressure plant insurance.
While studying the boiler explosion policy it is important to keep in mind that it does not
cover the losses covered by the fire policy. Its role and scope is restricted by this.
First of all we will clarify the different terms used at different places in the policy:
Definitions:
The terms used in this policy have been explained below:
1. A ‘Boiler’ is defined as any fired closed vessel or a combined container piping
system in which steam is generated under pressure.
2. ‘Pressure plant’ means any unfired closed container under steam gas or fluid
pressure.
3. ‘Explosion’ is the sudden and violent rending or tearing apart of the permanent
structure of a boiler or pressure plant or any part or parts thereof by force of internal
steam, gas or fluid pressure causing bodily displacement of the said structure and
accompanied by the forcible ejection of its contents.
4. ‘Collapse’ is the sudden and dangerous distortion of any part of boiler or pressure
plant by bending or crushing caused by steam, gas or fluid pressure whether
attended by rupture or not. It shall not mean any slowly developing deformation due
to any cause.
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5. ‘Flue gas explosion’ is the explosion of ignited gases in the furnaces or flues of the
boilers, economizers and super heaters.
6. ‘Chemical explosion’ means an explosion arising out of chemical reaction in any
plant.
The document that contains the details of the policy is called the Schedule. Beginning with
policy number and date, the Schedule contains details of amount insured, annual
premium, period of policy, boiler and pressure plants insured, surrounding property
insured, legal liability to third parties as well as additional perils covered. Steam or feed
water piping, separate super heaters, separate economizers etc. have to be mentioned
specifically in the Schedule. The term ‘boiler’ does not include them.
Let us see in detail the different perils the policy covers:
1. Damage (other than by fire) to the boilers and/or other pressure plant or surrounding
property described in the schedule.
2. Liability arising due to death of or bodily injury to any person provided he is not
employed or under apprenticeship with the insured.
3. Liability arising from damage to any property whether the insured is responsible for it
or not
The damages listed above must be caused by and solely by explosion or collapse of any
boiler or other pressure plant described in the schedule occurring in the course of ordinary
working.
General Exceptions
1. Damages arising directly or indirectly from fire, explosion or collapse or any other
cause.
2. Damages caused by war, hostilities or warlike operations, natural calamities etc.
Similarly damages from nuclear reaction, nuclear radiation or radioactive
contamination are excluded.
3. If the explosion results from any experiment requiring overloading or abnormal
conditions.
4. Defects that are gradually developing and would require repairs at some future date
are not covered under this policy. Suppose what would happen if such defects would
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be covered? Every insured would try to get his boiler well serviced before the expiry
of the policy.
5. Defects like wearing away or wastage of materials of any part of the boiler or failure
of individual tube (if there are multiple tubes in the boiler). This is because such
damages are not the result of explosion.
6. Damages due to negligence.
7. Consequential losses.
8. Damages due to flaws known but not disclosed by the insured.
Warranties
To prevent the insured from getting careless about the safety of boilers, these warranties
are required on his part:
1. Annual inspection of boilers by appropriate authorities.
2. Only certified competent people will handle the boiler.
3. The boiler must work under permissible pressure limits.
Conditions
There are general conditions like the policy and the Schedule that together form the
contract. If any specific meaning is attached to any term in either of them, it will apply to
whole of the policy. The pressure on the safety valves should not exceed the limit
permitted in the latest inspection or the limit specified in the schedule, whichever is lower.
If there is any change in the type of fuel used in the boiler, the details should be intimated
to the insurer and the terms of the policy revised accordingly.
Any fraudulent means that are resorted to, in order to benefit from the policy or if the claim
is rejected and no action is taken within 3 months, the benefits under the policy would be
forfeited. The insured cannot make any admission, promise, payment or indemnity without
the written consent of insurer. On the contrary, the insurer may act to settle the claims
arising and the insured is bound to disclose all the relevant information to him in such
circumstances.
If at the time of loss, the boiler or pressure plant turns out to be of greater value (including
freight, custom duty and erection costs), the insurer will bear a rateable share of the loss.
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The basis of indemnity differs when the item can be repaired and when it has to be
replaced. In the first case, the insurer will pay the repairing cost and the incidental cost
incurred in restoring the item to conditions prior to damage. The value of the salvage
would be deducted. If the item is destroyed, the company will pay the value as assessed
immediately before the accident. It will also pay the incidental charges (to the extent
provided in Schedule) incurred in setting it up in the premises. The company shall deduct
depreciation and salvage value. The charges for extra work necessitated shall be paid
only if mentioned in writing in the Schedule.
Obligations of the insured are more or less same as warranties. The insured should carry
out the conditions listed in the warranties attached in the standard policy. Besides, he
should give the insured the right to inspect the boilers anytime. Moreover he is obliged to
make all arrangements for the inspection. This includes stopping, cleaning, emptying the
boiler.
If there is any material change in the subject matter of the policy, the same would be
rendered invalid unless revised and endorsed by the company.
In case of an accident the insured is expected to observe the following duties:
(a) Immediately notify the company by telephone or telegram as well as in writing,
giving an indication as to the nature and extent of loss or damage.
(b) Take all reasonable steps within his power to minimise the extent of the loss or
damage or liability.
(c) Preserve the damage or defective parts and make them available for inspection by
an official or surveyor of the company.
(d) Furnish all such information and documentary evidence as the company may require
The company shall not be liable for any loss or damage of which no notice is
received or company has not received completed form within fourteen days of its
occurrence.
Upon notification of a claim being given to the company, the insured may proceed with the
repair of any minor damage, cost not exceeding Rs.2,500.
If the liability due to claim is covered under some other insurance policy as well, the
company will pay only its ratable proportion of such liability.
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As far as the position of the insured after claim is concerned, he cannot abandon any
property to the company once the claim is settled. Secondly the amount insured shall
decrease with each compensation unless it is otherwise reinstated.
As seen earlier, the change in the subject of the policy renders it invalid. So is the case
with ownership. If the interest in the property is transferred to some other party (except by
Will or operation of law), the insured should get the policy reinstated and endorsed by the
company.
The policy can be terminated by:
(a) The insured at request
(b) The insurer by notice of 15 days
In case of termination, the company will retain the premium for the period the policy had
been in force.
Regarding recourse, the insured reserves the right to perform any act necessary to obtain
relief from the claims arising under the policy.
In case of dispute or differences between the insured and the insurer, regarding the
quantum to be paid under the policy, the matter is to be solved through arbitration. If both
the parties do not agree on a single arbitrator within 30 days, three arbitrators will be
appointed, one by each party and the third by the two arbitrators.
It is clearly agreed and understood that no difference or dispute shall be referable to
arbitration as herein before provided, if the company has disputed or not accepted liability
under or in respect of this policy.
General Regulations
1. No policy to be issued on first loss basis.
2. No policy to be issued with a bonus clause.
3. Projects located outside India to be out of the jurisdiction of the Committee.
4. Sum insured: It is a requirement of the policy that the boiler and pressure plants are
covered for their present day new replacement value with a view to avoid under-
insurance.
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In addition, cover against damage to owner’s existing surrounding property or

selected limits of indemnity can be availed of. Likewise, damage to third party
property and/or personal injury can also be covered for selected limits of indemnity.
5. Boiler and pressure plant insurance policy cannot be issued on agreed value basis.
6. Escalation benefit shall not be allowed under a boiler and pressure plant policy.
7. Short period scale of premium rates have been laid down in the policy which are
applicable if the policy period is less than 12 months or if it is cancelled before this
period at the request of the insured.
8. Refund of premium for standstill period:- Refund of premium for standstill period can
be considered under this policy.
There should be minimum 3 months continuous standstill period for consideration of
refund of premium.
Causes of standstill for complete plant should be as under:
(a) Due to non-availability of raw materials, acute power shortage, shortage of water
supply and similar inputs.
(b) Standstill items like boilers, TG sets, steam engines and diesel generating sets, in
lieu of sufficient standby equipment’s being available in the plant.
(c) In case of continuous process plant, due to a major breakdown of any item the
whole plant cannot be run and as such refund to be considered. However refund of
premium for the repair of the affected equipment should not be considered.
The table for the scale of refund for standstill period has been laid down in the policy.
It has also been laid down in the policy that the risks will be eligible for the standstill
discount only when the claims experience under the policy for which the discount is
sought, is less than 60 % and that the standstill discount will not apply during overhauling
period (including hydraulic testing of boiler tubes under BPP policies).
No such refund is allowed for seasonal industries like sugar factories. However, the rate
applicable for machinery shall be 95% of the rate for equipments for such seasonal
factories. The decision of applying 95% of the rate for equipment in respect of seasonal
factories is applicable for policies issued on annual basis only.
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9. Rounding of Rates: It is not permissible to round off rates in boiler and pressure
plant insurance policies.
10. Mid-Term Increase in Sum Insured: If the sum insured is increased during the
currency of the policy:
(a) Short period scale of rates shall apply to increased amounts.
(b) If the policy is renewed thereafter for 12 months for an amount not less than
the increased sum insured, the difference of premium between short period
scale of rate and pro-rata rate may be refunded.
11. Mid-Term decrease in Sum Insured: If the sum insured is decreased during the
currency of the policy, short period scale of rates shall apply on the reduced sum
insured.
5.6 Machinery Breakdown Insurance Policy

The policy covers the damage caused to the machinery whether they are at work or at rest
or even when dismantled for repairing or overhauling. Similarly damages caused during
shifting them from one place to another or subsequent re-erection are also covered.
General exceptions
The company shall not be liable under this policy in respect of:–
1. Loss, damage and/or liability caused by or arising from or in consequence, directly
or indirectly of fire or natural calamities, impact of land borne or waterborne or
airborne craft or other aerial devices and/or articles dropped thereof.
Any loss or damage by fire within the electrical appliances and installation insured
by this policy arising from or occasioned by overrunning, excessive pressure, short
circuiting, arcing, self heating or leakage of electricity, from whatever cause
(lightning included), is covered; provided that this extension shall apply only to the
particular electrical machine; apparatus, fixtures, fittings or portions of the electrical
installation so affected and not to other machines, apparatus, fixtures fittings or
portions of the electrical installation which may be destroyed or damaged by fire so
set up.
2. Loss damage and/or liability caused by or arising from or in consequence, directly
of:
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a) War, invasion, act of foreign enemy, hostilities or war like operations (whether
war be declared or not). Civil war, rebellion, revolution, insurrection, mutiny,
riot, strike, lockout and malicious damage, civil commotion, military or usurped
power, martial law, conspiracy confiscation, commandeering by a group of
malicious persons or persons acting on behalf of or in connection with any
political organisation, requisition or destruction or damage by order of any
government de-jure or de facto or by any public, municipal or local authority.
b) Nuclear reaction, nuclear radiation or radioactive contamination.
3. Accident, loss, damage/and/or liability resulting from overload experiments or tests
requiring the imposition of abnormal conditions.
4. Gradually developing flaws, defects, cracks or partial fractures in any part not
necessitating immediate stoppage, although at some point of time in future repair or
renewal of the parts affected may be necessary.
5. Deterioration of/or wearing away or wearing out any part of any machine caused by
or naturally resulting from normal use or exposure.
6. Loss, damage and/or liability caused by or arising out of the willful act to willful
neglect or gross negligence of the insured or his responsible representatives.
7. Liability assumed by the insured by agreement unless such liability would have
attached to the insured notwithstanding such agreement.
8. Loss, damage and/or liability due to faults or defects existing at the time of
commencement of this insurance and known to the insured or his responsible
representative but not disclosed to the company.
9. Loss of use of the insured’s plant or property of any other consequential loss
incurred by the insured.
10. Loss, damage/ and/ or liability due to explosions in chemical recovery boilers, other
than pressure explosions for e.g. smelt, chemical, ignition, explosions etc.
Special exclusions
The Company shall not be liable for the following:
1. The excess, as stated in the Schedule, to be first borne by the insured out of each
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and every claim; where more than one item is damaged in one and same
occurrence, the insured shall not, however, be called upon to bear more than the
highest excess applicable to any one such item.
2. Loss of/or damage to belts, ropes, chains, rubber tyres, dies, moulds, blades,
cutters, knives or exchangeable tools, engraved or impression cylinders or rolls,
objects made of glass, porcelain, ceramics, all operating media (e.g. lubricating oil,
fuel, catalyst, refrigerant) felts, endless conveyor belts or wires, sieves, fabrics, heat
resisting and anti-corrosive lining and parts of similar nature, packing material, parts
not made of metal (except insulating material) and non-metallic lining or coating of
metal parts unless loss or damage to the equipments/machinery is indemnifiable in
terms of the policy.
3. Loss or damage for which the manufacturer or supplier or repairer of the property is
responsible either by law or contract.
In any action, suit or other proceeding where the company alleges that by reason of the
provisions of the exceptions or exclusions above, any loss, destruction, damage or liability
is not covered by this insurance, the burden of proving that such loss, destruction, damage
or liability is covered shall be upon the insured.
Provisions of this policy are as under:
1. SUM INSURED
It is the requirement of this insurance that the sum Insured shall be equal to the cost of
replacement of the insured property by new property of the same kind and same capacity
which shall mean its replacement cost including freight and customs duties, if any, and
erection costs.
2. BASIS OF INDEMNITY
(a) In cases where damage to an insured item can be repaired, the company will pay
expenses necessarily incurred to restore the damaged machine to its former state of
serviceability plus the cost of dismantling and re-erection incurred for the purpose of
effecting the repairs as well as ordinary freight to and from a repair shop, customs
duties if any, to the extent such expenses have been included in the sum insured. If
the repairs are executed at a workshop owned by the insured the company will pay
the cost of materials and wages incurred for the purpose of the repairs plus a
reasonable percentage to cover overhead charges.
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No deduction shall be made for depreciation in respect of parts replaced except for
(i) wear and tear parts and (ii) parts for which manufacturers have specified a fixed
life for use and the like but the value of any salvage will be taken into account.
If the cost of repairs as detailed herein above equals or exceeds the actual value of
the machinery insured immediately before the occurrence of the damage the
settlement shall be made on the basis provided for in (b) below.
(b) In cases where an insured item is destroyed, the company will pay the actual value
of the item immediately before the occurrence of the loss including costs for ordinary
freight erection and customs duties if any provided such expenses have been
included in the sum insured, such actual value to be calculated by deducting proper
depreciation from the replacement value of the item. The company will also pay any
normal charges for the dismantling of the machinery destroyed but the salvage will
be taken into account.
Any extra charges incurred for overtime, night-work, work on public holidays,
express freight are covered by this insurance only if especially agreed to in writing.
In the event of the makers’ drawings, patterns and for boxes necessary for the
execution of a repair not being available, the company shall not be liable for cost of
making any such drawing patterns or core boxes.
The cost of any alterations, improvements or overhauls shall not be recoverable
under this policy.
The cost of any provisional repairs will be borne by the company if such repairs
constitute part of the final repairs and do not increase the total repair expenses.
If the sum insured is less than the amount required to be insured as per provision 1
hereinabove, the company will pay only in such proportion as the sum insured bears
to the amount required to be insured. Every item if more than one, shall be subject
to this condition separately.
The company will make payments only after being satisfied, with the necessary bills
and documents that the repairs have been affected or replacements have taken
place, as the case may be. The company may, however, not insist for bills and
documents in case of total loss where the insured is unable to replace the damaged
equipments for reasons beyond their control. In such cases claims can be settled on
‘indemnity basis’.
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3. INSPECTION OF TURBINES AND TURBO GENERATORS–

All mechanical and electrical parts of any steam turbine, gas turbine or generator upto
30,000 KW shall be inspected and overhauled thoroughly under the supervision of maker’s
representatives, in a completely opened up state at least every two years: for turbines or
generators exceeding 30,000 KW such inspection and overhaul shall take place after
32,000 hours of operation or every four years. The cost of inspection and overhauling shall
be borne by the Insured and a copy of the report issued by the maker’s representative on
such inspection and overhauling shall be furnished to the company immediately after the
work has been carried out.
The conditions laid down in the policy are similar to those of other engineering policies.
Extensions or add-on cover
The standard MB policy shall not indemnify the following loss or damage due to
mechanical or electrical breakdown of any machinery:
1. Express freight, holiday and overtime rates of wages
2. Additional rate for airfreight only
3. Surrounding property damage
4. Third party liability
5. Customs duty
Important guidelines for Underwriting
1. Sum insured to be taken is the current replacement value of all machinery
2. Replacement cost to include freight, custom, and erection cost also
3. Sum insured can be increased or decreased during the policy period
4. Short-period policy can be issued
5. Discount for standby and seasonal equipment’s may be granted
6. Strong recommendation to accept risk after satisfactory inspection
7. Machines are to be insured after successful commissioning only, not at the stage of
erection, testing and commissioning in any case
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8. Before rating, it is necessary to collect full nameplate, details of the machine, and it
should be a part of the policy as well
5.7 Machinery Loss of Profits Insurance

Under this policy the company makes good the losses arising from unforeseen and
sudden damages to any machinery described in the schedule, during the period of policy.
The following requirements should be met:
• The liability of company for claims remains within the limit specified in the Schedule.
• The accident should happen during period specified in the policy and should be
covered by standard machinery insurance policy or boiler & pressure plant insurance
policy.
• The terms and conditions of the policy have been fulfilled.
• The statements and answers in the proposal form are true.
The cover provided under this policy shall be limited to loss of gross profit due to:
(a) Reduction in output and
(b) Increase in cost of working and the amount payable as indemnity there under shall
be in respect of (a) reduction in output and (b) increase in cost of working.-
The reduction in fixed charges if any during the period when business is disrupted, shall
be deducted from the compensation amount.
Definitions
1. Gross Profit: The sum produced by adding to the net profit the amount of the insured
standing charges or if there be no net profit, the amount of the insured standing charges
less such a proportion of any net trading loss as the amount of the insured standing
charges bears to all the standing charges of the business.
2. Net Profit: The net trading profit (exclusive of all capital receipts and accretions and all
outlay properly chargeable to capital) resulting from the business of the insured at the
premises after due provision has been made for all standing and other charges including
depreciation but before the deduction of any taxation chargeable on profits.
3. Output: The quantity of — produced at the premises, measured in units of —
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4. Indemnity Period and Time Excess: The period not exceeding the indemnity period
limit stated in the list of machinery and plant insured commencing with the occurrence of
the accident during which the results of the business are affected in consequence of such
accident. Provided always that the insurers are not liable for the amount equivalent to the
rate of gross profit applied to the standard output during the period of time excess (in
terms of days) stated in the policy.
5. Rate of gross Output
(a) Rate of Gross Profit: Rate of Gross Profit per unit earned on the output during the
financial year immediately before the date of damage.
(b) Standard Output: Output during that period in 12 months immediately before the
date of damage which correspond to indemnity period.
(c) Annual Output: The output during 12 months immediately before the date of
damage.
The following memos are attached with the standard policy:
1. MEMO 1 – BENEFITS FROM OTHER PREMISES
If during the indemnity period goods are sold or services are rendered elsewhere than at
the premises for the benefit of the business either by the insured or by others acting on his
behalf, the money paid or payable in respect of such sales or services shall be taken into
account in arriving at the turnover during the indemnity period.
2. MEMO 2 – RELATIVE IMPORTANCE
The term ‘relative importance’ referred to in the list of machinery and plant insured shall be
the percentage effect which a breakdown of a particular machine will have on the total
gross profit, disregarding any loss minimising measures.
If in the event of an accident affecting an insured item of machinery, the percentage of
relative importance stated in the list of machinery and plant insured for this item is lower
than the actual percentage of relative importance subsequently arrived at for the period of
interruption, the company shall only be liable to indemnify the proportion which the
percentage of relative importance stated in the list of machinery and plant insured bears to
the actual percentage.
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3. MEMO 3 – RETURNS OF PREMIUM

If the insured declares in the latest twelve months after the expiry of any policy year that
the gross profit earned during the accounting period of twelve months most nearly
concurrent with any period of insurance as certified by the insured’s auditors was less than
the sum insured thereon, a pro-rata return of premium not exceeding one half of the
premium paid on such sum insured for such period of insurance shall be made in respect
of the difference.
If any accident has occurred giving rise to a claim under this policy, the amount of such
claim shall be added to the revised gross profit as certified by the insured’s auditors before
calculating the proportion of return of premium.
4. MEMO 4 – OVERHAULS
In calculating the loss, due allowance shall be made for the time spent on any overhauls,
inspections or modifications carried out during any period of interruption.
5. MEMO 5 – REINSTATEMENT OF SUM INSURED
For the period following the occurrence of an accident up to the end of the policy period,
the sum insured shall be reinstated by payment of an additional premium on a pro-rata
basis. Such additional premium shall be adjusted against the net claim amount payable
and such premium shall be calculated for that part of the sum insured, which corresponds
to the indemnity paid. The agreed sum insured shall remain unaltered.
Exclusions
The company shall not be liable for any loss resulting from interruption of/or interference
with the business directly or indirectly attributable to any of the following causes:
(i) Willful act or willful neglect or gross negligence of the insured or his responsible
representatives.
(ii) Loss or damage to machinery or other items, which are not listed in the list of
machinery insured even if the consequence of material damage to an item indicated
in the list of machinery insured is involved.
(iii) Loss or damage caused by any faults or defects existing at the time of
commencement of this insurance within the knowledge of the insured or his
responsible representatives whether such faults or defects were known to the
company or not.
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(iv) Shortage, destruction, deterioration and spoilage of/or damage to raw materials,
semi finished or finished products or catalyst or operating media (such as fuel,
lubricating oil, refrigerant, heating media and the like) even if the consequence of
material damage to an item indicated in the list of machinery insured is involved.
(v) Any restrictions on reconstruction or operation imposed by any public authority.
(vi) An extension of the normal repair period for more than 4 weeks on account of-
(a) The inability to secure or delays in securing replacement parts, machines or
technical services.
(b) The inability to carry or delays in repairs.
(c) The prohibition to operate the machinery due to import and/or export customs
& other restrictions or by statutory regulations.
(d) Transport of parts to and from the insured’s premises.
(vii) Alterations improvements or overhauls being made while repairs or replacements of
damaged or destroyed property are being carried out.
(viii) Loss, damage and/or liability caused by or arising, directly or indirectly from or in
consequence of :
(a) War, invasion, act of foreign enemy, etc.
(b) Nuclear reaction, nuclear radiation or radioactive contamination.
General Regulations
1. The insurers should not quote a rate lower than Rs.1.40 even provisionally when
they underwrite new proposals in respect of fertiliser risks.
2. Policies are normally issued on turnover basis. The policies can be issued on
‘output’ basis for loss of profits cover following machinery breakdown and/or boiler
explosion only to manufacturers having single end products. For manufacturers
having multiple end products individual proposals must be submitted to Tariff
Advisory Committee for approval before granting LOP cover on ‘output’ basis.
3. Insurers can extend MLOP Cover on DG Sets subject to adequate re-insurance
support.
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4. With regard to the issuance of MB (LOP) policies in the first year of operation such
proposals will be considered by the committee on case-to-case basis and the rates
will be decided by the committee.
5. Rules for Cancellation: For cancellation of insurance during the currency either
wholly or in part
(a) At the option of the insurer, a pro-rata refund of premium may be allowed for
the unexpired term on demand.
(b) At the insured’s request, refund of premium may be allowed after charging
premium for the time insurance was in force on short period scale as defined
in the All India Fire Tariff subject to the retention of minimum premium by the
insurer.
However, if, a new annual policy replaces the old one, covering identical
equipment/ machines for sum insured not less than the respective sums
insured under the cancelled policy, refund of premium may be allowed on pro-
rata basis subject to retention of minimum premium.
If the risk is insured under short period scale, refund may be calculated at pro-
rata of the short period scale premium provided such cancellation is followed
by an annual policy for sum insured not less than the sum insured under
cancelled policy. Otherwise, retention of premium shall be on short period
scale.
For the sum insured not replaced in the renewed policy after cancellation,
refund must be calculated after charging premium on such sum for the time
insurance was in force on short period scale subject to retention of minimum
premium by the insurer.
For the policy issued or renewed for periods shorter than 12 months, the
premium rate shall be charged as per the short period scales prescribed under
CPM Tariff. The short period scale of rates under CPM Tariff shall also be
followed in respect of cancellation of policies during the currency of the policy
by the insured.
(c) In case of revision of tariff rates/excess, it is not permissible to cancel the
policy and allow a refund of premium whereby an insured pays lower premium
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for an insurance than is payable at the rates applicable at the commencement

of the policy.
6. Increase in Sum Insured: If the sum insured is increased during the currency of the
policy.
(i) Short period scale of rates shall apply to increased amounts.
(ii) If the policy is renewed thereafter for 12 months for an amount not less than
scale of rates and pro-rata rate may be refunded.
7. The Minimum Time Exclusion under LOP Policies is
(i) 14 days for Power Plants (both captive and public), fertilizer plants, petroleum
refineries, petrochemical plants, explosive manufacturing plant.
Insurers may accept 7 days ‘time excess’ for all MLOP proposals for fertilizer
risks with adequate reinsurance support.
(ii) 7 days for all other industries.
Note - The time exclusion for boiler will depend the industry in which it is installed.
8. Rating: Rates under this tariff will be decided at insurers discretion.
9. Rounding off rates: Premium rates shall not be rounded off in case of MLOP
policies.
Conditions
(a) This Policy shall be avoided due to one of the following :
(i) The business be wound up or carried on by a liquidator or receiver or
permanently discontinued.
(ii) The insured’s interest ceases otherwise than by death. In other words it
means, if the insured loses his insurable interest in the subject matter of
insurance.
(iii) Any alteration be made whereby the risk of an accident is increased.
(iv) The retention of standby or spare machinery or any other loss minimising
factors in existence when this insurance was effected be reduced or
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discontinued unless its continuance is admitted by an endorsement signed by

or on behalf of the company.
The insured shall be obliged to keep complete records. All records e.g. inventories,
production and balance sheets for the three preceding years shall be held in safe keeping
or as a precaution against their being simultaneously destroyed the insured shall keep
separate sets of such records.
In the event of a claim being made under this policy not later than thirty days after the
expiry of the indemnity period or within such further time as the company may allow in
writing at his own expense deliver to the company a written statement setting forth
particulars of his claim together with details of all other policies covering the accident or
any part of it or consequential loss of any kind resulting thereof and the insured shall at his
own expense also produce and furnish to the company such books of accounts and other
business books e.g. invoices, balance sheets and other documents, proofs, information,
explanation and other evidence as may reasonably be required by the company for the
purpose of investigating or verifying the claim together with if required - a statutory
declaration of the truth of the claim and of any matters connected therewith.
No claim under this policy shall be payable unless the terms of this condition have been
complied with and in the event of non-compliance therewith in any respect any payment
already made on account of the claims shall be repaid to the company forthwith.
Midterm increase in sum insured
‘If the sum insured is increased during the currency of the policy -
(i) Short period scale of rate shall apply to the increased amount.
(ii) If the policy is renewed thereafter for twelve months, for an amount not less than the
increased total sum insured, the difference of premium between the short period
scale of rates and pro-rata rate, may be refunded, or a new policy for the full
increased sum insured, may be issued, at the tariff rate (annual or short period, as
required) canceling the old insurance and allowing a pro-rata refund for the
unexpired period of the cancelled policy’.
Departmental clause– Applicable when business has separate sections or departments,
each earning a different rate of gross profit.
If the business is conducted in departments, the independent trading results of which are
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ascertainable, the provisions of clauses (a) & (b) of item 1 of the specification shall apply
separately to each department affected by the damage; provided that if the sum insured by
the said item be less than the aggregate of the sum produced by applying the rate of gross
profit provided for each department of the business (whether affected by the accident or
not) to the relative annual output thereof, the amount payable shall be proportionately
reduced.
In no case whatsoever shall the company be liable in respect of any claim under this
policy after the expiry of –
(i) One year from the end of the indemnity period or if later.
(ii) Three months from the date on which payment shall have been made or liability
admitted by the company covering the accident giving rise to the said claim unless
the claim is the subject of pending action or arbitration.
Every notice and other communication required by these conditions must be written or
printed.
Endorsement: Time excess clause is available as endorsement
5.8 Electronic Equipment Insurance

This is an omnibus cover against all risks for electronic equipments. In addition to break
down cover, it provides protection against fire and allied perils, burglary, terrorism etc.
Sum insured
It is a requirement of this insurance that the sum insured shall be equal to the cost of
replacement of the insured by new property of the same kind and same capacity which
shall mean its replacement cost including freight, dues and customs duty, if any, and
erection cost.
The policy covers the following:
a) Material damage.
b) Damage to external Data Media
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5.9 Advance Loss of Profits Insurance (Also known as business

Interruption Insurance)
 Suitability
This policy covers monetary losses due to delayed commissioning of the project as a
result of a loss during construction/erection which is covered under a project insurance
policy (MCE/EAR/CAR).
The policy is suitable for:
(a) The principal who shall be deprived of the anticipated earnings in the event of delay
in commencement of operations and
(b) The financial institutions to the extent of their interest in the project.
 Salient Features
The policy offers cover against loss of anticipated earnings/profits due to the delay in
commissioning of the project following a loss covered under the project insurance policies.
The costs covered are:
1. Loss of gross profits – based on anticipated sales, cost and prices.
2. Loss of gross earnings – sales value of production less consumed stocks, supplies
and services purchased.
3. Increased cost of working – costs involved in minimizing the effects of the delay.
4. Principal and interest – lending institutions’interest in the portion of gross profit.
5. Loss of rent – as a result of premises not being ready to earn rent.
6. Special expenses – costs involved because of delay such as advertisement
campaign etc.
 Benefits
The policy is operational during the whole or part of the preparatory period of a new
venture. In case of any accident or damage during this period which delays the
commencement of trading beyond the starting date, this policy covers loss of trading
income, loan interest and other charges which are payable despite lack of income and
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increase in expenses incurred in reducing or avoiding the delay in startup. The indemnity
period shall be the duration between the dates of actual commencement of insured’s
business and the date of scheduled commencement had there not been a delay.
There is a time excess of 30 days for this policy.
The changed industrial scenario led to the growing demand for insurance of loss of
anticipated earnings, due to delays in commissioning of projects. Foreign financial
institutions have also made the ‘advance loss of profit’ cover an essential condition for
disbursing assistance to Indian clients. It is thus vital for mega projects with substantial
financial involvement to have advance loss of profits cover together with cover for project
during its erection.
6. Engineering Insurance Claims

In case an unfortunate loss as covered in the policy occurs, to get prompt service, the
following actions are to be pursued:
(a) Immediately inform the office concerned over phone and in writing the occurrence of
the claim along with the correct policy number.
(b) Obtain the claim form from the office concerned, fill up the same in all respects and
submit the same in the office.
(c) In case the loss is very large, prompt intimation is required to send a suitable
surveyor to assist in minimizing the loss and quick settlement of claim which helps to
restart the business activity. The Claims officer may also visit the site of loss to have
first-hand information of the loss.
(d) In order to help to prove the claim the surveyor or officer may seek documentary
evidence, such as photocopies of necessary documents and obtain
acknowledgement.
(e) The insured should fully cooperate with the surveyors and insurance officials visiting
the site of loss to examine the cause of loss, to correctly estimate the extent of loss
and to work towards a quick settlement of the loss. They should be helped to take
photographs of the loss and obtain statements of witnesses.
(f) Necessary information, as if uninsured, should be given to the local fire station,
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police authorities and other Civil authorities as per law and local practice. Copies of
their reports should be obtained and handed over to the surveyor or office
(g) Surveyor may also be given copies of licences, permits and certifications etc. in
force to ensure that the operations are conducted as per law and as per the
necessary safety standards.
(h) A copy of the survey report may be handed over to the insured if he so wishes to be
aware of the assessment made.
(i) As soon as the survey report and copies of the document desired by the surveyor /
insurer are complied with the insured, the insured may be in touch with the office for
early disposal of the claim
Claims Examples
1. Equipment Breakdown Claim
Equipments are exposed to unique risks that other property is not. Electrical short
circuits, mechanical forces, overload, control failures are just a few of the causes for
equipment breakdowns. Examining some examples of the kinds of losses that can,
and do occur, offers solid insight into why equipment breakdown insurance is
important coverage for today’s equipment-intensive businesses.
2. Electrical Losses
(a) Office Building
Electrical arcing destroyed three main electrical panels and left an office building
without power. Temporary measures were taken to restore power to tenants –
particularly to an accounting firm that was in the height of its tax season crunch.
Total Loss: Rs. 1,597,389
(b) Apartment Building
An apartment complex's aluminum electrical supply bus burned out, severely
damaging electrical wires and cables. Angry residents had to be relocated.
Equipment Repair Cost: Rs.118,681 Relocation Cost: Rs. 72,152
Total Loss: Rs.190,833
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(c) Furniture Manufacturer

Sawdust in an electrical distribution panel severely damaged the interior of the
panel. Overtime was required to make up lost production.
Repair Cost: Rs. 21,087
Business Interruption: Rs. 14,600
Total Loss: Rs. 35,687
3. Mechanical Losses
(a) Hospital
A turbine generator supplying power to a hospital failed when blades broke and
penetrated the engine.
(b) Printer
A bolt came loose and fell into a high-speed press, damaging the cylinder and gears.
(c) Machine Shop
A power surge from a utility line damaged two computer circuit boards, halting a
metal shearing operation for nearly a week. Materials and workers were sent to
another plant several hundred miles away to meet production deadlines..
Repair Cost: Rs.9,485
Extra Expense: Rs. 42,541
4. Air Conditioning and Refrigeration Losses
(a) Apartment Building
An air conditioning motor burned out in a high-rise, senior citizen's apartment
building. Ninety-plus degree temperatures necessitated setting up four rented "spot
coolers." Overtime was required to get the motor back on line.
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Property Damage: Rs.83,557

Extra Expense: Rs.16,794
(b) Food Processor
An ammonia line ruptured when a compressor crankshaft and its connecting rod
broke. Fresh scallops were contaminated with ammonia. Rental units were needed
while the new compressor was installed.
(c) Medical Clinic
A control failed on a medical clinic's refrigerator, causing the temperature to dive
into single-digit . Drugs, which normally are stored between 36 to 43 degrees, had to
be discarded.
5. Boiler and Pressure Vessel Losses
(a) School
Sediment in a boiler caused a low-water condition that resulted in severe over-firing,
shutting down the boiler – and a school. a rental unit was needed until the damaged
boiler could be replaced.
Property Damage: Rs.98,500
Extra Expense: Rs. 25,164
(b) Manufacturer
A faulty circuit in a water pump caused a fire tube boiler to dry fire. The boiler was
severely damaged.
Church
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A section of a boiler and a steam pipe fitting cracked. Steam damaged the church
organ, choir robes, and public address system.
Total Loss; Rs.34,969
6. Business Equipment and Systems Losses
(a) Municipal Building
A power surge damaged a generator, burned out police radio equipment, printed
circuit boards for a fire alarm system, a small transformer, and small electric motors.
Total Loss: Rs. 90,160
(b) Office Building
Electrical power supply voltage fluctuation caused two telephone system terminal
boards to burn out.
(c) Service Station
A power surge damaged a service station's electronics, including the computerized
diagnostic system, telephone, paging system and the security system.
SUMMARY
• Rapid industrialization has led to increasing use of machines in industry.
• The major thrust is now on the infrastructure development, which in turn is
contributing to the socio-economic development.
• Infrastructure involves huge capital, human resources, and technical expertise.
• These projects are highly exposed to physical and financial losses and Third – party
liability affecting a number of parties such as owner, financial institutions and the
turnkey contractor.
• Engineering insurance covers all risks of all parties.
• The origin of EI dates back to the early part of the Industrial Revolution in the UK,
where frequent explosions of steam boilers involved loss of life and property.
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• The basic principles of insurance are all applicable to engineering insurance as it is

also a contract.
• All Engineering insurance policies take into consideration all the risk exposures of
industrial establishments and have suitable policies to cover these loss exposures at
two stages, namely construction phase and operational phase.
• However, these policies do not cover any loss or damage caused due to fire and
special perils, War and civil wars, Nuclear risks and experimental loss due to over
loading or tests
REVISION QUESTIONS
SECTION – A
1. Which of the losses are not covered by a Boiler Explosion policy
(a) Explosion
(b) Fire
(c) Collapse
(d) Damage of surrounding property
2. “Explosion” does not mean
(a) Sudden and violent tearing apart
(b) Collapse due to external pressure
(c) Bursting apart due to high pressure
(d) Bursting of the boiler due to chemical reaction
3. A boiler explosion policy specifically covers losses caused to
(a) Damage of surrounding property
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(b) Third party personal liability

(c) Third party property damage
(d) Losses not caused by inherent defects
(e) All the above
4. Warranties in a boiler explosion policy are inserted to ensure
(a) Safety of the boilers
(b) Sound maintenance of the equipment
(c) Certifications by authorized persons
(d) To check fraudulent claims
(e) All the above
5. At the time of loss, if the value of the pressure plant is greater than the sum
insured, the obligation of the insurer is to pay for the
(a) Total losses (b) Deny the claim
(c) Pay rateable share of loss (d) Pay only half the loss
6. The Boiler explosion policy cannot be issued on
(a) Agreed value basis (b) Market value basis
(c) Book value basis (d) Replacement value basis
7. Refund of premium during the standstill period is not permissible when the
loss is caused by
(a) Shortage of raw-materials
(b) Breakdown of plant and machinery
(c) Workers strike
(d) Lack of provision of standby equipment
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8. The Machinery breakdown policy covers any damage caused to machinery

(a) At work (b) At rest
(c) While dismantling for repairs (d) Shifting or re-erection
(e) All the above
9. MB policies cannot be issued on the
(a) First loss basis (b) With a bonus clause
(c) Without excess clause (d) For plants located outside India
(e) All the above
10. Deductible Franchise / Excess is the amount out of each claim by the
(a) Insured (b) Agent
(c) Broker (d) Insurer
11. Refund of premium is not permissible in a Machinery breakdown policy in case
of
(a) Lockout period
(b) While at work
(c) While at rest
(d) Standstill period due to shortage of fuel & raw material
12. The Machinery loss of profits policy covers loss of gross profit only due to
(a) Increase in output (b) Decrease in output
(c) Decrease in cost of working (d) Lockout period
13. The minimum time exclusion period for LOP policies in case of power plants is
(c) 30 days (d) 45 days
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14. The basis of total loss settlement in an EAR policy is payable on the basis of
(a) Actual value less salvage (b) Value decided by IRDA
(c) None of the above (d) All of the above
15. Which of the following is not Act of God perils
(a) Earthquake (b) Flood
(c) Negligence (d) Storm/ Tempest
16. Project Policies are
(a) All Risk (b) Named Perils
(c) Consequential Loss (d) Agreed value
17. Big Project Insurance Business is U/W on the basis of
(a) Long tail liability (b) Loss Reserve
(c) Profit Margin (d) Probable Maximum Loss
18. Percentage of obligatory cession to GIC is
(a) 30 (b) 20
(c) 05 (d) 10
19. CPM is
(a) Coverage all risk policy with inclusion of breakdown
(b) All risk policy with exclusion of breakdown
(c) Self propelled machineries on public/Private Road
20. FOES is an extension under:
(a) CPM (b) CAR
(c) DOS (Potatoes) (d) MBD
21. DSU stands for
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(a) Delay in startup insurance (b) Derivatives stock units

(c) Dead stock under insurance (d) Diluted stock undertaking
22. A machine worth Rs. 40,000/- insured for Rs. 30,000/- under MBD Policy. It was
damaged due to breakdown fire and the amount assessed in Rs. 16,000/- . The
claim payable is:
(a) Rs. 30,000/- (b) Rs. 12,000/-
(c) Rs. 16,000/- (d) Rs. 40,000/-
23. Material damage proviso under the MLOP Policy loss (with MBD Insurance)
means:
(a) Claims admissible under MBD Policy (b) Occurrence of the loss
(c) Loss discovered during stock taking (d) Loss of goodwill
24. In an LOP policy, Auditor fees is
(a) An Extension (b) A built in cover
(c) A part of standing charges (d) Not to be covered
25. Fire at supplier’s premises can be a part of
(a) Material Damage Fire policy (b) An LOP policy
(c) Is a standalone policy (d) Has no relevance
Answers
1. (b) 2. (b) 3. (e) 4. (e) 5. (c) 6. (a) 7. (c) 8. (e) 9. (e) 10. (a)
11. (a) 12. (b) 13. (b) 14. (a) 15. (c) 16. (a) 17. (d) 18. (c) 19. (b) 20. (c)
21. (a) 22. (b) 23. (a) 24. (a) 25. (b)
SECTION – B
1. Define the scope and aim of ‘engineering insurance’
Ans: Engineering Insurance schemes aim at protecting business houses from
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eventualities that could give rise to a loss and disrupt their day-to-day functioning.
Such losses arise due to the failure of machineries, explosion of boilers and
breakdown of computers and sophisticated electronic equipment. A major
breakdown due to mechanical failure could also result in consequential loss of
profits. All these risks can be covered under various engineering policies.
Engineering Insurance covers are available at the time of putting up of a factory or
even during an expansion. These insurance covers are the Storage-cum-erection
policies for industrial risks, the Contractors all risk policy for civil works and the
Contractors plant & machinery policy, which takes of the Contractors Insurance
requirements. The Advance loss of profits policy is a sophisticated insurance cover,
which takes care of losses arising out of delay in completion of a project well beyond
the stipulated period where the delay is caused by an insured peril.
2. Define the term ‘explosion’ and explain the scope of coverage in a Boiler
explosion policy
Ans: The term ‘Explosion’ refers to the sudden and violent rending or tearing apart of the
permanent structure of a boiler or pressure plant or any part or parts thereof by force
of internal steam gas or fluid pressure causing bodily displacement of the said
structure and accompanied by the forcible ejection of its contents.
The BP policy explicitly covers the following:
1. Damage (other than by fire) to the boilers and/or other pressure plant or
surrounding property described in the schedule.
2. Liability arising due to death of or bodily injury to any person provided he is
not employed or under apprenticeship with the insured.
3. Liability arising from damage to any property whether the insured is
responsible for it or not
3. State the general exceptions of Boiler Explosion policy.
Ans: The following losses are not covered under the policy:
 Damages arising directly or indirectly from fire or explosion or collapse or any
other cause.
 Damages caused by war, hostilities or war like operations, natural calamities,
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etc. Similarly, damages from nuclear reaction, nuclear radiation or radioactive

contamination are excluded.
 Loss resulting from any experiment requiring overloading or abnormal
conditions.
 Defects that are gradually developing and would require repairs at some future
date are not covered under this policy.
 Wearing away or wastage of materials of any part of the boiler or failure of
individual tube (if there are multiple tubes in the boiler).
 Damages due to negligence.
 Consequential losses
 Damages due to known flaws
4. Discuss the rules of rating for mid-term increase or decrease of sum insured.
Ans: If the sum insured is increased during the currency of the policy,
(a) Short period scale of rates shall apply to increased amounts.
(b) If the policy is renewed thereafter for 12 months for an amount not less than
scale of rate and pro-rata rate may be refunded.
(c) If the sum insured is decreased during the currency of the policy, short period
scale of rates shall apply on the reduced sum insured.
5. What are the facts to be disclosed in a proposal form of a boiler explosion
policy?
Ans: The material facts that need to be disclosed in a proposal form include the following:
• Total sum insured
• Details of boiler and pressure plants
• Details of surrounding property of the insured including property held in trust or
commission
• Legal liabilities to third parties
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• On payment of additional premium, does the insured wish to cover express

freight, overtime and holiday rates of wages, owner’s surrounding property and
third party liability? If yes provide limits of indemnity.
• State how boiler is fired, e.g. oil, gas, coal or pulverised fuel.
• What is the maximum load on a safety valve per square per inch?
• What is the working pressure?
6. Discuss the scope of coverage of a Machinery breakdown insurance policy
Ans: The policy covers the damage caused to the machinery whether they are at work or
at rest or even when dismantled for repairing or overhauling. Similarly damages
caused during shifting them from one place to another or subsequent re-erection are
also covered.
7. What is the basis of indemnity under an MB policy?
Ans: The basis of indemnity is as follows:
• In cases where damage to an insured item can be repaired, the company will
pay expenses necessarily incurred to restore the damaged machine to its
former state of serviceability plus the cost of dismantling and re-erection
incurred for the purpose of effecting the repairs as well as ordinary freight to
and from a repair shop, customs duties if any, to the extent such expenses
have been included in the sum insured.
• No deduction shall be made for depreciation in respect of parts replaced
except for (i) wear and tear parts and (ii) parts for which manufacturers have
specified a fixed life for use and the like but the value of any salvage will be
taken into account.
• In cases where an insured item is destroyed, the company will pay the actual
value of the item immediately before the occurrence of the loss including costs
for ordinary freight erection and customs duties if any, provided such
expenses have been included in the sum insured, and such actual value is to
be calculated by deducting proper depreciation from the replacement value of
the item.
• Any extra charges incurred for overtime, night-work, work on public holidays,
express freight are covered by this insurance only if especially agreed to in
writing.
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• The cost of any provisional repairs will be borne by the company if such
repairs constitute part of the final repairs and do not increase the total repair
expenses.
8. What is the main aim of a Loss of profits insurance policy?
Ans: Under this policy the company makes good the losses arising from unforeseen and
sudden damages to any machinery described in the schedule, during the period of
policy, on the basis of the following requirements:
• The liability of company for claims remains within the limit specified in the
schedule.
• The accident should happen during period specified in the policy and should
be covered by standard machinery insurance policy or boiler & pressure plant
insurance policy.
• The terms and conditions of the policy have been fulfilled.
• The statements and answers in the proposal form are true.
The cover provided under this policy shall be limited to loss of gross profit due to
(a) Reduction in output and
(b) Increase in cost of working and the amount payable as indemnity thereunder
shall be
o In respect of reduction in output
o In respect of increase in cost of working
The reduction in fixed charges if any during the period of business is disrupted, shall
be deducted from the compensation amount.
9. What is the scope of coverage under the Industrial All Risk Insurance?
Ans: Industrial all risk insurance is available to all major industrial units (other than
petrochemical risks) manufacturing as well as storage, having all sum insured of
Rs.100 crores and above, in one or more locations in India. The policy covers
damages that are covered under:
(i) Fire and special perils policy.
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(ii) Burglary insurance policy.

(iii) Machinery breakdown/ boiler explosion/ electronic equipment policy.
(iv) Business interruption due to fire and special perils policy.
The policy excludes the following:
(i) Inherent vice, defects, deteriorations and normal wear and tear.
(ii) Faulty material/ workmanship/ defective design and material.
(iii) Pollution, contamination, shrinkage, rust, corrosion, scratching and
temperature changes.
(iv) Collapse or cracking of buildings.
(v) Willful act, negligence, war and nuclear risks.
(vi) Larceny, fraud, dishonesty, inventory losses, shortage on delivery.
10. Discuss the comprehensive cover under the CAR policy
Ans. The CAR policy provides the following covers for losses due to:
(a) Collapse, collusion, impact.
(b) All the accidental events during construction like dropping or falling, defective
workmanship and material, lack of skill, negligence, malicious act and human
error (handling risks).
(c) Lack of skill, negligence, malicious and terrorist damage (risks of human
element).
(d) Theft and burglary, fire / lightning (location risks).
(e) Failure of safety devices, leakage of electricity, failure of insulation, short
circuit, explosion, etc. (operational risks).
(f) Natural calamities like flood and earthquake, inundation, etc.
11. How is the premium for a CAR policy determined?
Ans. The factors that affect the risk associated with the project are considered while
working out the premium. They include:
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1. nature of the project

2. project cost
3. project period
4. Geographic location
5. period of testing
If the sum insured in the project exceeds Rs.100 crores with the option of higher
deductibles, then a discount in premium is allowed. The discount is also given if the
project site is protected against the fire. Projects witha period of more than one year
are allowed to pay the premium in instalments. Where projects get completed before
the estimated time period, the premium for the balance period of insurance may be
refunded.
12. How is the EAR Policy different from the CAR Policy?
Ans. Erection all risk insurance is similar in its nature to the contractors all risk insurance.
It provides cover for the erection of the machinery. It is a comprehensive insurance
policy that covers all the risks right from the beginning when the materials are
unloaded at the project site till the time project is tested, commissioned and handed
over. The erection all risk policy is appropriate for projects involving ‘standing
structures.’ Such structures are exposed to various risks during the construction
period like the damage of the plant and the machinery or the supporting structures.
13. How is Machinery Insurance Policy different from Machinery Loss of Profits
policy?
Ans. Machinery (breakdown) insurance policy covers all the costs involved in bringing the
machinery back to pre-breakdown state. Machinery Insurance Policy covers almost
all the stationary capital equipment. The policy covers all sorts of events that can
cause breakdown of the machinery. All accidental, electrical, mechanical
breakdowns due to internal causes, external causes, operational deficiencies or
human errors are covered under the policy. The Machinery Loss of Profits Insurance
primarily aims at covering the consequential losses, say, due to simultaneous failure
of standby equipment. Machinery loss of profits insurance helps to make good such
losses. It minimises the effects of the consequential losses during the interruption
period and helps the entrepreneur to restore the business operations to normalcy.
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The policy covers the losses due to

1. Decrease in turnover
2. Rise in cost of working
The losses as a result of reduced turnover because of the damaged machinery and
the additional expenditure necessarily incurred for avoiding or reducing the fall in
turnover for the interruption period is compensated under this policy.
14. Does a Boiler explosion policy cover loss due to fire?
Ans. This policy covers loss or damage to steam generating equipments like boilers and
other fired and unfired pressure vessels against the risk of explosion and collapse
due to internal pressures that are inherent in all such equipments. The policy covers
the damage caused to the boilers and other pressure plant due to explosion (not due
to fire). For additional premium, damages to the surrounding property of the insured,
liability on account of damage to the property not belonging to the insured, can also
be insured. So a businessperson should avail this policy to be fully secured against
the losses due to fire and explosions.
15. How is a burglary policy beneficial for a commercial business unit?
Ans: The policy covers the following:
• Stock in trade
• Goods held in trust or on commission
• Fixtures and fittings, plant and machinery that is movable property
The policy offers protection against burglary and housebreaking. Forceful entry is
the chief characteristic of burglary. Other crime perils like theft, larceny, robbery, etc.
are not covered under this policy.
The policy requires proper care of the insured property. If the cash in the safe is
insured, the safe should be locked and keys of the lock should not lie anywhere near
the safe.
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SECTION – C
Case Studies
House damaged in fire
Mr. Kumar bought a large house that needed major restoration. While this work was taking
place there was a serious fire, thought to have been caused by a blowtorch used by one of
the builders. The estimate for repairing the damage was Rs. 7,50,000 and the building
contractor, Mr. Bhushan, put in a claim under his contractors' all-risks commercial
insurance policy for liabilities to third parties.
Mr. Bhushan was extremely surprised when the insurer rejected the claim. It said he had
breached a specific policy condition regarding the preparations necessary during the use
of heat in building works. The insurer said that it could also dismiss the claim on the
grounds of the builder's carelessness.
Mr. Bhushan complained to the insurer that the specific policy condition that he had
breached had not been part of his insurance contract, so he could not be bound by it. The
insurer disagreed. After a lengthy dispute about several slightly different versions of the
policy condition which applied in this case, and about the precise legal interpretation of
these different versions, Mr. Bhunshan referred the complaint to the Ombudsman.
Complaint upheld
The Ombusdman concluded that the policy condition could properly be considered a part
of Mr Bhushan's insurance contract. The difference in the wording of the various versions
of the policy condition were immaterial as far as this specific dispute was concerned. That
was because none of the versions explained exactly what policyholders were expected to
do - over and above taking standard fire-prevention precautions - in order to comply with
the policy condition. The Ombudsmen were satisfied from the evidence that
Mr Bhushan had ensured his staff had taken all standard precautions. There was nothing
to substantiate the insurer's view that it could also reject the claim on the grounds of the
contractor's carelessness. So it was held that the insurer should deal with the claim. It
agreed that the insurer it should pay the full amount due, even if this came to more than
Rs.100,000 - the maximum award the Ombusdman have the power to award in any such
individual case.
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CASE STUDIES OF ENVIRONMENTAL & CONTRACTOR CLAIMS

Environmental concerns are daily becoming headline news all over North America,
and the writer felt it timely to research some of the claims that have been settled in
recent years. We have briefly set out the details of some of these claims and their
settlement amounts. We have only outlined some of the typical environmental
exposures common to this class of business and it is not an all- encompassing list.
Phase 1 and Phase 2 Assessment Claim Samples
1. A Bank considering foreclosure on a property, hired a consultant to perform a
modified Phase 1 Assessment. The Consultant did not find any evidence of visual
contamination or an Underground Storage Tank (UTS). Eventually the bank
forecosed on the property. The Claimant entered into a contract to sell the property.
The prospective purchaser informed the Claimant that an UTS was located on the
property and requested that it be removed. At the time of the survey, the consultant
did not observe any vent pipe on stained soils because the area was covered with
debris. The Claimant is seeking a total of $135,000 in damages, of which $20,000 is
associated with the removal of the UTS and soil.
2. A Consultant performed a modified Phase 1 Assessment and determined the
property; the property being considered for purchase contained minor groundwater
contamination. During construction of the newly purchased property, the site
contractor discovered extensive contamination, which resulted in significant
remediation costs. The Consultant is now being sued for sums in excess of
$1,000,000.
3. A Consultants was retained to investigate conditions at a facility. The Claimant
alleged that the Consultant's investigation was inadequate and failed to raise or
investigate the possibility of an off-site source being the cause or potential cause of
contamination on the property. The facility further alleged that an extensive and
expensive groundwater treatment system, which the consultant recommended, was
indeed unnecessary. The resulting settlement was $250,000.
Utility Contractor Environmental Claims and Summary of Exposures
1. Contaminated Soil: A Utility Contractor unknowingly spread petroleum
contaminated soil across a project site. The Contractor was named in the lawsuit for
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exacerbating the extent of contamination. After lengthy deliberations, the Contractor

was found responsible for $250,000 in cleanup and legal and defense costs.
2. Trench Troubles: A Utility Contractor stockpiled soil on an adjacent property. The
scope of the project included excavation of 357 feet of trench for one week at a cost
of roughly $30,000. Prior to completion of the work, Dioxin was discovered in the
soil. The Environmental Protection Agency investigated the situation and issued an
administrative order finding the Contractor and their Client responsible for
contamination of the adjacent property. The Government mandated cleanup costs
exceeded $250,000.
3. Backhoe Hits Gas Line: A Utility Contractor was working on a $500,000
rehabilitation project. During excavation of a trench, the bucket of the backhoe hit a
natural gas line. This forced evacuation of the immediate area, including a small
strip mall. Store Owners filed for loss of business claims against the Contractor,
which exceeded $75,000. The Contractor's general liability Insurer denied the claims
based on their policy's Total Pollution Exclusion.
4. Contractual Liability: Whilst a Utility Contractor was installing new overhead
electrical lines, his subcontractor was sinking the new utility poles. The
subcontractor hit an underground sewer line with an auger. Through contractual
liability, the Utility Contractor was responsible for the actions of the subcontractor.
The cleanup of spilled sewage and repair of the sewer line amounted to $190,000.
5. An Example of a Denied Claim: A Utility Contractor was contracted to control the
vegetation on a right of way for a power line. The Contractor applied a herbicide to
reduce the vegetation. After a rain storm, the herbicide was washed into the
adjoining farm land. The farmer's crops and land were severely damaged. The
farmer filed a suit alleging $350,000 in damages. The Contractor claimed against his
general Liability policy. The claim however, was denied, due to the Absolute
Pollution Exclusion under his policy and as the herbicide was brought on-site by the
Contractor.
Summarizing Common Environmental Exposures for Utility Contractors
Operational Exposures:
• Completed operation exposures from improper line hook-up
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• Excavation through and spreading of unknown pre-existing contaminated soil

• Impacting underground utility lines and other underground structures and their
resultant business exposure losses
• Overuse of herbicides that could burn out vegetation
• Impacting groundwater from drilling and excavation work (cross contamination of
aquifers, etc.)
Owned Premises Exposures (maintenance garages, fabrication shops, etc.):
• Leaking underground/aboveground storage tanks
• Residual contamination from minor spills of oil, fuels, lubricants, etc. and poor
housekeeping
• Surface contamination from fuels and lubricants stored improperly (without
secondary containment)
• Improper disposal of waste materials
• Unidentified, pre-existing contamination from past owners of the premises
Transportation Exposures:
• Inadvertent transportation and subsequent disposal of unknown contaminated soil
• Spill of asphalt or cement during transportation
• Resulting pollution from collisions with various structures (pole mounted
transformers, aboveground tanks, etc.)
• Fuel/oil spills/leaks from vandalism
Mechanical Contractor Environmental Claims and Summary of Exposures
1. Mold Growth in HVAC System: A Mechanical Contractor installed a heating,
ventilation, and air conditioning system in a new commercial office building. After
three years, mold and mildew growth caused the release of airborne bacteria
throughout the entire building resulting in poor indoor air quality. Claims for bodily
injury and loss of property use exceeded $500,000. The Contractor was also
responsible for decontaminating the HVAC system.
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2. Fungus Infects Patients: A Mechanical Contractor removed ductwork from a

hospital's HVAC system. It was later determined that the ductwork was home to a
dangerous fungus. The dismantling activities and the on-site storage of dismantled
ductwork caused the fungus to spread into the hospital. Patients became infected
with the fungus; some were even critically infected. The Contractor was found liable
for the spread of the fungus and faced bodily injury and property damage claims that
exceeded $1,000,000.
3. Dust from Lead Removal Clogs HVAC: A Mechanical Contractor removed lead
based paint from a commercial building. The Contractor isolated the work areas with
containment, but the HVAC system was not disconnected. Dust generated from the
lead removal operations clogged the heating coils in the building's HVAC system.
The Contractor was found liable for replacing the HVAC system, as well as business
interruption claims that amounted to $150,000.
4. Fuel Release: Whilst a Mechanical Contractor was repairing leaks on a fuel line at a
shipyard, an unknown party opened the valve that separated the inactive lines under
repair from the active lines. Fuel began to flow through the lines under repair,
releasing 3.500 gallons of gasoline. The cost to clean up soils and groundwater
contaminated by petroleum hydrocarbons was $500,000.
5. Mercury Spill: A Mechanical Contractor was dismantling laboratory piping at a
university when he inadvertently spilled mercury. The result was building wide
mercury contamination. The Contractor spent over $350,000 to clean up the spill.
Summarizing Environmental Exposures for Mechanical Contractors
Operational Exposures
• Completed operations exposures including incomplete HVAC system hook-ups,
improper system construction or unbalanced systems causing condensation and air
quality problems
• Fumes, emissions and spills from chemicals utilized during construction )finishers,
sealants)
• Heating, ventilation, air conditioning (HVAC) construction or maintenance errors
causing release of airborne bacteria or fungus
• Incidental exposure from asbestos-containing build materials
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• Lead paint on pre-existing structures (welding etc.)

• Lubricant oils and other fluids from field equipment
• Release of oils/fuels as a result of vandalism
• Sprinkler system error or shut-off allowing potential toxic fire to spread
Owned Premises Exposures (fabrication shops, etc.)
Soil/groundwater contamination from:
• Leaking underground/aboveground storage tanks
• Residual contamination from minor spills of oil, fuel, lubricants, etc. and poor
housekeeping
• Surface contamination from fuels and lubricants stored improperly without second
containment
• Improper disposal of waste materials
• Unidentified, pre-existing contamination from past owners of premises
Transportation Exposures
• Inadvertent transportation and subsequent disposal of unknown contaminated
materials
• Resulting pollution from collisions with various structures (pole mounted
transformers, aboveground tanks, etc.)
• Fuel/oil spills/leaks from vandalism
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CHAPTER – 6
HEALTH INSURANCE
1. Introduction
2. Indian Health Insurance Portfolio – Its Experience & Exposure
3. Healthcare Financing Models
4. Challenges facing Health Financing Schemes
5. Types of Health Coverage
6. Health Insurance Exclusively For Senior Citizens
7. Health Insurance Portability
8. Health Risks
9. Importance of Health Insurance
10. Health Insurance Policies offered in America
11. Health Insurance Policies In India
12. Health Insurance: Governing Legislations In India
13. Recommendations of Various Reforms Committees
14. IRDAI’s Health Insurance Regulations
15. Recognizing Health Insurance as a class of business by IRDAI

16. IRDAI Health Insurance & Standardization Regulations 2016
17. IRDAI Protection of Policyholder’s (Health Insurance) Guidelines, 2017
18. Summary
19. Questions
After completion of the Chapter, the Student should be able to
• Explain the need and importance of health insurance in today’s world
• Describe the various financing models of health care and health care financing
• Discuss the scope and coverage of health insurance policies
• Evaluate the various provisions and guidelines of IRDAI for health insurance
• Describe the available health insurance policies in America and India
• Discuss the recommendations of various reforms committees on health
insurance
• Explain the latest guidelines on health insurance standardization of IRDAI
1. Introduction
World Health Organisation (WHO) in its preamble has defined Health as “a state of
complete physical, mental and social well-being and not merely absence of disease or
infirmity”. As per the Declaration of Universal Rights 1948, health is recognised as one of
the fundamental human rights. It is an essential component of human and social
development as well as of a nation’s growth and stability.
Definition of Health Insurance may be “The Contract to provide sickness benefit or
medical/surgical or hospital expense benefit - as inpatient or outpatient on indemnity or re-
imbursement basis, pre-paid, hospital or other plan basis including assured benefits &
long term care”. Health Insurance, like other property & casualty insurance is a contract
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HEALTH INSURANCE
between the Insurer and the insured. It draws two parties together based on mutual
consent in the form of a proposal by customer & fulfils the mandatory elements like offer &
acceptance, consideration, capacity to contract, legality of form etc. The policy is the
evidence of the contract. Insurance contracts are different from other contracts as the
customer may never see the contract till he receives the policy. While other contracts are
based on caveat emptor (let the buyer beware), the rule is modified in insurance to the
principle of good faith (Uberima Fides) from both sides. Health insurance like other
insurances is governed by the principles of insurance & violation of the principles results in
insurer deciding to avoid liability.
Health Insurance is an ideal mechanism for protecting an individual’s earnings by
transferring the risk to the insurer. A properly managed health insurance program would
not only protect the finances of the individual but also ensure wellness by providing access
to preventive health care. Claim outgo is being funded from either reserves or cross-
subsidized by other classes of insurance business like fire and engineering. Life insurers
also market health insurance which is mostly in the form of riders or long term benefit
policies. There are very few stand-alone health insurance products in the life sector.
Health insurance continues to be one of the most dynamic & fastest growing sectors.
Health insurance portfolio has grown on an average of 20% during the last few years. It is
estimated that in coming 6 – 7 years it might overtake motor insurance portfolio. Research
and innovation has resulted in developing the marketed products that cover maternity
benefits, cash less facility, Cumulative Bonus, restoration benefits, covering critical illness
riders, top-up plans, senior citizen plans, multiplier benefits, OPD coverage, life-long
renewal etc. Health Insurance in India began with the ESI Act, 1948 and it provided for
both cash and medical benefits. The ESIS was soon followed by a scheme for Central
Government employees, the Central Government Health Scheme (CGHS).The first serious
attempt to standardize the terms and conditions of health insurance made by the GIC is
known as the “Mediclaim” Policy.
The insurance industry also innovated and launched certain other health insurance related
products for lower socio-economic groups (Universal Health Scheme). From 2008 onwards
Union Government has introduced RSBY Policy for BPL Families for all over the India.
Hon’ble President of India Sri Pronab Mukherjee has expressed in Joint Session of
Parliament about the urgency for tightening Health Insurance & Pension safety nets. At a
recent meeting on Health Reforms where the Prime Minister was present the format of
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Health Insurance for all Indian Citizens, setting up Medical Colleges in each District & 3
yrs B.Sc. Course in Community Health were discussed.
A High power meeting was conducted by PM Mr. Narendra Modi on health reforms where
a decision was taken for health insurance coverage for all Indian citizens by opening new
medical colleges in each District. Three years B.Sc. course in community health services
is likely to be introduced. Finance Minister Sri Arun Jeitley expressed the need for a
National Policy on Health as well as reforms in Health Insurance. Dr. Harsh Vardhan, as
the Health Minister, offered the first glimpse into BJP Govt’s ambitious UHA Scheme for
Health Insurance component including Diagnostics & availability of 50 essential drugs.
Union health Ministry is eager to set up E-health regulator to regulate health care
providers through Electronic Health Record guidelines (EHR). With the help of ICT
(Information & Communication Technology) adoption it is expected to archive remote
consultation, diagnosis & treatment through Telemedicine.
2. Indian Health Insurance Portfolio – Its Experience &

Exposure
Health insurance can be defined in very slender sense where individual and group of
persons purchase in advance health coverage by paying a fee called premium. But it can
be also defined broadly by including all financing arrangements where consumers can
avoid or reduce their expenditures at the time of use of services. Organisation of
Economic Co-operation and Development (OECD) had defined Health Insurance as- “a
way to distribute the financial risk associated with the variation of individual’s health care
expenditures by pooling costs over time and over people.”
According to the Insurance Laws (Amendment) Bill, 2015, the minimum capital investment
in health insurance sector has been increased to Rs 100 crore, to ensure that only serious
players are present in the sector. The amendment Act has also expanded the definition of
health insurance business by including travel and personal accident cover. This would
result in further growth of the health sector, which is one of the most under-insured
segments in India. Thus the scope of the health insurance policy has increased as it
defines health insurance as “contracts which provide for sickness or medical, surgical or
hospital expense benefits whether in-patient or out-patient travel and personal accident
cover.”
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HEALTH INSURANCE
Currently India spends about 6.1% of GDP on health. Private Health Care expenditure is
around 75% or 4.8% GDP and most of the rest (i.e. 1.3% of GDP) is Government Funding.
Most of the public funding is for preventive, promotive and primary care programmes while
private expenditure is largely for curative care. Over the period the private health care
expenditure has grown at the rate of around 12.84% per annum and for each per cent
increase in per capita income the private health care expenditure has increased by1.47%.
Number of private doctors and private clinical facilities are also expanding exponentially.
3. Healthcare Financing Models

Healthcare Financing Models (Worldwide) may be divided into following types:
1. Government Taxes and Revenues - Prime example is National Health Services of
UK
2. Social Health Insurance- This is an employment based model, where employer and
employee pay regular contribution to a common fund for healthcare. e.g. - ESI
scheme.
3. Commercial Health Insurance - taken by individuals to cover their expenses towards
healthcare needs
4. Out of pocket expenses - Worldwide average is 18% whereas in India it is around
70%
4. Challenges Facing Health Financing Schemes

The Indian health financing scene raises a number of challenges such as -
1. Increasing health care costs;
2. High financial burden on poor eroding their incomes;
3. Increasing burden of new diseases and health risks;
4. Neglect of preventive, and primary care and public health functions due to
underfunding of the Government Health Care.
5. In view of all these, health financing options becomes critical and health insurance is
considered one of the main financing mechanisms to overcome the problems of
ever-increasing health care costs.
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6. 77.5% of total expenditure for health care costs are paid by individuals or
households. (WHO Report 2005).
7. Health insurance is the best mechanism to finance healthcare.
8. Total Health Expenditure represented 6.1% of India’s GDP – 4.8% of it is share of
private expenditure and a mere 1.3% of GDP is public expenditure. Of the 4.8%
private expenditure, 98.5% are out of pocket spending (WHO Report 2002). For the
year 2015-16, Total Health Expenditure (THE) for India is estimated at Rs. 5,28,484
crores (3.84% of GDP and Rs. 4116 per capita).
9. Household’s Out of Pocket Expenditure on health (OOPE) is Rs. 3,20,211crores
(60.6% of THE, 2.3% of GDP, Rs. 2,494 per capita) Private Health Insurance
expenditure is Rs. 22013 crores (4.1% of THE). Of the Current Health Expenditures,
Union Government share is Rs. 38416 crores (7.8%) and the State Government’s
share Rs. 75785 crores (15.3%). Local bodies’ share is Rs. 3808 crores (0.8%),
Households share (including insurance contributions) about Rs. 3,42,257crores
(69%, OOPE being 64.7%). Contribution by enterprises (including insurance
contributions) is Rs. 23,691 crores (4.8%) and NGOs is Rs. 7,708 crores (1.6%).
External/donor funding contributes to about Rs. 3,525 crores (0.7%). (National
Health Accounts Report, 2018)
5. Types of Health Coverage

Section (6) (c) of the Insurance Act 1938, defines health insurance business as ‘effecting
of contracts which provide for sickness benefits or medical, surgical or hospital expense
benefits, whether in-patient or out-patient, travel cover and personal accident cover'. It is a
milestone for the Indian Insurance Business and to all the stakeholders to recognize
health insurance as a standalone class.
Health insurance rightly provides timely and affordable medical help. But unfortunately not
all those who need are able to take this insurance cover. The reasons could be many,
including high premiums, applicability of too many conditions and a host of exclusions.
Health insurance can be seen as a weapon of social and economic empowerment of the
poor.
A systematic plan for financing medical expenses is an important and integral part of a risk
management plan. With rising health care costs it is no longer possible for an individual to
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HEALTH INSURANCE
meet the heavy cost of treatment involving hospitalisation. In the US as much as 47% of
health care expenses are met by the Government through medical benefit schemes
administered by it known as Medicare and Medicaid. While 19% of the expenditure is
taken care of by own resources, 35% of health care expenditure comes from private
insurance companies through various health insurance policies sold by them.
In India, health spend from own resources is 75% and out of the balance 25%, the share
of Central Govt. is 5.2%, States 15.2%, Employers and others 3.3% and Local Govt. and
donors 1.3%. From this, it is clear that there is a vast scope for Health Insurance in India.
Health insurance can be organized either on private or public basis - for individuals and
families against uncertain events. In developing countries, the potential for expanding
health care sector through government financing is very limited because of a very narrow
tax base. In such a situation, health care financing by individuals and families who can
afford, goes a long way in reducing the burden of the government.
Health insurance as a mechanism is already widespread in the developing countries. The
market for health insurance is growing both in terms of awareness and necessity levels.
Health insurance can be financed and organized in a number of ways. It can be purchased
by an individual, or by groups consisting of the self – employed, or retired persons, or
persons between jobs, part-time, temporary, or contract workers not covered by their
employers.
The reasons for rise in health care costs across the globe are :
• Increase in medical treatment costs.
• Technological advancements in medical equipment
• High labour costs
• Corporatisation and the increasing overheads
Some important products in Indian Health Insurance Sector which are now existing in the
market apart from the Standalone ‘Mediclaim” policies being issued by the General
Insurers in India are the following:
1. Retail, wholesale/group, Government & Micro schemes, Overseas travel;
2. Indemnity & Benefit Policies;
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3. Variants – Individual/ Floater/ Top up/ Hospital cash/ CI/ Disease specific like DM/
HIV/ Segment specific like students, elders, travel, micro health, BPL, RSBY, etc.
4. Ashadeep Plan or Jeevan Asha Plan by Life Insurance Corporation of India (LICI),
Overseas Mediclaim Policy, Cancer Insurance Policy, Bhavishya Arogya Policy,
Dreaded Disease Policy .
6. Health Insurance Exclusively For Senior Citizens

IRDAI has issued the following instructions on health insurance for senior citizens:
(i) Any proposal for health insurance of senior citizens which are denied on any ground
should be made in writing with reasons.
(ii) The premium charged for health insurance products catering to the needs of senior
citizens should be fair, justified transparent and duly disclosed upfront.
(iii) Insurers should devise mechanisms to reward policyholders for early entry and
continued renewals with the same insurer.
(iv) 4.Where TPAs are used by insurers, policyholders shall be given an option to seek a
change of TPA which could be exercised within 30 days before the renewal date of
the policy and such changed TPA would be allocated by the insurer from amongst
TPAs empanelled by the insurer for this purpose.
(v) Each instance of delay in issue of identity cards to policyholders beyond 30 days
from issue of policy may entail a penalty being levied on the concerned insurer.
(vi) Insurers will reimburse at least 50% of the cost incurred by the insured in pre-
insurance medical examination in case where the risk is accepted in addition,
insurers will also enlist for empanelment as the case may be.
7. Health Insurance Portability

IRDAI has mandated for implementation of portability of health insurance policies w.e.f.
1.10.2011 which has the following aspects:-
Portability means the right accorded to an individual health insurance policy holder to
transfer the credit gained by the insured for pre-existing conditions and time bound
exclusions in the following cases:-
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HEALTH INSURANCE
(a) If the policy holder chooses to switch over from one Insurance Company to another,
or
(b) If the policy holder switches from one plan/policy to another plan/policy of the same
Company provided the previous policy has been maintained without any break (A
break in the policy for the purpose of portability occurs when the premium due on a
given policy is not paid on or before the premium renewal date or within 30 days
thereof).
Health is a state of complete physical and mental well-being and not mere absence of
disease or infirmity. Health Insurance is going to be an important portfolio, huge potential
of Indian market, which largely remains untapped. Therefore, Government has taken
initiative to make a change in the Indian Health Care Sector through Insurance. At present
there is no standardization or regulation in the health care sector.
8. Health Risks
The risk of poor health includes both the payment of catastrophic medical bills and the
loss of earned income. Unless human beings have adequate health insurance or private
savings or financial assets, or other sources of income to meet these expenditures, they
will otherwise feel insecure. The matter becomes more catastrophic if old age added with
ill health or some form of disability persists with no or inadequate financial support. For
health care, more than anything else financing the healthcare expenses becomes a major
issue. The loss of earned income becomes a cause of still greater insecurity if the
disability is severe. In the case of long-term disability, besides substantial loss of earned
income, medical bills are incurred, employee benefits may be lost or reduced, savings are
often depleted, and the most difficult part of the whole problem is that someone must take
care of the disabled insured person.
9. Importance of Health Insurance

For better understanding of the concept of health insurance, let us define what health
insurance is all about.
Definition
“Health insurance is an insurance, which covers the financial loss arising out of poor
health condition or due to permanent disability, which results in loss of income.”
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According to the IRDAI, “Health insurance business” or “Health cover” is defined as

effecting of contracts which provide sickness benefits or medical, surgical or hospital
expense benefits, whether in-patient or out-patient, on an indemnity, reimbursement,
service, pre-paid, hospital or other plans basis, including assured benefits and long-term
care.”
Section (6) (c) of the Insurance Act, 1938 defines health insurance business as ‘effecting
of contracts which provide for sickness benefits or medical, surgical or hospital expense
benefits, whether in-patient or out-patient, travel cover and personal accident cover'. It is a
milestone for the Indian Insurance Business and to all the stakeholders to recognize
health insurance as a standalone class.
Health insurance rightly provides timely and affordable medical help. But unfortunately not
all those who need are able to take this insurance cover. The reasons could be many,
including high premiums, applicability of too many conditions and a host of exclusions.
Health insurance can be seen as a weapon of social and economic empowerment of the
poor.
A systematic plan for financing medical expenses is an important and integral part of a risk
management plan. With rising health care costs it is no longer possible for an individual to
meet the heavy cost of treatment involving hospitalisation. In the US as much as 47% of
health care expenses are met by the Government through medical benefit schemes
administered by it known as Medicare and Medicaid. While 19% of the expenditure is
taken care of by own resources, 35% of health care expenditure comes from private
insurance companies through various health insurance policies sold by them.
In India, health spend from own resources is 75% and out of the balance 25%, the share
of Central Govt. is 5.2%, States 15.2%, Employers and others 3.3% and Local Govt. and
donors 1.3%. From the this, it is clear that there is a vast scope for Health Insurance in
India.
Health insurance can be organized either on private or public basis - for individuals and
families against uncertain events. In developing countries, the potential for expanding
health care sector through government financing is very limited because of a very narrow
tax base. In such a situation, health care financing by individuals and families who can
afford, goes a long way in reducing the burden of the government.
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Health insurance as a mechanism is already widespread in the developing countries. The

market for health insurance is growing both in terms of awareness and necessity levels.
Health insurance can be financed and organized in a number of ways. It can be purchased
by an individual, or by groups consisting of the self – employed, or retired persons, or
persons between jobs, part-time, temporary, or contract workers not covered by their
employers.
The reasons for rise in health care costs across the globe are :
• Increase in medical treatment costs.
• Technological advancements in medical equipment
• High labour costs
• Corporatisation and the increasing overheads
10. Health Insurance Policies Offered in America

Generally, there are five types of health insurances policies offered by companies in the
US.
• Disability income insurance
• Medical expense insurance
• Long-term care insurance
• Major medical insurance
• Medicare supplement insurance
• Other forms of health plans are, (though they are not strictly insurance policies)
• Health saving accounts
• Health Annuities
Disability Income Insurance

Disability income insurance is one of the oldest coverages offered by health insurers.
Disability income insurance provides compensation to the insured when he is unable to
perform his regular duties due to sickness or due to injuries arising out of an accident. It
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provides security against loss of income. These policies can be short term or long-term.
Disability income insurance is provided by life insurance companies and other insurance
companies specialised in health insurance. Disability income insurance is offered to
groups and to individuals. In the US, a majority of the health insurance policies are group
policies.
Definitions
Injury: Injury can be defined as “any bodily injury caused due to an accident during the
period of the policy”.
Disability: An insured individual is stated to be disabled if he is rendered incapable of
performing his duties in his occupation due to ill health or sickness for a particular period.
The disablement can be temporary or permanent or total which results in loss of income.
Disability insurance provides regular income benefits to the insured person during the
period of disablement.
Exclusions
There are some common exclusions under disability insurance policies.
They are as follows:
• This policy does not cover disability due to wars, intentional injuries, and normal
pregnancies
• In individual policies and group policies, pre-existing conditions are excluded.
Medical Expense Insurance

Medical expense insurance coverage is extended only when the insured is hospitalised for
the treatment of the insured for injuries or sickness. Medical expense insurance polices
are offered to groups and to individuals as in the case of disability insurance and life
insurance policies.
People who are not covered under group medical insurance policies like students, retired
people, unemployed people, temporary workers are covered under individual medical
expense insurance policies. Insurers directly pay the actual medical expenses to the
concerned hospital where the insured took treatment. Premium is fixed based on the
benefits offered and period of the policy.
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Long-term Care Insurance

Long-term care (LTC) insurance was developed in the 1980s. The need for this coverage
arises out of the increase in life expectancy of individuals resulting in a large number of
people who had to be cared for in special hospitals at huge cost for an indefinite period.
But in the existing scenario it was difficult to provide long-term care at home due to the
following reasons:
• Increase in the number of working women
• Fewer children per family making it difficult to take care of older people
• Increase in the number of families with no children
In order to pay for the care of such older people, long-term care insurance was developed.
LTC covers nursing home care and community care.
Major Medical Insurance

Major medical insurance policy covers major medical expenses incurred by the insured
person. It will not reimburse the whole medical expenses. The insurer pays a part of
medical expenses and the remaining has to be borne by the insured. This is called
participation provision. The medical expenses will be reimbursed only after subtracting the
deductible amount.
Medicare supplement Insurance

Medicare supplement insurance is the supplement to the medicare programme. This policy
will only pay the deductible amount and the extra amount, which the insured has to bear
over and above the medicare limit.
11. Health Insurance Policies in India

In India, both general and life insurers offer health insurance products though the later
class is a recent entrant. Indemnity policies are offered only by general insurers.
The health insurance policies available in India are:
• Indemnity Policies (hospitalization policies)
• Agreed Value policies (critical illness, hospital cash, HIV care (for AIDS))
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• There is also a variant of agreed value policies - Unit Linked policies from LIC,
Reliance, etc.
Some examples are:
• Mediclaim Policy (individuals and groups)
• Overseas Mediclaim Policy
• Videsh Yatra Mitra
• Raj Rajeshwari Mahila Kalyan Yojna
• Bhagyashree Child Welfare Policy
• Janata Personal Accident Policy
• Cancer Insurance Policy
• Bhavishya Arogya Policy
• Jan Arogya Bima Policy
• Personal Accident Policy
• Gramin Personal Accident Policy
• Universal Health Insurance Policy
Mediclaim Policy (group and individual)

Mediclaim policy is offered to individuals and to groups exceeding 50 members. It covers
hospitalisation for diseases or sickness and also for injuries. Under group mediclaim
policy, group discount is allowed to groups exceeding 101 people. The medical expenses
will be reimbursed only if the insured is admitted in the hospital for a minimum duration of
24 hours. The insured can insure between Rs.15000 to 500000. This policy is available for
the people aged between 5 to 80 years and children between three months and 5 years.
Mediclaim policy offers the following benefits:
• Medical or hospitalisation expenses
• Expenses related to boarding, Doctor’s fees, Nurse’s fees, etc., can also be claimed.
• If any one person from the insured’s family opts for coverage under the policy, he
can avail the family discount of 10%.
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• It will pay the health check up costs equal to 1% of insured sum every 4 years, if the
insured does not make any claim during this period. However this benefit is available
only under individual policies.
• Cumulative bonus of 5% will be offered at the end of every year provided there is no
claim during the period. This bonus will be provided for a maximum of up to 10
years. If insured claims during this period, the sum insured with cumulative bonus
will be reduced by 10%.
• If the premium is paid by cheque, it will be exempted under income tax act up to a
maximum of Rs. 10,000/- under section 80D of Income Tax Act with an increased
limit of Rs. 15,000/- for senior citizens.
Exclusions
This policy will not cover the following:
• Any sickness or illness for first 30 days during the policy
• Any medical expenses relating to pregnancy
• Diseases caused by war, invasion or due to nuclear weapons etc.
• Any expenses incurred for spectacles, cosmetic treatment etc.
• Medical expenses incurred for purchasing tonics, vitamins unless incurred as part of
the treatment.
Conditions
Any situation in which insured claims the sum insured should be informed to the insurer
with the details about his injuries, admission etc., into hospital within 7 days.
Insured should file the claim with the insurer within 30 days after discharge from hospital
and show all medical bills and other information required by the insurer.
The insurer can appoint any medical practitioner to observe the injuries and diseases that
requires hospitalisation.
The medical treatment should be taken within Indian boundaries and compensation is paid
in rupees.
The insurance company will not pay the compensation in case the claim is proved to be
fraudulent.
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Overseas Mediclaim Policy

In 1984, the Overseas Mediclaim Policy was developed. This policy will reimburse the
medical expenses incurred by Indians upto 70 years of age while travelling abroad. The
premium will be charged based on their age, purpose of travel, duration and plan selected
by the insured under the policy. Employment study policy was introduced in 1991 for the
citizens who live temporarily outside India. This policy is provided to businessmen, people
going on holiday tour, travelling for educational professional and official purposes.
Overseas mediclaim policy provides two types of policies namely Standard cover and
Videsh Yatra Mitra. Under standard cover, three types of plans are offered with different
coverages and under vides hyatramitra three plans are offered with very wide coverage.
Benefits
• This policy reimburses the medical expenses when the insured stays abroad.
• In the event of claims, M/s Mercury International Assistance will provide the services
anywhere. It has worldwide coverage. It will pay claim amount directly to the
hospitals.
• M/s Mercury International Assistance will also bear all the expenses to send the
insured person to home country because of sickness or due to injuries.
• Reimbursement of medical expenses will be done in home currency of the country
visited.
• If the insured person is not able to contact Mercury Company he can collect all
expenses after coming back to India by showing all the relevant documents and bills
Exclusions
• The medical expenses incurred for non-emergency illness and for treatment already
planned
• The treatment expenses incurred on pre-existing diseases
• Injuries while participating in any adventure sports.
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Raj Rajeshwari Mahila Kalyan Yojna

It is a personal accident policy offered by an insurance company for the welfare of women.
It is offered to women residing in rural and urban areas. Women between 10-75 years of
age are eligible for this policy irrespecitive of their occupation and income level. This
coverage is provided on 24 hours basis.
Bhagyashree Child welfare policy

This policy is offered to girls between 0-18 years. The age of parents of the girls should
not be more than 60 years. It provides coverage to one girl child in a family who loses her
father or mother in an accident. It provides insurance coverage to the girl child and also
her parents against death and disability for 24 hours.
Janata Personal Accident Policy

Any individual between 10-70 years of age is eligible for coverage under this policy. This
policy offers coverage in the event of death or loss of limbs due to an accident. Amount of
premium charged is Rs.15 p.a. per individual. The premium charged under this policy is
comparatively less when compared to other policies as this policy is meant for the weaker
sections of society. Other policies can be taken along with this policy. This policy can be
taken for any period up-to 5 years.
Cancer Insurance Policy

Cancer insurance policy is designed for cancer patients aid association members. The
members of this association are eligible for this policy except those members who are
already suffering from cancer. The persons insured under this policy will pay premium to
their association along with the membership fee. This policy will offer coverage to the
insured in case he develops cancer. All the expenses incurred for treatment of cancer not
exceeding the sum insured will be paid directly to the insured person.
Jan Arogyabima Policy

This policy provides medical insurance to poorer sections of the people. This policy covers
illnesses like heart attack, jaundice, food poisoning, and accidents etc. that require
immediate hospitalisation. This policy is applicable to individuals between 5-70 years.
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Gramin Personal Accident Insurance

This policy is designed for the rural people in the country. This policy has fixed insured
sum of Rs.10,000/- and the premium charged is Rs. 5/- The individuals falling in the age
group of 10-70 are eligible for this policy.
12. Health Insurance: Governing Legislations in India

Health insurance in India was introduced in the year 1912 when the first insurance Act was
passed. As the maternity benefits defined under the Workmen’s Compensation Act, 1923
was found inadequate, need for a better comprehensive cover was felt, based on the
principle of risk- pooling and financing. Based on the recommendations of the Adarkar
Committee in 1943, a full length health insurance scheme was designed which was made
mandatory and contributory for the industrial workers engaged in textiles, engineering, and
minerals and metals. This Act, in fact marked the historic beginning of social insurance as
well as health insurance in India. The various legislations introduced to promote health
insurance in India are presented in the following Table.
Table : Health Insurance Legislations In India
Year Acts Implementing Authority
1912 Insurance Act, 1912 – introduced Health Government of India
insurance
1923 Workmen’s Compensation Act, 1923 Government of India
1938 Insurance Act (Revised), 1938 Government of India
1943 Adarkar Committee Recommendations, Government of India
1943
1972 General Insurance Business COI, Ministry of Finance
Nationalization Act, (GIBNA)
1993 Malhotra Committee Recommendations Government of India
1999 IRDA Act, 1999 Chairman, Insurance
Regulatory Development
Authority of India
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2000 Insurance Sector Liberalized IRDA

2000 – 07 Tariffed Regime TAC, IRDA
From 2008 De-tariffication initiated IRDA
Source: Compiled from IRDA Annual Reports
The Insurance Act of 1912, was however revised in the year 1938, with no major changes
till 1972, when the General Insurance Nationalization Act was passed (GIBNA), as a result
of which, the general insurance industry was nationalized, where in 107 companies (Indian
and Foreign) were brought under the aegis of the General Insurance Corporation (GIC) as
a holding company with four subsidiaries, namely the National Insurance Company Ltd.,
New India Assurance Company Ltd., Oriental Insurance Company Ltd., and United
Insurance Company Ltd. However, in the year 2000, the insurance sector was liberalized
and opened to private and foreign companies, with 26 percent FDI participation based on
the recommendations of the Malhotra committee, 1993. Since then, the Insurance
Regulatory and Development Authority is the Regulator of the insurance business
operations in India. Another noteworthy fact is that from year 2000 to 2007, the insurance
sector was under the tariffed regime, which means that the rates are fixed by the Tariff
Advisory Committee (TAC), a sub-committee under the aegis of IRDAI.
However, from year 2008, onwards the IRDAI has initiated de-tariffication regulations. 1 In
other words, de-tariffication means, insurance companies can now design, innovate and
introduce insurance policies and fix the rates and prices without any regulatory
interventions. Thus, from year 2008, onwards competition in real sense was induced in the
general insurance business in India.
13. Recommendations of Various Reforms Committees

The Government of India from time to time has constituted various committees to
recommend reforms to the insurance sector in India. Some of the important committee’s
recommendations are summarized below.
1 Refers to complete autonomy given to insurance companies to fix premiums from 2007-08, by
IRDAI.
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Malhotra Committee Recommendations-1993

The Central Government of India formed the Malhotra Committee in 1993 under the
chairmanship of R.N. Malhotra, former Governor of the Reserve Bank of India, to
recommend reforms in the insurance sector. The Malhotra Committee recommended
introduction of the concept of “professionalization” in the insurance sector. In its report
submitted in 1994, the Committee recommended:
• To permit private companies with a minimum paid up capital of rupees one hundred
crores to enter the insurance industry
• To permit foreign companies to enter the industry in the joint venture mode with the
domestic companies.
• To prohibit composite insurers (Life & Non-Life products by same insurer)
• Introduce alternate distribution channels for improving the insurance penetration
• Set up of an insurance regulatory body (IRDAI)
Thus, the Insurance Regulatory and Development Authority (IRDAI) Act was passed in
1999, with effect from January 1st 2000. As a result of this Act, private and foreign
companies are allowed to enter the Indian insurance market for Life and General
Insurance business, with an equity participation of 49 percent (2013) Foreign Direct
Investment.
Sastry Committee on Health Insurance for Senior Citizens-2007

The IRDA constituted the Committee on Health Insurance for Senior Citizens in the year
2007 under the Chairmanship of K S Sastry, Former Chairman, of National Housing Bank,
to suggest commercially viable health insurance schemes for senior citizens. The
Committee was in consensus with the National Policy on Older Persons adopted by the
Government of India and reiterated that only a judicious mix of public health services,
health insurance, health services provided by not for profit organizations and private
medical care can address the healthcare needs of the older persons in India. However, the
committee observed that no attention has been paid either by Government or by
healthcare providers towards preventive care, which is especially important for the senior
citizens. Some of the important observations and recommendations of the committee were
as follows:
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• Though there are some insurance products that are technically ‘available’ for senior
citizens, in practice it is not easy for them to obtain a health insurance cover.
• The underwriting practices of insurers are not transparent and there are several
complaints of arbitrary loading, denial of renewals and cancellations without
assigning reasons, restricting access of Senior Citizens to health insurance.
• Insurance companies need to assure the Senior Citizens that they will be protected
through health insurance with guaranteed renewal.
• Health insurance policy should be drafted in simple language with terms and
conditions clearly stated for easy understanding by the users
• The Industry to have uniform definitions of terminology, and standard terms and
conditions used in the policy.
• IRDA to create a national repository of data relating to health insurance as well as
health sector for the use of the industry.
• To constitute a government funded ‘pool’ mechanism with participation of all
stakeholders of the industry, under the aegis of the IRDA, to address the needs of
these ‘high risk’ individuals
• To streamline the procedural and operational issues related to senior citizens
pertaining to: service standards of TPAs, grievance redressal mechanism, policy
renewals, choice of TPAs, disclosure requirements, cashless authorisations and
delays in claim reimbursements
• All senior citizens with incomes below the average per capita income but above the
poverty line should be given a grant of Rs 100 per month by the Government.
• IRDA to play an active ‘developmental’ role till health insurance picks up momentum.
• IRDA should mandate the companies carrying on health insurance business that all
senior citizens should have access to health insurance regardless of age, health
condition or claim history
• ‘Standalone’ health insurance companies to be allowed to enter the market, to
develop health insurance sector and to transact this business on more professional
lines.
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• All insurance companies, both life and non-life should promote separate health
insurance subsidiaries.
• Stand-alone insurance companies should be permitted to accept long-term deposits
from those insured with the company. Such deposits should be made into a
‘healthcare savings account’ broadly patterned on the lines of Public Provident Fund
accounts but without any time limit, premature deposits being permitted only for
bona fide medical treatment, and qualify for deduction under Section 80C of the
Income Tax Act.
Expert Committee on Health Insurance-2014

The IRDAI, recently constituted an Expert Committee on Health Insurance in 2014, under
the Chairmanship of Mr. M. Ramprasad, Member (Non-Life), IRDAI to further visit various
areas in the health insurance sector, to ensure level playing field between the companies
and to rationalize various provisions. The Committee made the following
recommendations:
• The Committee opined that a focused regulatory oversight and control is necessary
as health insurance is being carried out by all categories of insurers.
• IRDA should form an exclusive vertical or department for Health Insurance and bring
all health insurance issues pertaining to life, non-life insurance and health insurance
companies onto the same platform, to facilitate level playing field and a consistency
in approach to regulatory aspects
• It recommended bringing in a great transparency and clarity to enable policy holders
to understand the boundaries of coverage in their policies.
• Insurers and third party administrators (TPAs) should have systems in place to
identify, monitor, control and deal with fraud, including hospital abuse, by various
agencies including health care providers.
• An industry-level collaborative effort to minimise subjective and varied interpretation
of policy terms and conditions, which is the root cause of disputes between insurers
and policy holders.
• Recommended Policy holder Protection, Policyholder Servicing, Fraud Control and
Risk Management initiatives
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• Product Distribution, Rural, Social Sector and Micro-insurance

Thus, the Committee opined that these recommendations will help to reduce the
asymmetry of information that exists among all the parties concerned that is customer,
provider, payer and others.
14. IRDAI’S Health Insurance Regulations

The IRDAI’s health insurance regulations primarily aim at ensuring fairness and
transparency in the policy conditions and claims settlement processes. The Regulations
pertaining to Health insurance are categorized as follows:
1. Protection of Policyholders Interests Regulations, 2002.
2. Advertisements and Disclosures Regulations, 2002.
3. Third Party Administrators’ Health Services Regulations, 2001.
4. Health Insurance Standardization Guidelines, 2013.
5. Insurance Ombudsman Guidelines.
These guidelines are briefly discussed in the following paragraphs:
1. Protection of Policyholders Interests Regulations

The IRDAI has introduced various regulations primarily to protect the policy holders’
interests. It has also constituted a Health Insurance Forum comprising of representatives
from Life Insurance Companies, Non-life Insurance Companies, Stand-alone health
insurance companies, Ministry of Family & Welfare, Ministry of Labor and Employment,
National Accreditation Board for Hospitals & Health Care Providers (NABH), Government
Hospitals, Private Hospitals, TPAs, FICCI, and CII, to aid, advise and assist the IRDAI in
evolving regulations relating to health insurance in India and in the efficient conduct of
health insurance business in India.
Some of the important provisions ensuring protection of health insurance policy holders’
interest are summarized below:
(i) Senior Citizen’s Renewability Provisions pertain to the renewal premiums and
policy renewals for senior citizens wherein, it is asserted that the premium charged
for senior citizens should be fair and transparent.
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(ii) Health Insurance Portability Provisions facilitate policyholder’s desirous of

porting their policy to another insurance company along with all the members of the
family on all Individual, Family floater and Group health insurance policy.
(iii) Repudiation of health insurance claims provisions with respect to repudiation or
rejections of claims, except in case of delay in intimations or submission of
documents, unless such delay has been caused due to unavoidable circumstances.
(iv) Combi–health insurance policies provisions granting permission to Life
insurance companies also to sell health insurance policies in association with a
general insurance company as a combi plans by combining a Pure Term Life
Insurance and a Health Insurance policy to cover sickness, medical, surgical and
hospital expense benefits.
(v) File and Use Provisions to ensure that no health insurance product shall be
marketed, or modified by any insurance company unless it has the prior clearance of
the Authority.
(vi) Withdrawal Provisions to withdraw a health insurance product, an insurer shall
have to take prior approval of the Authority by giving reasons for withdrawal and
complete details of the treatment to the existing policyholders.
(vii) Health insurance Policy Design Provisions giving flexibility to insurance
companies in designing health insurance plans as per the needs of the customers
from different income-class, gender, disease, etc.
(viii) Entry and Exit Age Provisions with regard to issuance of new health insurance
policies with an entry age up to 65 years and exit age up to 70-80 years, with
guaranteed renewal provisions.
(ix) Free Look Period provisions allowing a free look period of 15 days to enable the
policyholders to review the terms and conditions of the policy and to return the same
if not satisfactory.
(x) Pricing provisions giving autonomy to insurance companies to fix premium rates,
design policies and define the terms and conditions on all policies.
(xi) Renewal Loadings provisions to load premiums at the time of renewal for those
policyholders who have made claims during the year, and the same to be disclosed
upfront in the prospectus and policy document.
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2. Advertisements & Disclosures Regulations

The Health Insurance Advertisements & Disclosures Regulations were introduced to
ensure that all insurance advertisements clearly identify health product as an insurance
product and specify the availability of insurance coverage, along with a Key Features
Document in simple language, to enable customers to understand its main features and
take a decision as to its suitability.
3. Third Party Administrators’ Health Services Regulations
The Third Party Administrators’ Guidelines were additionally introduced to ensure speedy
settlement of claims through the cash-less facility for the policyholders. The TPAs in turn
submit the details periodically to the IRDAI, based on age groups, to understand and
analyze the frequency and severity of health insurance claims by age.
4. Health Insurance Standardization Guidelines, 2013
The Health Insurance Standardization Guidelines of 2013 aim to standardize health
insurance business processes and practices in the country, by reducing ambiguity,
confusion and misunderstandings between the insurance company and re-insurance
company, consumers and hospitals. These guidelines include definitions of critical
illnesses, commonly used terms, lists of excluded items in coverage, hospitalization billing
formats, discharge summary formats, and standard contract wordings in agreements
between TPAs, insurance company and hospitals.
Some of the standardization provisions include:
(i) Standard definitions to help in better comparability and uniformity in the
interpretation of critical terms and conditions by all insurance companies and to
remove ambiguity in interpretations and thereby grievances.
(ii) Standard billing formats to enable easy mapping of hospital information systems
to specific data requirements of the Insurance companies and thus help in faster
claim processing and enhanced analysis of data.
(iii) Standard Service Level Agreement specifying standard clauses that should be
present in contractual agreements between the insurance company and TPA,
hospitals and insurance company. These guidelines aim to bring uniformity and
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more clarity about the service standards and minimize the chances of disputes over
interpretation.
(iv) National Standard Treatment Guidelines framed jointly with FICCI with the
Ministry of Health & Family Welfare, Government of India, specifying standard
treatment procedures and costs for major illnesses and surgeries.
(v) Standardized Pre-authorization OCR Claim form to streamline health insurance
claims processes at all stages. The OCR format facilitates transfer of data from
handwritten paper based form to IT systems, which in turn can help to develop
Electronic Health Records with detailed demographic database, claims disease-
wise, city-wise and region-wise.
(vi) Standard Claims settlement format for settling claims arising in multiple policies
wherein one insurance company could pay for the entire amount, which in turn
would reduce delays in claim settlement.
5. Insurance Ombudsman Regulations

Claims and grievance settlement are the major challenge areas for insurance companies
to prove their service quality. Therefore, the IRDAI introduced the Insurance Ombudsmen
Scheme in accordance with the Redressal of Public Grievances Rules, 1998, to facilitate
speedy disposal of complaints in a cost-effective and efficient manner. Additionally an
Insurance Grievance Call Centre is also set up to register grievances or complaints online
for speedy reprisal. As a support to this facility, the Integrated Grievance Management
System (IGMS) was launched in 2012, to enable speedy settlement of grievances by
insurance companies, and to carry out root cause analysis of grievances.
Thus, all the health insurance reform guidelines aim to ensure protection of policyholders’
interest and provide a healthy environment for the growth and development of health
insurance segment. Although the health insurance business has experienced visible
momentum during the last decade yet, the profitability and viability of this segment is a
matter of concern. .
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15. Recognizing Health Insurance as a Class of Business by

IRDAI
With the emergence of new life style and social order, awareness of health is growing at a
faster pace; so also the new types of health conditions, including those related to one’s
occupation. New developments in health care sector have introduced sophistication at a
higher cost. Thus, health insurance is fast emerging as growing segment of non-life
insurance particularly because of reasons which include increasing awareness amongst
the public about medical insurance, vast number of ‘uncovered’ population for health risk,
increasing cost of health care, newer developments in the medical sphere, corporatisation
of health care providers etc.
Another important factor for the growth of this segment is because of the declining share
of Public expenditure on health care, which is currently just 0.9% of GDP. Although in
terms of amounts a considerable part of the public funds are used for provisioning of
health care services, yet about 80% of health costs are still paid by patients out of pocket
thus resulting in either increased level of debt/erosion of savings or in inadequate level of
healthcare, which in turn resulting in death or reduced earning capacity.
Health care provisioning in India normally takes three forms namely: State funded,
Employer funded and Self funded. Examples of State funded insurance schemes are tailor
made schemes (such as Rajiv Aarogyasri Scheme of Andhra Pradesh). The beneficiaries
are mainly the poor. Other schemes such as ESI are implemented by the Govt. with
contributions from other stakeholders. Employer funded schemes have become an
essential part of the package offered to the employees. For others, almost total healthcare
expenditure is met from own savings. This leaves a large scope for health insurance
business.
To augment growth in this segment, Section 3 (2AA) of Insurance Act 1938 provides for
special treatment for new insurance companies which opts to operate exclusively in health
insurance. Further IRDA also prioritizes in giving license to companies having health
insurance in their portfolio. Some of the companies operating as standalone Health
insurance companies are in fact designing a variety of tailor made health insurance plans
to suit to the requirements of all the segments of the society as standalone products.
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As observed from the growth trends of the health insurance industry, although health
insurance penetration is low at present, the pace at which it is growing indicates the latent
potential demand existing in this segment. Presently, Health Insurance is the second
largest portfolio, second only to Motor Insurance. A recent estimate puts the potential
health insurance market at current levels at Rs.15,000 crores and another estimate puts
the asset based insurance premium being only 25% of the real health insurance
potentials. Health insurance is becoming more of a necessity than an option whether
voluntary or as a beneficiary.
Some of the new creative health products available in the Indian markets include:
• Critical illness cover
• Hospital cash
• Family Floater
• Special policies for Diabetics and HIV patients
These policies also have a facility of Cashless settlements through the Third Party
Administrators (TPAs), which is a Western model, wherein the payments are made directly
to the treating hospitals. The Indian market is further trying to adopt some of the Western
healthcare providers practices to bring in more innovative products such as Health Saving
Accounts, Health Annuities, Managed Health Care through organizations acting as
facilitators such as Health Maintenance Organizations (HMO), Preferred Provider
Organizations (PPO), Point-of-Service (POS) plans, etc.
The focus of the insurers is more on provisioning of ‘holistic health’ rather than ‘financing
for health’ which is possible only through products with reasonable and adequate cover at
optimum premiums. Thus, with increased activities and innovative plans, the Regulator
and the Government will act as facilitators with the required legislations and administrative
mechanisms. Further, the regulations will regulate not only the health insurers but also
health service providers, viz., hospitals, doctors, diagnostic laboratories, etc.
Health insurance in India is still in the developing stage. The increasing health care costs
in the country is likely to contribute to the development of more health insurance products.
Health insurance is not at present recognized as a separate segment in Indian insurance
industry. The present health insurance policies available in the Indian markets have some
inherent limitations.
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IRDAI is very seriously considering breaking insurers into three broad categories from the
current two, i.e., Life, Non-life & Health. Already, as mentioned earlier, section 32AA,
Insurance Act, 1938, provides for special treatment in the matter of issuing licence for
exclusive health insurers. Even the solvency margin is going to be risk based for health
insurance instead of the current 1.5, which is fixed.
Some of the areas that need to be focussed from the coverage perspective are
• Old age Health care – mostly required at old age to take care of health problems
associated with aging.
• Long-term care – for a term of three to five years.
• Disability income insurance, which is not provided in basic policy cover.
• Mental care – to provide financial assistance for the caring parents.
• Health cover for the daily wage earners seasonal workers casual laborers,
construction workers, etc.
• Workers employed in the seasonal factories.
• Juvenile insurance- to meet ill health/medical expenses associated with health
related problems of children.
• Special/exclusive health care policies for ‘women’ for gender related diseases.
Health cover for the informal sector/unorganized sector.
• Rural health policies to be tailor-made for the members, to suit to their needs.
Thus, a health insurance policy to be meaningful should be designed in such a way that
the basic needs of health care are met. The Insurance Regulatory and Development
Authority (IRDAI) on its part is also taking initiative to increase the penetration of the
health insurance markets in India. The IRDAI is also looking into regulatory issues to allow
stand alone health insurance companies with lesser capital requirements. Probably, with
such exclusive health insurance companies, there would be better choice available to
consumers to choose policies that would be suitable for their requirements. On the other
hand, the companies can also have greater freedom in designing policies with fair
premiums depending upon the riskiness of insured individual.
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16. IRDAI Health Insurance Regulations 2016

The Insurance Regulatory and Development Authority of India has updated its guidelines
in the year 2016 to address various changes in the health insurance industry. These
changes are aimed at increasing transparency and satisfying customer needs.
On July 12th, 2016, the Insurance Regulatory & Development Authority of India
(IRDA) announced a new set of Health Insurance Regulations which will have a positive
impact for insured individuals. These new revised regulations replace those which were
last set in 2013 and will bring about some changes in the health insurance industry as
discussed below:
1. Health Insurance Companies Can Now Offer Pilot Products:

To enable insurers to offer innovative products and features, IRDAI’s new regulations
governing Health Insurance now allow health insurance companies to offer pilot products.
These pilot products will be offered to policyholders for a maximum period of 5 years,
following the expiry of which, the products will go back to functioning as regular health
insurance products. The continuation of the pilot product for a term of 5 years is solely
dependent on its feasibility for the health insurance company. If the product is feasible, it
will be converted to a regular at the end of 5 years, and if not, the company can
discontinue it.
2. Data Disclosure to Improve Transparency

The new regulations effective from 2016 will help improve data disclosure, which in turn
will help bring about transparency. In addition to repudiated claims, insurers have another
category of closed claims, which include claims which couldn’t be paid back due to
incomplete documentation or failure on the policy holder’s part to follow up with the
insurer. A high number of closed claims allow insurers to project a lower percentage of
rejected claims. As per the new regulations, insurers cannot close a claim in their books.
3. Early Buyers & Health Conscious Customers to Get Discounts

In order to motivate and increase awareness regarding the importance of health insurance
among people, individuals who purchase health insurance early in life, practice wellness
or preventive habits or renew their policy regularly will stand to benefit from discounts in
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HEALTH INSURANCE
premium and/or on medical services like diagnostics, consultation or pharmaceuticals

which are a part of the network.
4. Loan/Credit Linked Health Insurance

Term insurance based on an individual’s existing loan or credit is offered by many
insurance providers. The benefit provided by these plans is dependent on the condition
that upon the death of the insured, their nominee can utilize the claim amount of the policy
to pay back the loan. These policies however do not give any such option in case the
insured has fallen ill and is unable to repay the loan amount due to the sudden medical
expenses which he has to incur towards the illness. The new regulations do provide
respite in this regard, which means that health insurance companies will now be offering
credit linked group health insurance products which will be for a maximum term of 5 years.
5. Agents Will Not Earn Any Commission from Portability

According to the new Health Insurance Regulations passed by IRDAI, insurance agents
will not earn any commission if customers choose health insurance portability. They will,
however, continue to earn commission when a policyholder renews the same insurance
policy regularly. Health insurance portability only implies the portability of your mobile
number, which allows you to carry forward the benefits offered by your existing policy (like
pre-existing conditions, accumulated bonuses, waiting period, etc.) over to the new policy.
6. Life Insurers Not Allowed to Offer Indemnity-Based Products

Following the new regulations, life insurance providers will no longer be allowed to offer
indemnity products. Customers currently holding such policies will continue to have them
until the respective policy expires. In order to meet the expected claims raised by such
policies, insurers have created adequate reserves. This is done to ensure that the existing
policyholders will not suffer in terms of policy servicing and claims processing.
7. Combi Plans Can Comprise of Any Life & Health Plan

Following the new IRDAI Health insurance regulations, health insurers can offer combi-
plans which can be a hybrid of any health and life (endowment, money-back or ULIP) plan.
GST rate of 18% applicable for all financial services effective July 1, 2017. Premiums may
vary depending upon factors like age, location and prevailing taxes/GST.
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Note
(i) The Detailed document is available in the IRDAI website for further reference.
(ii) Guidelines on Standardization in Health Insurance is also available as per the
following reference circular Ref: IRDA/HLT/REG/CIR/146/07/2016 dated 29.07.2016
17. IRDAI Protection of Policyholder’s (Health Insurance)

Guidelines, 2017
The following are some of the guidelines for health insurance:
A. Matters to be stated in a health insurance policy:

A health insurance policy shall clearly state:
(a) The name of the policyholder and the names of each beneficiary covered, UIN of the
product, name, code number, contact details of the person involved in sales
process;
(b) Date of birth of the insured and corresponding age in completed years;
(c) The address of the insured;
(d) The period of insurance and the date from which the policyholder has been
continuously obtaining health insurance cover in India from any of the insurers
without break;
(e) The sums Insured;
(f) The sub-limits, Proportionate Deductions and the existence of Package rates if any,
with cross-reference to the concerned policy section;
(g) Co-pay limits if any;
(h) The pre-existing disease (PED) waiting period, if applicable;
(i) Specific waiting periods as applicable;
(j) Deductible as applicable – general and specific, if any;
(k) Cumulative Bonus, if any;
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(l) Periodicity of payment of premium instalment;

(m) Policy period;
(n) Policy terms, conditions, exclusions, warranties;
(o) Action to be taken on the occurrence of a claim for cashless and reimbursement
options separately;
(p) Details of TPA, if any engaged, their address, toll free number, website details;
(q) Details of Grievance Redressal mechanism of insurer;
(r) Free look period facility and portability conditions;
(s) Policy migration facility and conditions where applicable;
(t) that, on renewal, the policy could be subject to certain changes in terms and
conditions including change in premium rate;
(u) Provision for cancellation of the policy; and
(v) Address and other contact details of Ombudsman within whose territorial jurisdiction
the branch or office of the insurer or the residential address or place of residence of
the policyholder is located.
B. General principles governing issuance of general and health

insurance policies:
(i) In stipulating the exclusions of the policy, insurers shall endeavour to classify the
exclusions, wherever possible as under:
(a) Standard exclusions applicable in all policies;
(b) Exclusions specific to the policy which cannot be waived;
(c) Exclusions specific to the policy, which can be waived on payment of
additional premium.
(ii) The insurers may also endeavour to broadly categorize policy conditions into
following, so as to give clarity and understanding of the conditions to the
policyholder:
(a) Conditions precedent to the contract;
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(b) Conditions applicable during the contract;

(c) Conditions when a claim arises;
(d) Conditions for renewal of the contract.
(iii) Every insurer shall keep the insured informed on the requirements to be fulfilled
regarding lodging of a claim arising in terms of the policy and the procedures to be
followed by him so as to settle claim early.
SUMMARY
• World Health Organisation (WHO) in its preamble has defined Health as “a state of
complete physical, mental and social well-being and not merely absence of disease
or infirmity”.
• As per the Declaration of Universal Rights 1948, health is recognised as one of the
fundamental human rights.
• It is an essential component of human and social development as well as of a
nation’s growth and stability.
• Health insurance can be defined in very slender sense where individual and group of
persons purchase in advance health coverage by paying a fee called premium.
• Section (6) (c) of the Insurance Act. 1938, defines health insurance business as
‘effecting of contracts which provide for sickness benefits or medical, surgical or
hospital expense benefits, whether in-patient or out-patient, travel cover and
personal accident cover'.
• Portability means the right accorded to an individual health insurance policy holder
to transfer the credit gained by the insured for pre-existing conditions and time
bound exclusions.
• In India, both general and life insurers offer health insurance products though the
later class is a recent entrant. Indemnity policies are offered only by general
insurers.
• In 1984, the Overseas Mediclaim Policy was developed. This policy will reimburse
the medical expenses incurred by Indians upto 70 years of age while travelling
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abroad. The premium will be charged based on their age, purpose of travel, duration
and plan selected by the insured under the policy.
• Health insurance in India was introduced in the year 1912 when the first insurance
Act was passed. As the maternity benefits defined under the Workmen’s
Compensation Act, 1923 was found inadequate, need for a better comprehensive
cover was felt, based on the principle of risk- pooling and financing.
• The Health Insurance Standardization Guidelines of 2013 aim to standardize health
insurance business processes and practices in the country, by reducing ambiguity,
confusion and misunderstandings between the insurance company and re-insurance
company, consumers and hospitals.
• Claims and grievance settlement are the major challenge areas for insurance
companies to prove their service quality. Therefore, the IRDA introduced the
Insurance Ombudsmen Scheme in accordance with the Redressal of Public
Grievances Rules, 1998, to facilitate speedy disposal of complaints in a cost-
effective and efficient manner.
• To augment growth in this segment, Section 3 (2AA) of Insurance Act 1938 provides
for special treatment for new insurance companies which opts to operate exclusively
in health insurance.
• The Insurance Regulatory and Development Authority of India has updated its
guidelines in the year 2016 to address various changes in the health insurance
industry. These changes are aimed at increasing transparency and satisfying
customer needs.
• The Protection of Policyholder’s (health insurance ) guidelines, 2017 laid down very
clearly all the matters that are to be stated in a health insurance policy and the
claims settlement processes.
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REVISION QUESTIONS
SECTION – A
1. Mediclaim policy is basically a -
(a) Benefit policy
(b) Indemnity policy
(c) Neither benefit nor indemnity policy
(d) Both indemnity and benefit policy
2. Group mediclaim policies are of:
(a) High volume & high margin (b) Low volume & high margin
(c) Low volume & low margin (d) High volume & low margin
3. The penetration of health insurance in India is around:
(a) 5% of the total population (b) 2% of the total population
(c) 4 % of the total population (d) 10% of the total population
4. The coverage of pre-existing diseases was a major bone of contention in case
of mediclaim policies over the years. Who has defined the pre-existing
diseases recently for use by all Indian non-life Insurance Companies?
(a) Insurance Regulatory & Development Authority
(b) General Insurance Council
(c) Health Insurance Council
(d) GIPSA
5. Mediclaim policy was introduced by PSU Insurers in the year:
(a) 1986 (b) 1973
(c) 1976 (d) 1996
6. Medical underwriting is practiced in case of:
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(a) Group health policies

(b) Community based health policies
(c) Individual mediclaim policies
(d) All the above
7. The new definition of pre existing disease is being implemented by Insurers
with effect from:
(a) 1.4.08 (b) 1.6.08
(c) 1.4.07 (d) 1.6.07
8. The TAC collects health Insurance data from TPAs and Insurers in respect of:
(a) Policy, members and claims (b) Policy and claims only
(c) Policies and members only (d) Claims only
9. Critical Illness policy is a:
(a) Indemnity policy (b) Benefit policy
(c) Both indemnity and benefit policy (d) Neither of the two
10. Insurers, TPAs and Broking Companies cannot raise capital except through:
(a) Preference Shares (b) Equity capital
(c) Hybrid Instruments (d) Transfer of shares
11. IRDAI Grievance Redressal Department deals with only:
(a) Cases of delay & non response
(b) Claims dispute
(c) Policy contract dispute
(d) Complaints written on behalf of policy holders by Advocates, agents or any
third party
12. ‘A’ takes a mediclaim policy with coverage of Rs 5 lacs for a year from 1.1.09.
In May 2009, he prefers a claim for Rs 1.5 lacs. The coverage available to ‘A’
for the balance period is:
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(a) Rs 1.5 lacs (b) Rs 3.5 lacs

(c) NIL (d) Rs 5 lacs.
13. All factors other than one stated below does not determine the premium
payable under a health policy:
(a) Age (b) Occupation
(c) Sum insured (d) TPA option
14. Mediclaim policy generally has post and pre hospitalization benefits for:
(a) 30 days and 60 days (b) 60 days and 30 days
(c) 30 days and 15 days (d) 15 days and 30 days
15. Under the Rashtriya Swasthya Bima Scheme the Central and State Government
share the premium in the ratio of:
(a) 50:50 (b) 75:25
(c) 25:75 (d) 80:20
16. Under the UHIS policy, a portion of the premium is borne by:
(a) State Government
(b) Central Government
(c) Both Central & State Government
(d) Neither the Central and State Government
17. World Health Day is celebrated on:
(a) April 7 (b) August 15
(c) December 7 (d) December 15
18. A health insurance policy may be cancelled for all reasons except one. Which
one:
(a) Misrepresentation (b) Fraud
(c) Non-disclosure or non co-operation (d) Claims history
19. The World Health Organization is headquartered at:
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(a) Geneva (b) Berne

(c) New York (d) Tokyo
20. All but one statement is not correct in respect of Jana Arogya policy:
(a) The coverage is for poorer sections of the society between the age of 5 to 70
years.
(b) The sum insured per person is restricted to Rs 5000/-
(c) Tax benefit under Section 80 D is available for premium paid
(d) The policy can be taken for parents as well.
21. What is common to Jana Arogya Policy and group mediclaim policy?
(a) Cumulative and health check up charges are not payable under both.
(b) Maternity benefit extension is available
(c) Renewal is subject to Bonus/ Malus ( additional increase in premium) clause
(d) Both are group policies
22. Group Discount is generally not offered under a Group Mediclaim Policy if the
group size is:
(a) < than 51 (b) < than 101
(c) > than 101 (d) > than 51
23. The underwriting practices of a health insurance company provides for
loading of a tailor-made group policy if loss ratio is > than 70 % to keep it at
70% as the basis. In a particular tailor-made group policy, the loss ratio is
150%. What would be the loading on renewal to maintain the loss ratio at 70%?
(a) 120% (b) 114%
(c) 70% (d) 100%
24. Group Discount under a group mediclaim policy is allowed on the group size:
(a) At the end of the policy period
(b) On anticipated group size
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(c) Actual size at the commencement of policy

(d) To be adjusted on average group size
25. The basic premium under a group mediclaim policy is:
(a) The total premium computed before applying Group Discount, High Claims
Ratio Loading/ Low Claims Discount and Special Discount, if any
(b) The total premium computed after applying Group Discount
(c) The total premium computed after applying all discounts
26. All except one statement is correct in respect of Cancer Medical Expenses
Policy of the Indian Cancer Society. Which one is incorrect?
(a) The policy is available for members of the society upto the age of 70 years.
(b) The policy is available to individual ordinary, Well Wisher Ordinary, Well
Wisher Corporate and Well Wisher Life Member
(c) The policy covers the member and spouse for Rs 50,000/- and in case of claim
by one the partner is not entitled for any benefit under the policy.
(d) The sum insured of Rs 50,000/- is paid as a benefit in case of detection of
cancer.
27. Mr A has enrolled himself along with his spouse as members of Cancer
Society from 1.1.09. The insurance will commence from:
(a) 1.1.09 (b) 1.2.09
(c) 15.1.09 (d) None of the above
28. Which statement is correct in case of Overseas Mediclaim policy?
(a) Premium is payable in foreign currency and claim is payable in foreign
currency.
(b) Premium is payable in rupees and claim is payable in foreign currency.
(c) Premium and claim is paid only in US dollars
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HEALTH INSURANCE
29. The premium under OM policy depends on all except:

(a) Age band (b) Trip band and country of visit
(c) Coverage (d) Income
30. Which is not a government supported health policy?
(a) UHIS (BPL) (b) Varishtha/ Sr Citizens policy
(c) RSBY (d) Rajiv Arogyashree
31. ABC Company has a tailor-made group mediclaim policy with an Insurer. The
Insurer has 4 TPAs in panel and the policy will be serviced by a TPA. What is
the best way to select the TPA?
(a) Any TPA
(b) Leave it to the option of Insurer
(c) Arrange for a presentation from TPAs and then select
(d) Accept as it comes
32. There could be many ways to reduce health insurance premium. Which one of
the below listed does not help in reducing premium:
(a) Reduction of benefit
(b) Curtailment of coverage by imposing co-payment
(c) By getting subsidy
(d) TPA option
33. A Company needs to have a license from IRDAI to act as TPA. The amount of
non-refundable processing fees and license fees payable are:
(a) Rs 20,000/- and Rs 30,000/- (b) Rs 30,000/- and Rs 20,000/-
(c) Rs 25,000/- and Rs 50,000/- (d) No fees payable
34. A TPA whose application for license has been rejected may apply afresh after:
(a) 2 years (b) 1 year
(c) 5 years (d) 3 years
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35. The license issued to a TPA is valid for a period of:

(a) 3 years (b) 2 years
(c) 5 years (d) 1 year
36. What is the threshold limit of transfer of shares of a TPA to be informed to
IRDA?
(a) 5% (b) 1%
(c) 10% (d) 26%
37. One of the conditions is not relevant to act as TPA in India. Which one:
(a) A company with share capital and registered under the Companies Act 1956
(b) The minimum paid up capital shall be in equity shares of Rs one crore and
should have working capital not less than Rs one croreat any time of its
functioning
(c) The TPA to carry on only health services
(d) Aggregate holding of equity shares by a foreign company may be upto 50%.
38. The look back period for pre-existing disease from first commencement date
of mediclaim policy is:
(a) 48 months (b) 36 months
(c) No limits (d) 12 months
39. The look back period for pre-existing disease from the policy commencement
date under Overseas Mediclaim policy is :
(a) One year (b) Six months
(c) No limits (d) 48 months
40. The any one-trip limit and total duration of stay under CFT are restricted to:
(a) 60 days and 180 days (b) 30 days and 60 days
(c) 14 days and 180 days (d) 15 days and 30 days
41. The mediclaim policy, if claim free, earns a cumulative bonus. However in case
of a claim the earned benefit is reduced by:
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(a) 5% of the accrued benefit (b) 10% of the accrued benefit

(c) 10% of the sum insured (d) 10% of the claim amount
42. A disease is said to be acute when:
(a) It has an abrupt beginning and quick ending
(b) Gradual beginning and long persistence
(c) Left alone can be fatal
(d) Disease without complication
43. The minimum hospitalization period for accrual of benefit under mediclaim
policy is:
(a) 24 hours (b) 48 hours
(c) No time limit (d) 12 hours
44. According to recent regulation of IRDAI all health insurance policies should
have a mechanism to condone delay up to a specified time for continuity of
benefit in respect of waiting period and pre-existing disease. What is that
period?
(c) 1 month (d) 3 months
45. Any change in the premium structure and terms of health insurance policy can
be implemented only after the approval of IRDAI. However the Insurer has to
intimate the changes/ revisions to all policyholders at least:
(a) 3 months prior to the date of renewal of policy
(b) 1 month prior to renewal
(c) Not necessary to inform before renewal
(d) 6 months prior to renewal
46. The fees payable to TPA for rendering health services in the eastern and
western India is:
(a) 6% of premium (b) 5.4% of premium
(c) 5.5% of premium (d) None of the above
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47. Senior citizens are entitled for tax benefit under Section 80 D of the Income
Tax Act up to:
(a) Rs 20,000/- (b) Rs 15,000/-
(c) Rs 50,000/- (d) Rs 25,000/-
48. The co-branded health insurance policy with Banks has become very popular
in India. It is an example of:
(a) B2B business model (b) B2B2C business model
(c) B2C business model (d) None of the above
49. Which one of the following policy is a deferred mediclaim policy?
(a) Jana Arogya (b) Arogyashri
(c) Bhavishya Arogya (d) Sampoorna Arogya
50. The beneficiary under CGHS and Central Services (Medical Attendance) Rules
1944 can opt for mediclaim policy. State which statement is incorrect?
(a) They can claim reimbursement from both the sources subject to the total
reimbursement not exceeding the total expenditure incurred for treatment
(b) The beneficiaries first have to claim on original documents with Insurer and
secondly claim with CGHS on photocopy and certification from Insurer
(c) The reimbursement from CGHS or other department source will be restricted
to admissible amount as per approved package subject to the amount not
exceeding total expenditure on treatment.
(d) The amount of treatment will be shared under contribution clause.
51. The Rashtriya Swasthya Bima is a smart card based health scheme for BPL
families in States across the country. What is the sum insured under the
policy?
(a) Rs 30,000/- (b) Rs 25,000/-
(c) Rs 50,000/- (d) Rs 20,000/-
52. The Rashtriya Swasthya Bima Scheme provides for pre and post
hospitalization benefit up to:
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(a) 1 day and 5 days (b) 7 days and 15 days

(c) Does not provide for it at all (d) Total 10 days
53. The BPL families can enroll themselves under Rashtriya Swasthya Bima
Scheme by payment of registration fees of:
(a) Rs 10/- (b) Rs 30/-
(c) Rs 50/- (d) Free of cost
54. Under Rashtriya Swasthya Bima a fixed transport allowance per visit (choose
from the following) is allowed subject to an annual limit of Rs 1000/
(a) Rs 100/- (b) Rs 50/-
(c) Rs 60/- (d) Rs 30/-
55. The Rashtriya Swasthya Bima entails only:
(a) Cashless hospitalization (b) Re-imbursement
(c) Both cashless and re-imbursement (d) Pre-paid system
56. The age for calculation of premium under mediclaim policy is:
(a) Completed age (b) Running age
(c) Either of the two (d) Keyto
Answers
1. (b) 2. (d) 3. (b) 4. (b) 5. (a) 6. (c) 7. (b) 8. (a) 9. (b) 10. (b)
11. (a) 12. (b) 13. (b) 14. (b) 15. (b) 16. (d) 17. (a) 18. (d) 19. (b) 20. (c)
21. (d) 22. (a) 23. (b) 24. (b) 25. (c) 26. (a) 27. (d) 28. (b) 29. (b) 30. (d)
31. (b) 32. (c) 33. (d) 34. (a) 35. (a) 36. (a) 37. (a) 38. (d) 39. (a) 40. (a)
41. (a) 42. (c) 43. (a) 44. (a) 45. (a) 46. (a) 47. (b) 48. (a) 49. (b) 50. (c)
51. (d) 52. (a) 53. (b) 54. (a) 55. (a) 56. (a)
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SECTION – B
1. Describe the salient features of the Individual Mediclaim insurance policy.
Ans. The individual Mediclaim policy covers reimbursement of Hospitalization/ Domiciliary
Hospitalization expenses for illness/ diseases or injury sustained. The company will
pay to the Insured Person the amount of such expenses as are reasonably and
necessarily incurred but not exceeding the Sum Insured in any one period of
insurance.
2. What is the scope of cover under the various clauses in a health insurance
policy?
Ans. In the event of any claim/s becoming admissible under the scheme the company will
pay to the insured such expenses as mentioned below:
• Room expenses, boarding expenses as provided by the hospitalization/
nursing home.
• Nursing expenses
• Surgeon, anesthetist, medical practitioner, consultants and specialists fees.
• Other expenses relating to blood, oxygen, surgical expenses.
3. What Institutions can be considered as Hospital/ Nursing Home under a
Mediclaim policy?
Ans. Hospital/ Nursing Home means an institution in India established for indoor care and
treatment of sickness and injuries and it should have been registered with local
authorities and should be under the supervision of a qualified medical practitioner or
should comply with minimum criteria of having 15 in-patient beds, fully equipped
operation theatre and fully qualified nursing staff and doctors round the clock.
4. What are the benefits under a Domiciliary Hospitalization cover of health
insurance?
Ans. Medical treatment exceeding three days for such illness/disease/injury which in the
normal course would require care and treatment at a hospital/nursing home but
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HEALTH INSURANCE
actually taken at home in India is referred to as domiciliary hospitalization. The

benefits can be availed under the following conditions, namely:
• the patient cannot be removed to the hospital due to his/her condition
• there is lack of accommodation in the said hospital/ nursing home.
5. What is considered as Surgical Operation for the purpose of Reimbursement
under the policy?
Ans. Surgical operation means any manual and /or operative procedure for correction of
deformities and defects, repair of injuries, diagnosis and cure of diseases, relief of
suffering and prolongation of life.
6. Who is a Qualified Nurse?
Ans. Qualified Nurse means a person who holds a certificate of a recognized Nursing
Council and who is employed on the recommendations of the Medical Practitioner.
7. Mention the major basic coverage provided in an individual Health insurance.
Ans. Health insurers sell a wide variety of individual health insurance coverages.
Important individual coverages include the following:
• Hospital-surgical insurance
• Major medical insurance
• Long-term care insurance
• Disability-income insurance
8. What is a Basic Health Plan cover?
Ans. It is principally a hospital-surgical insurance and it takes care of routine medical
expenses as well. However it does not pay for catastrophic losses.
9. What is a Complete Plan under a health insurance cover?
Ans. Under a Complete Plan, the following are covered-
• Hospital expenses
• Surgical expenses
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• Out- patient, diagnostic, x-ray and laboratory expenses

• Physician ís in-hospital expenses
• Maternity expenses
10. What are the major exclusions in a medical insurance policy?
Ans. The insurer shall not be liable to make any payment under this policy in respect of
any expenses incurred by any insured in connection with:
• Pre-existing illness or diseases
• Hospitalization during first 30 days of the cover
• War related injuries
• Elective cosmetic surgery
• Non accident related dental care
• Work related injury
• Fraudulent claims
• Eye test, glasses, hearing aid
• Experimental surgery
11. How is cumulative Bonus determined in a health insurance cover?
Ans. The sum insured under the policy shall be progressively increased by 5% in respect
of each claim free year of insurance, subject to a maximum accumulation of 10 claim
free years of insurance. In addition to cumulative bonus, the insured will be entitled
to reimbursement of the cost of medical check-up once at the end of every four
underwriting years provided there are no claims reported during the block.
12. Discuss the implication of the following clauses in a health insurance policy
• Pre-existing conditions clause
• Policy reinstatement clause
Ans. The object of the pre-existing clause is to prevent adverse selection. There may be
some physical or mental conditions of the insured, which may have existed prior to
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HEALTH INSURANCE
the date on which the policy takes effect. Pre-existing conditions will be covered
after a waiting period, which differs from insurer to insurer.
Under the policy reinstatement clause, when the premium is not paid even within the
grace period, the policy lapses. However, the policy may be reinstated if the
premium is received at least within 45 days. Sometimes a fresh application is
required. There is a waiting period for sickness, not accidents, for the reinstated
policy.
13. What steps would you suggest for minimization of losses in Health Sector?
Ans.
(i) There is robust growth of business in Health Sector and this trend is expected
to continue in future also. Unfortunately, ratio of loss in this sector has
increased with the business growth. Hence, there exists urgency of minimizing
losses.
(ii) Aggressive marketing of Health Policies to the people of younger age by
introducing new products, training to the agents and greater incentives for
procuring this business.
(iii) Loading of premium on group policies based on their past claim experiences.
(iv) Careful selection TPAs having professionals favorable past records
(v) Monitoring the working of TPAs on regular basis as the loss ratio in the health
sector increases considerable after introduction of TPA.
(vi) The benefits under various heads like Room rent, Doctors fees and Diagnostic
materials etc. should have individual limits instead of overall SI without any
sub limits.
(vii) Maximum limits of compensation may be fixed for treatment of common
diseases like cataract, kidney stone, and heart ailments etc.
(viii) While empanelling Hospitals for cashless service, we may negotiate for
discounts.
(ix) Prompt investigation of doubtful cases to detect fraud.
(x) Blacklisting of Hospitals and TPA found resorting to fraudulent means.
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SECTION – C
Case Studies
1. Mr. Khanna had obtained a mediclaim insurance policy from the United India
Insurance Company from 01.01.2002 to 31.12.2002 for a sum of Rs.1,50,000/- for
himself and his wife, Smt. Karuna Khanna. During the subsistence of this policy,
Smt. Karuna Khanna suddenly developed pain in her knees. She had never suffered
from any medical problems relating to her knees earlier. However, she went to the
doctor who advised her to undergo surgery for knee replacement of both knees
which she underwent on 15.09.2002 at a total cost of Rs.1,78,945/-. Unfortunately,
she died due to sudden cardiac arrest in the hospital on 29.09.2002. Requisite
information regarding her admission into Nayyar Hospital, her subsequent treatment
there and the relevant medical bills were forwarded to the Insurance Company for
settlement of the claim as per the policy but this was repudiated by the Respondent
on the grounds that the claim was not covered as per Clause 4.8 of the policy as
well as the Exclusion Clause 4.1 since it was a pre-existing disease. Since, the
insured did not have any pre-existing disease nor were she or the Petitioner ever
made aware of the terms and conditions of the policy, Petitioner, - filed a complaint
before the District Forum on grounds of deficiency in service for having wrongly
repudiated the claim and requested that the Respondent be directed to pay the
Petitioner Rs.1,78,945/- towards medical treatment of the deceased insured with
interest @ 12%, Rs.10,000/- as compensation as well as any other relief available
under the law. However, the above contention was denied by the Respondent
(company)_which stated that there was no doubt that the insuree had a pre-
existing disease since it was medically well established that any problem which
would require replacement of the knees cannot occur within days or months and in
fact takes years for the knees to degenerate to a condition where total replacement
is medically advised. Thus, under Clause 4.1 of the policy which is an exclusion
clause, any pre-existing disease even if it is without the knowledge of the insuree is
excluded. The Counsel for Petitioner reiterated that the claim was wrongly
repudiated on the ground that the deceased had a pre-existing disease. According to
the Counsel for Petitioner, the deceased/insured did not have any medical complaint
pertaining to her knees nor did she undergo any treatment and when she felt pain for
the first time in September, 2002, she visited the doctor. In fact, the onus to prove
414
HEALTH INSURANCE
that she had a pre-existing disease was on the Respondent who failed to file any
expert medical or credible evidence in support of its case. Further, the deceased
had been taking the mediclaim insurance policy from the Respondent right from
1996 and she had also, as per the practice, been examined by the doctor of the
Respondent/Insurance Company who has nowhere recorded that she had any
medical problems relating to the knees. Further, it is not disputed that the insured
had been taking mediclaim policy right from 1996 and nowhere has it been recorded
that she had any medical condition including the problem of the knees, by the
Respondents doctor who examined her. Thus, there is no record produced by the
Respondent to indicate that any such disease existed and that it was, therefore, pre-
existing.Further, it is settled law that the onus to prove that the insured had a pre-
existing disease was on the Respondent which as stated above, has failed to prove.
For the reasons cited above and particularly in the absence of any credible
documentary or other evidence by the Respondent on whom was the onus to prove
the reasons for repudiation, the Court allowed the revision petition. Thus, the
Respondent/Insurance Company was directed to pay the Petitioner Rs.1,78,945/-
along with interest @ 6% from the date of the claim and Rs.1,000/- as litigation cost
within six weeks from the date of this order.
2. A privately insured member claimed for treatment to his shoulder two days after
obtaining a policy. The member was on a full medical underwriting (FMU) policy.An
Initial request for the members medical history did not identify a pre existing injury
and the insurer commenced to fund the treatment. The members GP confirmed in a
report that the condition was new.Three months after the initial claim an anonymous
caller contacted the insurer and reported that they were aware the medical
insurance members injury was preexisting. The matter was referred to fraud
investigators who interviewed the physiotherapist. The physiotherapist informed
investigators that the injury was preexisting. Investigators interviewed the health
insurance member who admitted the fraud. The member repaid the £1800 of funding
that the insurer had paid, their policy was cancelled and they were reported to the
HICFG.
3. Policyholder X submitted numerous cash-plan claims, over a short period of time, for
various treatments. Regular reporting lead to a review of these claims and it was
found that 15 of these treatments did not take place – this was confirmed by the
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treatment providers. Further investigations revealed that the Policyholder X had

taken out 2 further policies with the same company using different names. Under the
Section 29 (3), (anti-fraud), provisions of the Data Protection Act 1998, details of
Policyholder X were shared with other HICFG members who found that the same
thing had happened to them. All policies were cancelled and the police was
informed. Policyholder X was convicted in a criminal court, which resulted in them
receiving community service and being ordered to compensate for the monies
fraudulently gained.
4. A Mr. M took out a medical insurance policy and within a few weeks made a claim
for cancer treatment. The insurer was suspicious that the condition was known about
when the policy was taken out and asked for a GP report. The GP report stated that
the condition arose after the policy commenced. However the insurer’s suspicions
remained and further enquiries were made. It was discovered that the GP was in fact
already monitoring the condition and had been doing so for several months before
the policy inception. The insurer issued a notice of legal proceedings against the GP
who made an out of court settlement without admission of liability which covered the
entire cost of the medical treatment.
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CHAPTER – 7
MISCELLANEOUS INSURANCE
1. Introduction
2. Crop Insurance
3. Aviation Insurance
4. Personal Accident Insurance
5. Overseas Travel Insurance
6. Golfer’s Indemnity Insurance
7. Crime Insurance
8. Burglary Insurance
9. Baggage Insurance
10. Bankers Indemnity Insurance
11. Plate & Glass Insurance
12. Fidelity Guarantee Insurance
13. Money-in-Transit Insurance
14. Horse/ Donkey/ Mule/ Pony Insurance
15. Kidnap & Ransom Insurance
16. Package Policies

17. Summary
18. Questions
• Explain the need and importance of insurance for miscellaneous risks
• Describe the scope and coverage for crop insurance and other allied policies
under agriculture
• Evaluate the coverage, benefits and exclusions available under aviation,
personal accident, overseas travel, burglary and many other insurance policies
• Describe the importance and need for taking liability insurance against risks of
dishonest and disloyal employees and negligence.
• Explain the benefits of package policies as an umbrella cover for many risks at
a time.
1. Introduction
The insurance industry is developing rapidly, not only in the scope of activities covered but
also by the various new insurance covers that are being introduced. One area that saw
rapid growth in a short span is miscellaneous insurance, also called accident insurance in
England and casualty insurance in USA. According to Section 2 (13B) Insurance Act, 1938
Miscellaneous Insurance Business is “the business of effecting contracts of insurance
which is not principally or wholly of any kind or kinds included in Fire, Life and Marine
Insurance business.”
There are innumerable Miscellaneous products available in the market which may be
distinctly divided into three types as shown below –
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The risks covered by miscellaneous insurance are classified into four main categories
concerning-
• Person
• Property
• Pecuniary risks, and
• Liabilities
The first category includes insurance for individuals and groups against health risks such
as accidents and hospitalization & critical illness.
Property risks relate to burglary, housebreaking, etc., and include other classes like
livestock, plate, glass, money in transit and others.
Pecuniary risks refer to fidelity and other credit or financial guarantees
419
Liability insurance includes personal liability insurance, commercial general liability,

professional indemnity, product liability and other similar policies.
2. Crop Insurance
In India crop insurance cover is not very widespread.
Crop Insurance schemes in India
In order to provide a boost to the agriculture in India, a number of experimental crop
insurance schemes have been introduced. The first ones of the experimental crop
insurance schemes has been a Pilot Crop Insurance scheme. This was introduced by GIC
from the year1979.
Some of the important features of the scheme were that the scheme was based on “Area
Approach”. This scheme covered crops such as Cereals, Millets, Oilseeds, Cotton, Potato
and Gram. The scheme was confined to loanee farmers only and on voluntary basis. The
risk was shared between General Insurance Corporation of India and State Governments
in the ratio of 2:1. The maximum sum that could be insured under the scheme was 100%
of the crop loan, which was later increased to 150%.
(a) Under this scheme, 50% of the subsidy was provided for insurance charges which
was payable to the small/marginal farmers by the State Government & the
Government of India on 50:50 basis.
(b) Among the earlier crop insurance schemes that were introduced was a
comprehensive Crop Insurance Scheme. The Government of India introduced the
Comprehensive Crop Insurance Scheme with effect from 1st April 1985. This
scheme was introduced with the active participation of State Governments. The
Scheme was optional for the State Governments.
Objectives
The objectives of the scheme are as follows: -
1. To provide insurance coverage and financial support to farmers in the event of
natural calamities, pests and diseases.
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2. To encourage the farmers to adopt progressive farming practices, high value inputs
and higher technology in agriculture.
3. To help stabilise farm incomes, particularly in disaster years.
Salient features of the scheme
• Crops covered
The crops in the following broad groups in respect of which (i) the past yield data based on
Crop Cutting Experiments (CCEs) is available for adequate number of years, and (ii)
requisite number of CCEs are conducted for estimating the yield during the proposed
season:
(a) Food crops (Cereals, millets and pulses)
(b) Oilseeds
(c) Sugarcane, cotton and potato (annual commercial/annual horticultural crops)
Other annual commercial/horticultural crops subject to availability of past yield data will be
covered in a period of three years. However, the crops, which are covered next year, will
have to be specified before the close of preceding year.
• Farmers to be covered
All farmers including sharecroppers, tenant farmers growing notified crops in notified areas
are eligible for coverage.
The scheme covers the following groups of farmers:
(a) On a compulsory basis: All farmers growing notified crops and availing Seasonal
Agricultural Operations (SAO) loans from financial institutions i.e. loanee farmers.
(b) On a voluntary basis: All non-loanee farmers growing notified crops who opt for the
scheme.
• Risks covered and exclusions
Comprehensive risk insurance will be provided to cover yield losses due to non-
preventable risks (natural perils) like, fire and lightning, storms, hailstorm, cyclones,
typhoon, hurricanes, tornados, as also floods, landslides, droughts, pests/diseases etc.
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Losses arising out of war and nuclear risks, malicious damage and other preventable risks
shall be excluded.
• Sum insured /limit of coverage
The Sum Insured (SI) may extend to the value of the threshold yield of the insured crop at
the option of the insured farmers. However, a farmer may also insure his crop beyond the
value of threshold yield level upto 150% of average yield of notified area on payment of
premium at commercial rates. In case of loanee farmers the sum insured would be atleast
equal to the amount of crop loan advanced. Further, the insurance charges shall be
additional to the Scale of Finance for the purpose of obtaining loan. In matters of crop loan
disbursement procedures, the guidelines of RBI/NABARD shall be binding. Premium rates
go to the maximum 3.5% for bajra and oilseeds.
• Premium subsidy
A 50% subsidy in premium is allowed in respect of small farmers (a cultivator with a land
holding of 2 hectares [5 acres] or less) and marginal farmers (a cultivator with a land
holding of 1 hectare or less [2.5 acres]) to be shared equally by the Govt. of India and
State Government/Union Territory. The premium subsidy will be phased out on sunset
basis within a period of three to five years subject to review of financial results and the
response of farmers at the end of the first year of the implementation of the scheme.
Risk will be shared by the implementing agency and the Government. The quantum of risk
to be assumed by each is listed down in the policy.
• Area approach and unit of insurance
The scheme would operate on the basis of ‘area approach’ i.e., defined areas for each
notified crop for widespread calamities and on an individual basis for localised calamities
such as hailstorm, landslide, cyclone or flood.
• Estimation of crop yield
The State Govt/UT will plan and conduct the requisite number of Crop Cutting Experiments
(CCEs) for all notified crops in the notified insurance units in order to assess the crop
yield. It maintains single series of Crop Cutting Experiments (CCEs) and resultant yield
estimates, both for crop production estimates and crop insurance.
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• Levels of indemnity and threshold yield

Three levels of indemnity, viz. 90%, 80% and 60%, corresponding to low risk, medium risk
and high risk areas shall be available for all crops (cereals, millets, pulses and oilseeds
and annual commercial/ annual horticultural crops) based on Coefficient of Variation (C.V.)
in the yield of past 10 years’ data. However, the insured farmers of unit area may opt for
higher level of indemnity on payment of additional premium based on actuarial rates.
The threshold yield (TY) or guaranteed yield for a crop in an insurance unit shall be the
moving average based on past three years’ average yield in case of rice and wheat and
five years average yield in the case of other crops, multiplied by the level of indemnity.
• Nature of coverage and indemnity
If the ‘actual yield’ (AY) per hectare of the insured crop for the defined area [on the basis
of requisite number of Crop Cutting Experiments (CCEs)] in the insured season, falls short
of the specified threshold yield, all the insured farmers growing that crop in the defined
area are deemed to have suffered shortfall in their yield. The scheme seeks to provide
coverage against such contingency.
‘Indemnity’ shall be calculated as per the following formula:
(Shortfall in yield / threshold yield) X Sum insured for the farmer
{Shortfall = Threshold yield – Actual yield for the defined area}
• Procedure for approval and settlement of claims
Once the yield data is received from the State Govt/UT as per the prescribed cut-off dates,
claims are worked out and settled by Implementing Agency (IA).The claim cheques along
with claim particulars will be released to the individual nodal banks. The bank in turn, shall
credit the accounts of the individual farmers and display the particulars of beneficiaries on
their notice board.
• Financial support towards Administration and Operating (A & O) expenses
The A & O expenses would be shared equally by the Central Government and the
respective State Governments on sunset basis [100% in 1st year, 80% in 2nd year, 60% in
3rd year, 40% in 4th year, 20% in 5th year and ‘zero’ percent thereafter].
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• Corpus fund
To meet catastrophic losses, a corpus fund shall be created with contributions from the
Govt. of India and State/UT on a 50:50 basis. A portion of calamity relief fund (CRF) shall
be used for contribution to the corpus fund.
The corpus fund shall be managed by an Implementing Agency (IA).
• Implementing Agency (IA)
An exclusive organisation is to be set up in due course, for implementation of crop
insurance. Until such time the GIC of India will continue to function as the Implementing
Agency.
Scenario in India
Crop insurance which - offers efficient and comprehensive protection to farmers has been
under discussion since Independence. A Pilot Crop Insurance Scheme (PCIS) was in
place between 1979-80 and later from 1984-85. A comprehensive crop insurance scheme
was introduced in April 1985. The National Crop Insurance Scheme was started from
1999-2000 rabi season. All these schemes were group insurance schemes, aimed at
farmers taking crop loans from banks.
The premiums were minimal — 1-3 percent. The risk was shared by the Centre, the State
governments and the General Insurance Corporation. The financial results of the three
schemes indicated that none succeeded in correctly estimating the actuarial probability of
the risk covered. The claims paid were almost six times the premiums collected in the
comprehensive schemes. They would be more than six times higher under the National
Crop Insurance Scheme. The block nature of the crop insurance schemes and the fact that
the premium has no actuarial basis, takes away the business character of the schemes. It
encouraged those wanting to take undue advantage of the schemes. It would appear that
in many cases where the actual loss was serious, little or no compensation was paid.
There are also cases where there was little loss but the compensation was based on block
experience. As India moves towards world-class agriculture and is becoming increasingly
market-oriented, a dependable crop insurance scheme has become a necessity. The
agricultural sector primarily depends on monsoon, which is known for its erratic character.
Furthermore, the low capital utilisation and the small size of holdings make agriculture in
India fraught with risk.
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A study comparing model yields of 15 crops showed that the risk of loss is as high as 40-
60 percent. The model yields in India are much lower than the actual yields in many other
countries; and the actual yields are still lower. It would appear that if crop insurance is to
give protection at the present model yields after deducting a basic loss, the premium might
be as high as 30 percent. Thus, a crop insurance scheme based on a premium of 1-3
percent of the amount covered cannot provide effective insurance cover.
Agriculture Insurance Company of India Ltd., New Delhi is the exclusive Company for
implementing crop insurance in India now. It started functioning from 1.4.2003. The
Company enjoys the distinction of being the largest crop insurance provider in the world in
terms of the number of farmers insured annually. During 2005-06, more than 167 lakhs
farmers were brought under the crop insurance umbrella. The main product i.e. “National
Agricultural Insurance Scheme” [NAIS] is presently implemented in 23 States and 2 UTs
by the company and it is also making continuous efforts to bring the remaining States/UTs
into its fold. The Company presently operates through its 17 Regional Offices located in
State Capitals across the country, under the supervision and control of Head Office at New
Delhi. The company envisages to bring more and more farmers into the insurance net by
offering them varied and tailor-made products and services. Of late, great emphasis is
being laid on risk management in agriculture too.
A Working Group has been set up under the Planning Commission, to look into the various
aspects relating to agriculture and allied activities, including Credit & Insurance, so as to
identify the various kinds of risks and the various ways and means to address them,
including extensive as well as intensive enhanced insurance coverage under NAIS. The
company also appointed Prof. V. S. Vyas and his team at The Institute of Development
Studies, Jaipur to carry out a comprehensive study of the working of the Crop Insurance
program. The findings of the study are still being examined by the company. Further, to
adopt a more realistic and market-based approach based on sound insurance principles,
the Company is also taking the assistance from the World Bank for designing and pricing
of area based yield product. The World Bank conducted the study through reputed
international Actuaries, particularly in the areas of designing and rating of Weather
Insurance Products and the Company’s Risk Portfolio Management.
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Agriculture scenario
Ironically, even though agriculture’s share in Gross Domestic Product has steadily
declined to 18.5% during 2006-07, till today, more than half of the population directly
depends on this sector and that is the reason why agriculture is so crucial in the socio-
economic fabric of the country. It is well known that a vast majority of the farmers cultivate
their crops in rain-fed conditions during monsoon season which impacts every stage of
agricultural operations from land preparation to selection of seed variety, timing of sowing,
transplantation, schedule of irrigation, fertilizer application, usage of pesticide, harvesting,
etc.
It is in this context that the agricultural risk management products, viz. insurance,
particularly for the small and marginal farmers, are of critical importance. A Study reveals
that ‘variability in rainfall’ accounts for more than 50% variability in crop yields. It is also
found that the negative impact of excess rainfall is not as high as the adverse impact of
deficit rainfall. In this backdrop, the 2006 monsoon rainfall was at 99% of the long period
average but distribution over time and space was uneven which affected east India, north-
west India and southern peninsula.
National Agricultural Insurance Scheme (NAIS)

The National Agricultural Insurance Scheme, which is being implemented by the
Company, on behalf of the Union/State/UT Governments, is the main business of the
Company. The Company’s emphasis is towards educating the farmers and creating Crop
Insurance awareness. During the year 2005 -06, the number of farmers insured under
NAIS grew by 3.08% to 167.18 lakhs farmers, with corresponding increase in Premium
booked by 3.72%.
The following table presents the latest status of the NAIS.
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National Agricultural Insurance Scheme (NAIS)

(Rs. In lakh)
S. Season No. of Sum Premium Claims
No. Farmers Insured Reported
Insured
1 Rabi 2011-12 5239299 1128393.63 25767.81 54320.16
2 Kharif 2012 10649354 2719906.05 87874.18 27878.90
3 Rabi 2012-13 6141677 1571008.05 44769.98 20524.95
4 Kharif 2013 9749600 2900218.30 97752.19 310027.16
5 Rabi 2013-14 3973588 1255204.10 29752.22 104275.74
6 Kharif 2014 9683529 2438783 84465.84 289683.52
National Crop Insurance Programme (NCIP)

The most important change is the introduction of NCIP from 1st November 2013
consequent to the withdrawal of NAIS. NCIP has three component Schemes viz. Modified
National Agriculture Insurance Scheme (MNAIS), Weather Based Crop Insurance Scheme
(WBCIS) and Coconut Palm Insurance Scheme (CPIS). MNAIS and WBCIS are being
implemented by AIC and 10 other insurance companies.
Modified National Agricultural Insurance Scheme (MNAIS)

The Scheme before incorporation in NCIP was piloted from Rabi 2010-11 to Kharif 2013.
The modified version has many improvements viz Insurance Unit for major crops are
village panchayat or other equivalent unit; in case of prevented / failed sowing ,claims up
to 25 percent of the sum insured is payable, post-harvest losses caused by cyclonic rains
are assessed at farm level for the crop harvested and left in ‘cut & spread’ condition up to
a period of 2 weeks in coastal areas; individual farm level assessment of losses in case of
localized calamities, like hailstorm and landslideon-account payment up to 25% of likely
claim as advance, for providing immediate relief to farmers in case of severe calamities;
threshold yield based on average yield of past seven years, excluding upto two years of
declared natural calamities; minimum indemnity level of 80 percent is available(instead of
60 percent in NAIS); and premium rates are actuarial supported by up-front subsidy in
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premium, which ranges from 40% to 75%, equally shared by Centre and States. The
Insurer is responsible for the claims liabilities. AICIL has been implementing MNAIS since
its inception. During Kharif 2014, the MNAIS was implemented by AIC in 133 Districts
across 13 States and during Rabi 2014-15 in 87 Districts across 9 States. Following Table
gives statistical data regarding the Scheme.
Modified National Agricultural Insurance Scheme (MNAIS)
(In Rs. Lakh)
S. Season No. of Sum Good Claims

No. Farmers Insured Premium Reported
Insured
1 Rabi 2011-12 61738 161183.19 15506.86 7264.40
2 Kharif 2012 1605822 438424.52 51101.60 61077.94
3 Rabi 2012-13 805609 162406.22 17948.57 4626.48
4 Kharif 2013 1429499 429557.29 53280.57 61951.09
5 Rabi 2013-14 2163549 441179.85 37314.38 43924.88
6 Kharif 2014 2347611 405412.47 46976.92 23022.86
Considering the learnings from existing and previous schemes and views from various
stakeholders, NCIP/NAIS was reviewed and a relatively matured Scheme “Pradhan Mantri
Fasal Bima Yojana (PMFBY)” was launched in 2016. From Kharif 2016, PMFBY replaced
the erstwhile NAIS/MNAIS in NCIP. WBCIS component under NCIP was also reviewed
and premium structure and administrative structure was made in line with PMFBY. This
reviewed WBCIS component had been named as Restructured Weather based Crop
Insurance Scheme (RWBCIS). Coconut Palm Insurance Scheme (CPIS), a component of
NCIP, is being continued without any change.
New Products Launched
Some of the new products introduced by the company with sustained R&D efforts include
the following:
• Sookha Suraksha Kavach
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• Coffee Insurance
• Mango Weather Insurance
Sookha Suraksha Kavach

The Company had launched another rainfall index based insurance product, specially
designed for the State of Rajasthan. It was implemented in a few districts for the benefit of
farmers in drought-prone areas. The product has been designed to cover popular and
widely grown crops like Guar, Bajra, Maize, Jowar, Soyabean and Groundnut which are
grown in the semi-arid climate of Rajasthan.
Coffee Rainfall Index & Area yield Insurance

Coffee Rainfall Index & Area Yield Insurance has been introduced on a pilot basis in the
State of Karnataka, to indemnify the coffee growers against the likelihood of diminished
coffee yield resulting from either shortfall in actual rainfall index within a specified
geographical location and a specified time period, and/or yield losses due to other non-
preventable natural factors. In all 58 coffee planters, covering an area of 514.21 hectares
was insured for Rs. 169.43 lakhs against a Premium of Rs. 3.66 lakhs. No Claims have so
far been reported.
Mango weather Insurance

The Company has come out with a product to insure the Mango crop under weather
insurance. The Mango crop is extremely vulnerable to weather factors like excess rainfall,
frost, temperature-fluctuations, and wind-speed. The Company has designed Mango
Insurance for a few districts of Andhra Pradesh, Maharashtra and Uttar Pradesh on a pilot
basis. The product is unique in the sense that, as many as four weather parameters are
used as triggers for indemnity. The product has been designed after an extensive field
study and discussions with the scientists working on Mango cultivation.
Coconut Palm Insurance Scheme (CPIS)

AIC in collaboration with Coconut Board designed a Scheme for coconut i.e. Coconut
Palm Insurance Scheme (CPIS) which is now a component of NCIP. The Scheme is
available to all Coconut growing States/UTs in the country. Dwarf and Hybrid coconut
palms in age range of 4 to 60 year and Tall variety coconut palms in the age range of 7
429
to60 year are eligible for coverage. On premium,50% subsidy will be paid by Coconut
Development Board (CDB) and 25% by State Government concerned and balance 25% of
the premium will be paid by farmer / grower. In case, the State Government does not
agree to bear 25% share of premium, farmers / growers will be required to pay50% of
premium, if interested in insurance Scheme. Besides the above, AIC has developed
various crop insurance products for risk mitigation of various crops viz. Rainfall Insurance
Scheme-Coffee (RISC) in collaboration with Coffee Board Rubber Plantation Insurance,
Bio-Fuel Plants Insurance, Grapes Insurance, Mango Weather Insurance, Potato Contract
Farming Insurance, Pulpwood Tree Insurance, Rabi Weather Insurance, and Varsha Bima
/ Rainfall Insurance
Awareness & Publicity Program
The Company undertakes extensive awareness and publicity activities through print and
electronic media, posters, wall paintings, bus panels and mobile-vans, awareness
workshops at State and District levels where farmers, bank officials, district level
government functionaries and other interested parties are briefed about the services. A
massive awareness campaign for NAIS called “Krishi Bima Kisan Tak” [KBKT] was
undertaken to touch 1,00,000 villages in 3,600 tehsils, across 400 districts of 23 States &
2 UTs, with an objective to make the farmers aware of crop insurance and the benefits
available thereunder.
Micro Level Marketing strategy
Further, to reach out to the farmers at their doorstep, the Company has made plans to
launch “Krishi Bima Sansthan” [KBS], which conceptualizes utilization of rural
entrepreneurs to market crop insurance products, especially to non-loanee farmers. The
KBSs are proposed to be established at district levels, backed by the work-force of
Agents/Micro-Agents. IRDA regulations on micro insurance provides for servicing of micro
insurance products through micro insurance agents to be selected from SHGs, MFIs &
NGOs.
Product Development
The Company has undertaken studies to design various farmer-friendly, tailor-made,
affordable products, in accordance with the sound actuarial principles to cater to the
specific needs of different farmer groups. Some of the products are:-
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Rainfall Insurance
Rainfall Insurance product, more popularly known as Varsha Bima, was developed to
combat the impact of adverse rainfall incidence. The product was aimed at mitigating
some of the adverse financial effects of rainfall variation on crop yield. A correlation
between the deviation in crop output and the deviation in the adverse rainfall is
established and payout structures are created and the insured farmers are accordingly
compensated. The main advantage of the product is quick settlement of claims on the
basis of rainfall data obtained from the designated Rain Gauge Stations.
Rabi Weather Insurance for Field Crops

The Company designed a tailor-made weather index based insurance product for Rabi
season for the farmers serviced by ‘e-chaupals’ of ITC in the States of Madhya Pradesh,
Maharashtra, Rajasthan & Uttar Pradesh. The product covered potato, wheat, barley,
lentil, gram etc.
Bio-Fuel Tree / Plant Insurance
The Company designed a named peril product to insure six different species commercially
grown for bio-fuel production. The annual policy is being sold to corporates / institutions
involved in commercial production of bio-fuel.
Potato Crop Insurance
There has been a demand from potato growers for an ‘individual farm’ based potato
insurance against natural calamities, pests & diseases. Considering this, AIC has
designed “Potato Crop Insurance (Input) Policy”. The product has been designed after a
careful study of package of practices, lending arrangements and buy-back arrangements
by the agencies. Initially, during Kharif 2006 season, the product was tried out in and
around Pune.
Modified Products
Poppy insurance
Poppy insurance introduced during Rabi 2005-06 season has been modified on the
basis of experience and review; and got it approved as ‘Micro Insurance Product’ for Rabi
2006-07 season. This policy was made available to the licensed poppy growers in the
States of Madhya Pradesh, Rajasthan & Uttar Pradesh.
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Wheat Crop Vigor & Weather Insurance

Wheat Crop Vigor & Temperature based insurance product piloted in a few districts of
Haryana & Punjab during Rabi 2005-06 season has been modified on the basis of the
review. Anew trigger in terms of ‘unseasonal rainfall’ has also been added. The product is
being marketed as ‘Wheat Crop Vigor & Weather Insurance’ product from Rabi 2006-07
season. Apart from the above two yield guarantee insurance Schemes, the Government of
India had introduced another Pilot namely, Pilot Weather Based Crop Insurance Scheme
(WBCIS) with effect from Kharif 2007, which became full-fledged Scheme as a component
of NCIP with its introduction. The Scheme operates on an actuarial basis with premium
subsidy which ranges from 25% to 50% equally shared by Centre and States. AIC has
since implemented the Scheme in various States during all previous Kharif and Rabi
seasons starting Kharif 2007. WBCIS is a parametric insurance product designed to
provide insurance protection to the cultivator against adverse weather incidence during the
cultivation period, such as deficit & excess rainfall, frost, heat (temperature), relative
humidity, wind speed etc., which are deemed to adversely impact the crop yield. Crops
and ‘Reference Unit Areas (RUA)’ are notified before the commencement of these as on
by the State Government Each RUA is linked to a Reference Weather Station (RWS), on
the basis of which payout/ claims are processed.
The payouts are made on the basis of adverse variations in the current season’s weather
parameters as measured at Reference Weather Station (RWS). Claim under WBCIS is
area based and automatic. Today, WBCIS component under NCIP was also reviewed and
now the WBCIS component had been named as Restructured Weather based Crop
Insurance Scheme (RWBCIS). Coconut Palm Insurance Scheme (CPIS), a component of
NCIP, is being continued without any change.
Weather based Crop Insurance Scheme (WBCIS)
(In Rs. lakhs)
S. Season No. of Sum Good Claims
No. Farmers Insured Premium Reported
Insured
1 Rabi 2011-12 3169918 669577.58 55754.43 58211.10
2 Kharif 2012 3547463 724009.97 72647.97 54697.44
3 Rabi 2012-13 3706834 646623.46 57562.09 77740.13
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4 Kharif 2013 5000339 891262.43 89820.20 66692.59

5 Rabi 2013-14 1287898 311593.89 28610.78 29798.38
6 Kharif 2014 2455421 600899.01 62123.08 55089.77
Pradhan Mantri Fasal Bima Yojna (PMFBY)

Pradhan Mantri Fasal Bima Yojana (PMFBY), is primarily an Area Yield Index based
scheme, where losses (in reference to Pre-Notified Threshold Yield) for a notified area are
determined based on requisite number of sample Crop Cutting Experiments (CCEs) under
the General Crop Estimation Survey (GCES). However, to reduce the basis risk (i.e.
mismatch in farmer expectations and payment from scheme) under the PMFBY, localized
losses (due to hailstorm, Landslide & Inundation) and Post-Harvest losses (due to
Cyclone/Cyclonic Rains & Unseasonal Rains) are assessed on Individual farm level survey
basis. PMFBY also protects farmers in the event of the ‘Insured area being prevented from
sowing/ planting’ due to deficit rainfall or adverse seasonal conditions. To provide
immediate relief to the insured farmers in case of mid-season adversaries causing
expected yield to be less than 50% of Threshold yield., PMFBY provides for On-Account
partial payment (up to 25% of likely claims) without waiting for final yield data.
The PMFBY mandates compulsory coverage for all loanee farmers and non-loanee
farmers are also encouraged as well. The scheme is open to all food & oilseeds crops and
annual commercial/ horticultural crops for which past yield data is available and for which
requisite number of Crop Cutting Experiments (CCEs) are conducted as part of the
General Crop Estimation Survey (GCES). The unit of insurance is Village/Gram Panchayat
for major crops; and for other crops the unit of size may be above this level. Sum insured
per hectare under PMFBY is equal to the Scale of Finance, which is usually equivalent to
the production cost. PMFBY is market led when it comes to discovery of premium rates.
While the Insurance companies charge the Actuarial Priced Premium Rate (APR), farmer
has to pay a maximum 2% for Kharif and 1.5% for Rabi crops and 5% for
commercial/horticultural crops. The difference between actuarial premium rate and the
rate of Insurance charges payable by farmers shall be treated as Rate of Normal Premium
Subsidy, which shall be shared equally by the Centre and State Government. However,
the State/ UT Governments are free to extend additional subsidy over and above the
stipulated subsidy from its budget.
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Restructured Weather Based Crop Insurance Scheme (RWBCIS)

Restructured Weather Based Crop Insurance Scheme (RWBCIS) is primarily envisaged as
a scheme for those crops for which historical yield data is not available or the yield
estimation process does not exist, but are also exposed to climatic risks and production
loss. Restructured Weather Based Crop Insurance Scheme is Area Weather Indexed
based Scheme, wherein deemed losses (In reference to notified Payout-structure) for
notified areas are determined based on weather data from a notified Reference Weather
Station (RWS). Hailstorm / cloud-burst may also be covered as Add-on/Index-Plus
products for those farmers who have already taken normal coverage under WBCIS.
Losses of add-on covers are assessed on individual farm level.
Similar to PMFBY, RWBCIS is a compulsory coverage for all loanee farmers and optional
for nonloanee farmers. Under RWBCIS, Sum Insured (SI) is based on the ‘Scale of
finance’ as decided by the District Level Technical Committee(DLTC). If the scale of
finance is not declared by DLTC the sum insured will be broadly based on the cost of
cultivation of the crops and will be decided by State Government. Similar to PMFBY,
RWBCIS is market led when it comes to discovery of premium rates. Here again, the
Insurance companies charge the Actuarial Priced Premium Rate (APR), farmer has to pay
just 2% for Kharif and 1.5% for Rabi crops and 5 % for commercial/horticultural crops.
The latest status of crop insurance for the year 2017-18 is shown below:
Table Crop Insurance during Financial Year 2017-18 as on 31-03-2018
(Amount in Rs. Lakhs)
No. Company PMFBY RWBCI Total Crop Insurance Business (PMFBY +
RWBCI + others)
No. of Gross Claim Reported No. of Gross Claim Reported No. of Gross Claim Reported
farmers written farmers written farmers written
covered premium covered premium covered premium
Amount No. of Amount No. of Amount No. of
benefi- benefi- benefi-
ciaires ciaires ciaires
1 AIC 15908307 767194 1063055 8928598 200425 21826 44042 178491 16123906 789339 1233939 14201166
2 Bajaj AlinZ 3195195 170481 39711 118183 43439 13052 75642 400102 3238634 183535 114352 518205
3 Bharti Axa 371576 37946 9176 48456 0 0 0 0 871576 37946 9176 48456
4 Cholamanalam MS 862960 37282 13927 201830 58693 12434 2585 335015 921658 49716 16512 536845
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5 Future General India 0 [137] 6436 36696 0 0 0 0 0 (137) 6436 36696

6 HDFC Ergo 1992514 92877 150717 993439 372699 127257 26481 354930 2364942 220131 177234 1374816
7 ICICI Lambard 2139878 236927 123244 869287 2852 65 242 6343 2163575 237106 138206 1870649
8 IFFCO Tokio 2158269 91267 165233 556470 198363 16462 1795 265 2433267 107861 186304 1358825
9 The New India 2907094 178449 121825 354601 0 0 0 0 2907094 178449 121825 354601
Assurance #
10 National Insurance 3613124 135416 117550 1110346 78786 8340 14193 71923 3691910 143760 131748 11822269
11 The Oriental Insurance 2104052 82522 113207 644637 0 0 0 0 2104052 82522 113207 645637
$
12 Reliance 3005156 93428 24431 452332 44742 24692 11520 82411 3049898 118114 47596 1784102
13 Royal Sundaram 6557 189 1 35 0 0 0 0 6657 189 1 35
14 SBI General 705008 51209 6668 36007 164553 18821 3202 48878 869561 70030 9871 84835
15 Shriram General * 0 [2723] 12739 315468 2432 319 3472 17335 2432 (2403) 16211 332803
16 Tata AIG 1380718 41569 30799 210721 168 7 3684 87665 1388886 41576 34482 298336
17 United Insurance * 3105125 147040 147346 2617401 25770 0 1599 12295 3031595 147040 148945 2659696
18 Universal Sanpo 2154521 112542 78087 242306 0 0 19702 0 234563 124385 98509 258369
Total 46009354 2273479 2224370 17767733 1192927 243278 201164 1615653 47436106 2529159 2615054 27546441
Note: “Gross Written Premium (GWP) of PMFBY also includes RWBCIS premium for Telngana Khariff 2017. PMFBY & RWBCIS bifurcation
being reconciled on portal as on 31-03-2018.
# No of beneficiaries include only those beneficiaries to whom Claims have been paid during 2017-18.
$ No. of farmers covered, No. of Beneficiaries are provisional.
Negative GWP due to removal of entities (No business underwritten in 2017-18 and reversal pertains to 2016-17 business)
RWBCIS: Total No. of beneficiaries exceeds No. of farmers covered – due to claim payments pertaing to previous years made in 2017-18.
IRDAI NOTIFICATION - Ref. No. IRDA,/INT/CIRy PSP/ 1231 061 2016 DATED 24TH
JUNE, 2016
The Regulator IRDAI in its recent circular issued to all the CEOs of General Insurance
companies had notified the Guidelines on Point of Sales Person for Govt. approved
Crop insurance Scheme. As per the guidelines, the Government of India has approved
inclusion of the following Government sponsored crop insurance Schemes that can be
solicited and procured through Point of Sales Persons of non-life insurers:
(i) Pradhan Mantri Fasal Bima Yojana (PMFBY),
(ii) Weather Based Crop Insurance Scheme (WBCIS) and
(iii) Coconut Palm Insurance Scheme (CPIS)
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The Authority has removed the cap on sum insured for the above mentioned Government
sponsored crop insurance Schemes. The insurers wishing to solicit and procure the above
Government sponsored crop insurance schemes through Point of Sales Persons shall
follow the procedure prescribed under clause 3 of Para V of the Guidelines on Point of
Sales Person - Non-life & Health lnsurers.
3. Aviation Insurance
Aviation industry is vulnerable to risks of devastating losses. If a single aero plane
crashes, lives of hundreds of people are lost along with the aircraft besides the damage
caused to the place where the accident occurs. Insurance is therefore of paramount
importance for this industry. The most common coverages of aviation insurance are:
• Aircraft liability insurance
• Hull coverage
• Personal accident
The premium rate for each aircraft is driven by international reinsurance markets, mainly
at UK, based on the world trend in claims experience during the preceding years.
Aircraft Liability Insurance

The liability in case of aviation insurance is divided into two categories:
• Passenger liability
• Death and injury to third parties
There are some policies that cover both these categories as well as property damage with
a single limit to cover all three of them (like floating policies in fidelity guarantee).
Admitted liability
Here specific amounts are allocated beforehand to the various kinds of injuries like the
loss of a limb, eye or life. The policy is written on ‘per seat’ basis. In case of an accident
the insurer offers payment along with the release of liability against the insured. The
injured party is required to sign the release against the insured if he wants payment from
insurer. Otherwise he will have to obtain compensation on his own. As the insurer
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voluntarily offers compensation on the occurrence of accident, this policy is also called
“voluntary settlement charge”.
Medical Payments
The aircraft liability insurance also provides coverage of medical payments for injuries
sustained while travelling in or entering or alighting from the aircraft. This policy coverage
is available only if the policy includes passenger bodily injury liability.
Hull coverage
Hull refers to the body and machinery of the aircraft. Some policies provide open perils
coverage both on ground and in flight whereas others restrict the open perils coverage to
ground only. In flight policies do not cover crash or collision. They cover perils of fire,
lightning or explosion in air.
In India the following are the important policies available in aviation insurance.
• Aircraft Hull and Spares All Risks Aviation Liability Insurance (Airlines)
This policy is best suited for scheduled airlines.
Covered Risks: Accidental physical loss or damage to the aircraft/aircraft spares, legal
liability to third parties towards bodily injury/death and property damage, passenger(s)
bodily injury/death baggage, cargo and mail. Premises, hanger keepers, catering and
vehicle liability on airports also can be covered.
• Aircraft Hull/Liability Insurance Policy
This policy is meant for the owners/operators of smaller aircrafts used for private pleasure,
training, industrial aid, business, commercial, offshore operations etc.
Covered risks: Accidental physical loss or damage to the aircraft. Bodily injury/ death of
the passenger(s), loss of passenger’s baggage and bodily injury/death and property
damage to the third parties.
• Aviation Fuelling/Refuelling Liability Insurance Policy
This policy is meant for the suppliers of ATF (Aviation Turbine Fuel).
Covered risks: Legal liability to third parties arising out of injury/death and property
damage.
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• Aviation personnel accident (Crew members)

This policy is meant for pilots and other crew members.
Covered risks: Accidental bodily injury, disablement (temporary / permanent) and death.
Policy operates worldwide.
• Loss of license insurance
This policy is meant for operating crew, pilots, co-pilots and flight engineers.
Covered risks: Suspension or termination of license due to disease, sickness or accident.
Policy operates worldwide.
4. Personal Accident Insurance

Personal accident insurance provides protection to the insured person financially, if he is
injured. This policy provides monetary compensation in case of death or disablement
resulting from accidental injury arising out of external, violent and visible means. Medical
expenses incurred for treatment of injuries from such accident are also reimbursed to a
certain extent on payment of additional premium.
The policy also pays a pre-determined sum if death occurs as a result of an accident. All
of us are exposed to the risk of accident, which is a threat to our financial security, and
therefore it is prudent to have adequate personal accident cover to manage this
contingency. For handling accident risks, personal accident policy, janata personal
accident policy and gram in personal accident policies are available in India. Other
personal accident policies are offered to particular groups like students, NRI’s, women etc.
Scope of cover
Personal accident policy pays compensation to the insured in the event of happening of
one or more of the following which may be selected by insured at the time of taking policy:
• On death
• On permanent total and partial disability and
• On temporary total disability
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In case of accidental death during the policy period, normally, the policy, in addition covers
funeral expenses of the insured person. (some companies even provide removal of mortal
remains). Permanent total disablement occurs when an individual is unable to perform his
regular duties for the remaining part of his life. (loss of both eyes, upper limbs, lower limbs
etc. are treated as total disability.
Table of Benefits
Sl. No. Benefit Description Table Benefits
covered
1 Death (100% of CST) I I
2 Loss of two limbs or loss of one limb and loss of sight of
one eye(100% of CSI)
3 Loss of one limb or loss of sight of one eye (50% of CSI)
4 Permanent Total Disablement from injuries other than II I to 4
named above (100% of CSI)
5 Permanent Partial Disablement III I to 5
6 Temporary Total Disablement Weekly 1% of CSI upto
100 weeks (max. Rs. 5000/- per week)
Additional benefits without additional premium
1. Education Fund: In case of death or permanent total disablement of the insured
person due to accident, in addition to the compensation certain percentage of the sum
insured is paid towards the education of the dependent children.
2. Expenses for Carriage of dead body: In case of the death of the insured away from
his/her place of residence due to accident, such expenses for carriage of the dead body to
the place of residence are paid upto 2% of the CSI subject to Rs. 2500/- maximum.
3. Cumulative bonus: At the time of renewal of the policy, in case of no claim having
been reported under the earlier policy, then the policyholder is entitled to an increase in
the compensation payable for death and permanent disablement by 5% each year up to a
maximum of 50% of CSI.
The policy is effective for a period of one year from the payment of premium.
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The cover is operative on a 24 hours and worldwide basis.

When an individual is injured in an accident and as a result he is unable to perform his
normal duties for a certain period we can describe it as temporary total disablement i.e.
weekly benefits are paid @ 1% of sum insured). This policy can also be extended to
reimburse the medical expenses due to accidents up to 10% of the insured amount or 25%
of the claim amount or expenses incurred for treatment of the insured person whichever is
less. (this can vary from insurer to insurer)
In 1989, a new clause was added to personal accident tariff (now all detariffed) namely
education fund. According to this clause, in case of death or permanent total disablement
of insured person, it provides additional compensation to the insured’s children for their
education. The dependent children should be below 23 years on the date of accident of
insured person.
• If there is only one dependent child then 10% of CSI (Capital Sum Insured) and a
maximum of Rs.5000.
• If there is more than one dependent child then 10% of CSI and a maximum of
Rs.10,000/-.
The above compensation will be paid along with the capital sum insured to the dependent
or the person who is entitled to receive the claim amount.
Personal accident insurance covers the following perils. The option is given to the insured
to take cover for one or all of the risks. All accidents are covered subject to named
exclusions of suicide, intentional self injury, nuclear, etc. are covered. Even a murder is an
accident.
• Accidental injuries, drowning, poisoning
• Injured by snake bite, dog bite, etc.
• Accidents during transit
• Injuries while engaged in sports
• Injuries occurring in course of construction of buildings, offices etc.
• Accidental injuries due to slipping or collision
Personal accident policy does not cover injuries resulting out of war, self-inflicted injury,
diseases or insanity, death due to war operations, attempted suicides, accidents in armed
forces, aircraft accidents, accidents due to nuclear weapons etc.
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Underwriting
Like life insurance policy, personal accident policy will pay the predetermined benefits or
compensation if the accident occurs. This is an agreed value policy and not an indemnity
policy. So even in case of multiple policies, the claim can be made from all the policies.
Only the underwriter has to be careful in not granting over insurance. It is a contract to pay
benefits, which are fixed, but not a contract of indemnity. There is a condition in personal
accident policy that if insured wants to take another similar policy he has to take written
permission from the insurance company with which he is already insured. The financial
position of the insured determines the insurance amount. If the insured reaps more
benefits from the policy that places him in a better position than he was, it will force the
insured to become intentionally disabled. Hence it is necessary to take the insured’s
income into consideration and also the income he loses due to an accident. An acceptable
limit has to be followed for additional expenses incurred by insured as a result of
disablement. In temporary total disablement, the claim is limited to weekly earnings of
insured.
Capital sum fixation

Capital Sum Insured (CSI) is the maximum amount the insured can claim from the insurer
under the policy. The amount of capital sum insured under personal accident policies is
fixed on the basis of income or salary. In order to fix the capital sum, the income levels of
insured are categorised under first, second and third levels. These levels are applicable to
those persons who undertake more than one policy. The policy issuing office should see
that insured person’s income is proportional to CSI. (The indicative limits are 75 times the
monthly salary for death only / total permanent disability cover and 60 times for permanent
partial disability and 36/25 times , weekly benefits.) The existing personal accident policies
should be observed by policy issuing office so as to make sure that the sum mentioned at
different levels are not exceeded. The personal accident policy will be applicable to those
persons who possess good health (physical and also mental conditions).Permanent
disablement of any part of body is decided based on the capacity and utility of that
particular part.
Premium Rates
Generally PA policies are issued to insured between age group of 5 yrs to 70 yrs and the
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upper age may be relaxed on merit. The premium rates of personal accident policy are
fixed based on the nature of occupation of the insured. The occupations are classified into
three categories. The Personal Accident risks are classified into three groups.
Risk group – I: Accountants, Doctors, Lawyers, Architects, Consulting engineers,
Teachers Bankers, Executives.
Risk group – II: Builders, Contractors and Engineers engaged in superintending
functions, veterinary doctors, paid drivers, garage and motor mechanics, machine
operators, athletes, sportsmen, wood working mechanists, cash carrying employees.
Risk group – III: Persons working in underground mines, explosive magazines workers
involved in high tension supply electric installation, Jockeys, Circus personnel, persons
engaged in hazardous sports activity.
Classification of Personal Accident Insurance

• Individual personal accident insurance
• Group personal accident insurance
Individual Personal Accident Insurance
An individual between 16 and 65 is eligible for this. This policy offers cover all through the
year. This policy covers consequences of accidents such as death, permanent total
disability and medical reimbursement. Under individual personal accident insurance, each
individual should submit a standard proposal form with relevant information required by
the insurers. Fresh forms will have to be given only after two renewals. Proposal forms
should mention the income level and state of health of the insured. During the policy
period, the capital sum fixed should not be changed or altered and the sum is fixed at the
commencement of the policy. Rs. 30 is the minimum premium amount charged under this
policy. The compensation will increase by 5% after every claim-free year during the
currency of the policy and this cumulative bonus will not exceed more than 50% of the
capital sum fixed. If the insured person is an employee in any organisation and if personal
accident is restricted only to duty hours then the premium is reduced to 75%. In addition to
these benefits, the policy will provide for medical expenses up to 10% of insured amount
or 25% of claim amount whichever is less. This policy also reimburses the funeral
expenses of the insured to the extent of 2% of sum insured or Rs. 2500 whichever is less.
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Group Personal Accident Insurance

Group Personal Accident policy covers a group of persons. The group discount is based in
the size of the group. The group discount ranges from 5% to 30% depending on the size of
the group. Any person irrespective of sex occupation, and profession in the age group of
10 to 7o years may be covered. Group policies are categorised into two levels. A premium
rate for this policy is fixed on the basis of the category to which an individual belongs. First
level consists of all named and unnamed employees of companies, industries, firms and
associations and second level comprises of members of association, institution, society
etc. In the first level, employer will decide the group of employees to be insured. The
minimum amount of premium to be paid under group policy is limited to Rs.100 (depends
on the company’s policy). Cumulative bonus is not allowed under group policies. The
employer can take cover for his workers who may be injured by accidents during the
period of employment. Group discount is allowed only if the number of individuals insured
exceeds 25 (again depends on the insurer). Reimbursement of medical expenses will be
the same as in the case of individual personal accident policy. For group policy exceeding
500 people, it is possible to customise the policy according to the requirements of the
group. In PA policies, the geographical area is worldwide.
5. Overseas Travel Insurance

Travel Insurance covers travel related accidents also. While travelling outside India,
individuals face risks such as loss of baggage, accidents involving injuries, illnesses and
medical emergencies requiring hospitalisation treatment. Unless adequate precautions are
taken, these contingencies will pose serious consequences to the overseas traveller. A
prudent person should therefore carefully examine the risks that he is exposed to and
secure the required coverages before leaving his home country (many countries do not
allow people without medical insurance).In India, today, travel insurance has become
popular among international travelers and their insurance requirements are met by the
nationalised insurance companies as well as the new entrants into the General Insurance
industry. Now let us take a look at the various coverages offered by the insurance
companies of India to meet the requirements of the overseas travellers.
Coverage
The following are the coverages offered under travel insurance policies in India:
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• Flight life Insurance, which covers only single flight and travel accident insurance.
• Lost baggage insurance, which provides security to valuable items carried during the
trip. Insurer pays the value of the missing items.
• Overseas health insurance.
• Reimbursement of overseas medical expenses.
• Trip cancellation and interruption insurance provides for the huge non-refundable
prepayments made when an individual is unable to take trip due to illness or any
other emergency conditions.
• Delay in arrival of baggage. Delay in departure.
• Public liability at the foreign land.
Overseas Travel Insurance

Overseas travel insurance, provides protection against all risks while travelling abroad.
Accidents and mishaps can happen anytime and at any place and therefore it is essential
for an individual to identify the travel related risks in advance and insure these risks. Both
private and public sector insurers sell travel insurance products.
Example: When an individual on an overseas tour is hospitalised after an accident, the
medical expenses would be so high that an average person cannot meet them. If he is
insured under travel accident insurance, the insurer will reimburse the medical expenses
up to policy limit. Travel insurance products can also be purchased from travel agents or
from tour operators wherever it is convenient. Today the importance of travel insurance is
fully recognised and therefore it is often said that this product is purchased and not sold.
Types of travel insurance policies are Individual, Corporate frequent travelers, students,
family.
All Risks
‘All risks policy’ as the name suggests does not cover all the losses or damages. ‘All risks’
insurance policy covers only those losses or damages, which arise due to fire or burglary
or theft. It also covers losses due to accidental or unexpected circumstances. Since all
risks policy covers a wide range of risks and perils, it is difficult for the insured to prove
that he has incurred the loss.
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This type of policy is especially suitable for valuables like jewellery, gold and silver
articles, art and painting works, cameras, clocks, and other valuables. It is difficult in all
risks policy to estimate the value of risks covered under the policy like art and paintings. In
such case, the valuables are insured on value agreed by insured and insurer and claims
are settled on this basis after deducting depreciation. But the value of items like jewellery,
gold and silver plates is calculated by consulting a professional appraiser. The policy can
be limited to a single article or set of articles. If inventory and valuation clause is included
in the policy, then there is no need for the insured to show the invoices and to prove cost.
In this case, the claims are settled according to the values assessed by professional
valuer and mentioned in the policy.
6. Golfer’s Indemnity Insurance

While playing a sport like golf, if a person accidentally injures other persons, then he is
responsible for the other person’s injuries. Golf indemnity insurance provides protection
against losses or damages to the golf players and to golf equipment. It also provides
protection against public liability resulting is death or disability. All golf players or sports
persons can insure themselves under golfer insurance policy in order to protect their rights
and interests as sports persons.
Coverage
The following risks are covered under golfer insurance:
• Any material damages to golf equipment while transporting the equipment, which
includes breakage of golf clubs.
• Injury to third party who is not a family member or employee of insured person.
• If the insured is injured during the golf course in India, he is entitled to receive
personal accident benefit up to Rs.25,000.
Exclusions
The golf indemnity insurance does not cover the following losses:
• Losses due to war or invasion, nuclear perils, riots.
• Damages due to earthquakes, floods etc.
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• Loss or damage brought about by the insured either directly or indirectly. Any
consequential losses, losses due to depreciation and wear and tear.
In India, National Insurance Company (NIC), Oriental Insurance Company (OIC), United
India Insurance Company (UIIC) and New India Assurance Company (NIAC) and other
private insurance companies offer Golf insurance.
7. Crime Insurance
Crime is one thing that all the countries in the world want to eliminate but are
unsuccessful. Crime has also become one of the most serious problems of the recent
times. Unfortunately crime is also the field that has received less than the required
attention from the insurance companies. A study reveals that in US less than 10% of loss
from the ordinary crime is insured. Imagine then, in a new market like India. Looking at the
grave necessity of crime insurance, U.S. Federal Government itself started extending
burglary and robbery insurance. There are two types of financial protection that are
available against the losses caused by crime. They are fidelity and surety bonds and
burglary, robbery and theft insurance.
Bonds and insurance are very much alike. A bond is a legal instrument in which a third
person (surety) ensures the performance of a contract properly by the principal or the
obligator. He does this by promising reimbursement of damages in case of default in the
performance of the contract by the principal. For example, if a contractor is asked to
deposit a bond by the owner of any building, it means the surety will pay the damages in
case the contractor is not able to complete the project. Hence to a great extent bonds
sound just like insurance. Yet it is not insurance. We will see the difference between
insurance and bonds after going through them.
The classification of bonds and insurance is shown in the figure above. So in the coming
section only the definitions of these terms are given. Fidelity bonds deal with assurance of
bonafide behaviour by an employee during the course of his employment. In fidelity bond,
as the word itself suggests the surety assures the employer of trustworthiness and
honesty of the employee and agrees to pay the damages that arise due to the dishonest
acts of that employee. If the fidelity bond is meant for a single individual, his name is
mentioned in the bond and it is called individual bond, whereas if the bond mentions a
class and indemnifies the acts of all the employees falling in that class, it is called the
schedule bond.
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Surety bonds, also called the financial guarantee bonds, are the bonds in which the surety
promises to make good any loss arising from the default of the principal in fulfilling his
liabilities towards the obligee. The example of the contractor cited in the beginning of the
discussion falls under this category. To be more specific, it is an example of the
construction bond and the bid bond. In contract construction bond the contractor
guarantees that the bidder will sign the contract if it is awarded to him at his bid.
Now let us go through the insurance covers available against crime. While reading them,
think of the basic difference between the type of perils covered by them and those covered
by the bonds. Insurance cover is available basically for burglary, robbery and theft. It is
necessary to see the meaning of each to differentiate them from one another. When
somebody forcefully enters the business premises and unlawfully takes any property, the
act is called burglary. The ‘forceful entry’ is a prerequisite to burglary. Hence if a customer
hides in the business premise until it closes, steals something and leaves without forcing
the door or the windows to open, the act would not be considered as burglary. Personal
contact is a prerequisite for robbery. It covers the acts of unlawful taking of any property
from any person by force, threat of force or violence. Therefore pick-pocketing or theft of
luggage of a person while he was sleeping, would not be classified as robbery. Here the
personal contact is there but the force, threat of force or violence is missing.
Theft is a wider term that includes all the crimes of stealing, whether or not covered by
burglary or robbery. Acts like passing false cheques come under forgery. Now that we
have gone through the various crime bonds and the crime insurance covers, did you
notice any difference between the perils covered by the bonds and the insurance? The
bonds cover the losses that arise due to the dishonesty or incapacity of the person
entrusted with some work, money or property, whereas, insurance covers the losses due
to stealing or theft by strangers, the people who are not trusted by the work, money or
property. The crimes committed by the insured, officers, employees or the directors of the
insured do not come under the purview of burglary, robbery or theft i.e. they are not
covered by crime insurance but by fidelity bonds.
This is the specific difference between fidelity bond and crime insurance. The general
differences between a bond and insurance are as follows:
• In bonding, the surety does not expect the loss to actually happen and if the loss
happens and he is required to pay for it, he reserves the right to recover it from the
defaulting principal, whereas the insurer is prepared to pay for the loss and works on
the principle of spreading this loss over the group of insured people.
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• The nature of risk is different, as we have seen in case of fidelity bonds and
insurance. Usually, the matter covered by bonds is under the control of the insured
and the losses covered by insurance are matters outside the control of the
individual.
• The insurance contract is cancellable, usually, by either of the parties. The bonds
cannot be cancellable until all the obligations of the principal are fulfilled.
• Insurance contract involves two parties, whereas bonds involve three.
8. Burglary Insurance
Burglary insurance is as common in business houses as fire insurance. It involves forceful
and illegal entry into the business premises for the purpose of stealing. “Forceful entry” is
the prerequisite for burglary. It is necessary to differentiate it from theft, robbery or
housebreaking.
Robbery requires a forceful personal contact. It is an aggravated form of burglary where
force is used against a person. Housebreaking is entering the house for the purpose of
committing any crime. Six ways of entry that come under the purview of burglary have
been listed in the Penal Code. Theft is a wider term and includes whatever is covered or
not covered under burglary or robbery. The other way to understand the scope of any
policy is to look at what is not included in it. But before going through the exclusions let us
get acquainted more with the policy. Burglary insurance is not only for the goods owned by
the person but also for the goods he is responsible for like those held in his trust. It also
includes the relationship of bailment or agency regarding the goods. Under burglary
insurance, various types of schemes are available. The policy with wider cover excludes
the items that are specifically covered under other policies. For example, if the jewels of a
person are covered under jewellery and valuables policies and he avails all risk policy of
burglary insurance jewellery would not be covered under it.
Moral hazard is of special significance in burglary insurance, especially in the private
dwellings policies. Fraudulent or exaggerated claims may be presented to the insurer to
avail the benefits of the policy. The value of the property may be misrepresented to take
advantage in the amount of premium charged. These things might happen in other
insurance policies also but the burglary insurance is more susceptible to moral hazards.
The main policies available under the burglary insurance are:
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i) Burglary business premises insurance policies

ii) Burglary private dwellings insurance policies (theft covered)
iii) Combined fire and burglary insurance policies
iv) All risk insurance policies
v) Baggage insurance policies
vi) Jewellery and valuables insurance policies
i) Burglary business premises insurance policies, that insures the stock-in-trade and
other goods, can be issued on the basis of:
Full value
(i) Non declaration policies
(ii) Declaration policies.
• First loss
• Inventory and valuation
• Floating policies
Think over the terms and you can make out the difference. There are certain goods that
can be stolen as a whole like jewellery or any small machine. But some goods like sulphur,
rock phosphate etc. (bulk commodities) cannot be lost all at a time. Full value policies
cover the former category of goods and the latter are covered by “first loss” policies.
In first loss basis policies, the maximum likely loss on one occasion is assessed (specified
as percentage say 10% or 15% of full value) and insured. A notable feature of this type of
policy is that the pro-rata condition of average is not applied, though the insurance is not
for the full value. But in a sense the policy is not free of average, as in the event of the
sum insured not measuring upto the stipulated percentage of full value of stocks held by
the insured on the date of loss, average would still be applicable to the extent of the
difference in percentage of the full value. This is known as the ‘condition of partial
average’.
In full value policies, the goods are insured for their full value. This includes the original
cost price and overheads. The consideration of profit is not included. One thing noticeable
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here is that the level of inventory might not remain the same always. In goods like food
grains, cash crops etc. the level of inventory varies greatly over a period of time. As the
level of stock decreases, the loss that the burglary could cause would also decrease.
For goods whose inventory levels vary at different points of time, there is a ‘declaration
policy’. In declaration policies the maximum value of the stocks is estimated in the
beginning. The insurance is based on this amount and premium is charged on 75% of this
amount on provisional basis. Later the stock is valued and declared at the end of every
month. At the termination of the policy period, the average stock during the year is
calculated and the actual premium payable is arrived at. The difference between the
premium payable and premium paid is then adjusted (paid or refunded) accordingly.
The declaration provides insurance cover at cheaper rates. A policy buyer needs to keep
in mind the following points:
• In case the insurer fails to declare the stock for any month, the maximum value is
taken as the stock value for that month.
• An alteration in the maximum value is possible only with the consent of both the
parties.
• The condition of averages is applicable whereby the insurer pays only pro-rata loss,
if the value on the date of the loss is in excess of the maximum value for which the
cover is operative.
In non-declaration policies, the amount of inventory need not be declared every month and
the premium is charged on the full value recorded in the proposal. If the full value of the
stock changes, it can be given effect through endorsement by insurer.
The floating policies are meant for situations when the stock lies in more than one
location. The subject matter should be the same in all the locations and these locations
must be within the same city, town or village. This policy cover is extended only to few
well-known clients of the company. For items like paintings, stamps, antiques, etc.
sometimes the sentimental value is more than the intrinsic value. For such items, ‘valued
policy’ is available. In this policy the insurance amount is decided in the beginning and
whenever loss occurs during the period of the policy, that value is paid to the insured. As
the value of loss is not determined at the time of its occurrence it appears that the
principle of indemnity is violated in valued policy. But some experts argue that the
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indemnity is decided in advance, instead of at the time of occurrence of damage. Hence

the principle is followed.
We have seen that in valued policy the valuation of items is done beforehand. This
removes the cumbersome procedure of establishing the value of the stolen property after
the burglary. Otherwise being a contract of indemnity, burglary insurance requires the
valuation of stock that is stolen. The insured needs to give evidence and produce invoices
in order to establish his claim. This complication can be removed by adding an ‘inventory
and valuation’ clause in the policy. The clause requires the valuation of inventory by
experts in the beginning and the claim is settled on the basis of this valuation afterwards.
This happens in valued policies too. However, the difference lies in the provision of
depreciation and appreciation in the inventory and valuation clause. There is no such
consideration in valued policy. Secondly the nature of subject matter also differs in the two
policies.
Exclusions to burglary business premises Insurance Policy

Besides the usual exclusions like war and allied risks, riots, wear and tear and
consequential risks etc., the other noticeable exclusions are:
• Loss or damage in which the employee of the insured or any other person who can
lawfully be present on the premises, is involved.
• Loss covered by fire and allied perils, motor or glass insurance policy.
Loss or damage to deeds, bonds treasury notes, cash, medals, securities for money,
cheques, unless they are otherwise included in the policy.
Burglary private dwellings Insurance Policies

These policies, which are available to households require great care in execution. They
are contracts of indemnity and establishing the value of the lost articles may become
difficult due to a variety of reasons like the invoice not being available, the item may have
been gifted with the donor dead or untraceable, or the owner might exaggerate the value
because of personal attachment. Hence the surveyor needs to be very skilful to establish
the claims.
The exclusions to the burglary private dwellings insurance policies are the same as those
of business premises. Referring to the first exclusion mentioned in the burglary business
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premises policy, the person who can lawfully remain present within the premises include
the tenant, lodger or any member of the insured family.
All risk policies

We have a fair idea of all risk policies. The all risks insurance policies of burglary
insurance provide protection against loss by burglary, housebreaking, theft, fire and allied
perils. A few significant points about this policy are:
• If the premises were left vacant for more than 60 days in aggregate during the policy
period, the benefits of the policy would not be provided.
• Similarly the insured property should not be shifted to other place or premises for
more than 60 days in aggregate during the policy period.
• The value of any item should not exceed 5% of the total sum insured. This clause is
not enforceable to furniture, and musical instruments like organ or piano.
• For items that are in pairs or sets, the claim will be paid in proportionate to the loss
caused to the pair or set. The entire value of the set would not be awarded for
damage to its part.
9. Baggage Insurance
This policy covers the baggage carried during a journey and temporary stay in any hotel or
rest house during the course of the journey. The cover includes apparels, wrist watches,
fountain pens and other items but excludes articles like jewellery and valuables, cameras,
opera glasses etc. the maximum sum that can be insured depends upon the insurance
company’s underwriting policy. Pilferage is not covered under this policy.
Claims
A separate department deals with the claims of the burglary insurance policy. As soon as
the insured intimates information of burglary to the insurer, a bank claim form is sent to
him along with the suggestion to file a police complaint, if not filed yet. The claim form is
required to be filled and returned to the insurer within a week with the copy of FIR
attached.
The claim form contains the details of the burglary. Examples: the description and value of
property stolen, the details of the burglary and premises, the ownership of the property,
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other insurance policies covering the lost or damaged property, previous losses if any and
the details of the notice to the police (if notice has not been given, the reasons for it).After
the claim form has been submitted a thorough investigation of the case is carried out by a
professional claim investigator. They work in cooperation with the police and check
various details like:
• The authenticity of the claim
• Whether the event that has caused the loss was an insured peril
• If the loss was excluded in the policy
• Whether the property was insured under the policy
• Whether the insured followed the conditions and warranties stated in the policy, etc.
A mere disappearance of articles does not constitute a valid claim. The article should not
have been recovered even after bonafide search measures have been undertaken. The
amount to be awarded in the claim is arrived at after a proper valuation. The insured
submits various evidences to establish the intrinsic value of the property lost. Intrinsic
value means that the profits on the insured items would not be included. Only the cost will
be refunded. The insurer reserves the right to reinstate, replace or repair the property
instead of making the cash payment. Lastly if the loss exceeds the insured amount, the
insured bears a rateable share of it. For example, if the stock in trade was insured for
Rs. 10,000 with its actual value at Rs. 20,000. and the loss of Rs. 4,000 occurs the insurer
would pay only Rs. 2,000 and the rest will have to be borne by the insured.
After the claim is settled, the rights and remedies of the insured against third parties will
get transferred to the insurer. For instance, if any property is recovered from the burglar or
any third party, the insurer will have the right to have it. However this right of subrogation
is restricted to the extent of loss indemnified by the insurer. On payment of the claim, the
amount of the claim paid automatically reduces the sum insured, but it can be reinstated to
the previous level by payment of additional premium. Generally, after settlement, the
insurer suggests additional measures of safety to the insured on the basis of the
experience of past burglary.
10. Bankers’ Indemnity Insurance

This is also referred to as bankers’ blanket cover, and it provides insurance against fire
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perils, burglary, cash in transit, fidelity guarantee and marine insurance. This policy
provides comprehensive insurance cover to the banking sector.
Coverage
This policy covers the direct losses of money and/or securities discovered during the
period specified in the policy. More specifically, it covers the following losses:
Premises- By fire, riot and strike, burglary or house breaking or hold up resulting in loss to
money/securities at the premises.
Transit - Lost, stolen, mislaid, misappropriated or made away either due to negligence or
fraud of employees of the insured whilst in transit.
Forgery - Loss by bogus, fictitious or forged or raised cheque/drafts/FDRs or forged
endorsements.
Dishonesty- Loss of money and/or operations due to dishonesty.
Hypothecated goods - By fraud and/or dishonesty or criminal act of the insured
employees.
Registered postal articles - Loss of parcels by robbery, theft or by other causes to the
parcels insured with the post office.
Appraisers - Infidelity or criminal acts by appraisers on the approved list.
Janata Agents - Infidelity or criminal acts by Janata agents/Chhoti Bachat Yojana
Agents/Pygmy collectors.
Meaning of terms used

“Money” includes bank notes (signed and unsigned), bullion, coins, currency, jewellery,
ornaments, postage & revenue stamps (uncancelled) and stamp papers. “Securities”
include acceptances, air consignment notes, bank money orders, bills of exchange, bills of
lading, bonds, CDs, certificates of shares/stock, cheques, coupons, debentures, DDs,
express postal orders, FDR issued by the insured, lorry receipts, lottery tickets, postal
receipts, promissory notes, railway receipts, time drafts and the like. “Employee” refers to
all existing classes of employees and apprentices on the payroll of the bank at all its
offices. It excludes any director or partner other than those salaried.
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Exclusions
These include losses due to:
1. Default of Director or partner of the insured other than salaried
2. War and allied risks
3. Acts of God
4. Incendiaries
5. Direct or indirect nuclear reactions
6. Acts of omission by the concerned employee after discovery of a loss in which the
said employee was involved
7. Losses of money, securities or personal property of the insured, the nominal value
and description of which have not been ascertained by the insured before loss
8. Trading losses, and
9. Losses sustained or discovered beyond the period specified in the policy.
Premium
The insured has to bear certain percentage of loss according to its type.
Points as in coverage listed above % Loss borne by the insured

1, 2 and 3 Flat excess
4, 5 and 8 25% subject to a minimum limit
6, 7 and 8 25%
Special Reinstatement Clause

The bankers’ indemnity insurance contains a special reinstatement clause that facilitates
the automatic reinstatement of the sum insured each time a claim is paid. As this is a
blanket policy, the claims might arise rather frequently. The clause saves time and effort
needed to get the amount reinstated every time. An additional premium is charged for this
facility that is paid indirectly in the form of deduction made from the claim amount. The
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bankers might take undue advantage of special reinstatement clause. As this clause
reinstates the amount to the previous level, whenever it reduces, the bankers might
purchase the policy of small amount. This is because the policy is not going to be
exhausted anyway. That is why an upper limit has been placed on the total policy amount
(original amount + reinstated values or value of the claims paid). This limit is twice the sum
originally insured. In case of liability insurance it is equal to the sum insured.
11. Plate Glass Insurance

Do not judge a book by its cover – the adage does not apply to marketing. In fact window
dressing plays a vital role in marketing. The more the glasses, the bigger and better the
shop. The glasses of the display windows and showcases of commercial establishments
are expensive. Plate glass insurance covers the damages caused to these glasses.
However, it indemnifies only the actual breakage of glass. The policy does not cover
superficial damages or scratches nor does it cover cracked or imperfect glass or loss
arising from the interruption of the insured’s business during the period between breakage
and replacement.
The policy specifically indemnifies damages to glass, lettering or ornamentation described
in the schedule caused by breakage or by accidental chemical spills or acids. The policy
also covers repairer replacement of sashes or frames, boarding up or protecting windows
in the event of unavoidable delay in replacements, and removal of fixtures or other
obstructions to replace the glass. Policies may cover breakage of other than “regular”
glass, such as neon signs, half-tone screens, memorial windows, glass bricks, and
fluorescent lights. A rider is also available in return for a reduced premium giving the
company the option to substitute two panes for one while replacing a plate of glass at least
100 feet square in size.
The policy excludes the following risks:
• Fire or explosion
• Earthquakes
• Riots, strikes, war and kindred risks
The policy considers the increase in the prices of glass. It also has a provision of
automatic reinstatement each time the claim is paid. The insurer has the right of
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subrogation. But isn’t useful as it is very difficult to trace the guilty. The insurer also has
the right for salvage. Prior to policy insurance, a company representative or an inspector
from the cooperative inspection bureau inspects the designated glass.
The premium of the policy is decided on the basis of the following:
• Size: This determines the cost of the glass and hence the expected loss when it is
damaged. A table of premium rates is laid down in the standard form of policy on the
basis of size.
• Cost: The policy considers the price fluctuations of glass.
• Kind and use: In the standard policy, only the rates of ‘plain glass’ are listed. In
actuality other varieties of glass are also used viz., leaded glass, opaque glass and
wired glass to name a few. The rates for these other types of glass are determined
either by increasing the rates of plain glass by a few percentage points or doubling,
trebling and so on.
• The first method of deciding the rates is called valued basis and the second is called
the multiplier basis. Art glass, for example, is decided on a valued basis (applicable
rate is 10% more than the standard rate). And so are Opalite and Argentine. Glass
not set in frames, bent glass (applicable rate is 2-5 times the standard rate); interior
glass, showcases etc are rated according to the multiplier model.
• Location: The location of the glass, obviously influences its exposure to risk.
Display windows stand to face a higher risk than glass above the ground floor.
These factors come into play while deciding the percentage of increase or decrease
over the standard rates.
• Type of occupancy: Mercantile buildings form the majority of policyholders. Glass
used in residences, churches, banks, office buildings etc are written at a discounted
price against the premium charged on mercantile locations.
• Territory: This has a two-pronged influence on the premium. The cost of the glass
includes the freight from the factory. Further, the risk of breakage is relatively higher
in some territories. The risks differ between cities and the countryside and urban
districts and the suburbs. Differentials in the form of percentage are given
accordingly.
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The insurer can settle the claim by cash payment or replacement. The liability of the
insurer is limited to the amount stated in the policy. If any changes were made in the
structure of the premises, the policy would cease to be effective. Similarly, any change in
occupancy, tenancy or business carried on in the premises renders the policy ineffective.
Generally claims are settled on replacement basis. Insurers have got arrangements with
manufacturers and suppliers of plate glass to replace the damaged plate glass at a
discounted price.
12. Fidelity Guarantee Insurance

Fidelity Guarantee Insurance (FGI) is a necessity in today’s scenario, where each day new
frauds are discovered. The necessity manifests itself in the insistence by the GOI and the
State Governments on their employees obtaining their policies. Fidelity Guarantee covers
the employer against the direct pecuniary loss that may be caused to him due to dishonest
employees in the course of employment. Fidelity Guarantee insurance is non-tariff.
Three parties are involved in the contract as against the usual two. Both the law of
insurance and the suretyship are relevant in Fidelity Guarantee Insurance.
The popular policies of Fidelity Guarantee Insurance are as follows:
• Individual policy– where the behaviour of only one person is guaranteed. The
individual’s name is written in the policy.
• Collective policy – The behaviour of more than one individual (usually the whole
staff) is indemnified in the single policy. The Schedule of such a policy contains the
names of all the individuals whose behaviour is guaranteed. The duties of the
individual and the amount of guarantee for his behaviour are written along with each
name. Additions and deletions of the names in the list (due to transfers,
appointments, retirements, etc.) require the insurer’s endorsement. .
• Floating policy or the Floater – The problem with the collective policy is the
assignment of the amount of guarantee to each individual. It is difficult to estimate
the amount of loss that an individual can cause alone or with others. Moreover,
fixing employees who are more likely to commit fraud may put the manager in a
dilemma. A floating policy provides the solution. In a floating policy, the guaranteed
amount is not apportioned amongst the employees. Instead, it is floated over the
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whole group. If any individual, listed in the group commits fraud and a claim has to
be paid, the guarantee amount is reduced unless reinstated or the policy is renewed.
The employer should be careful in fixing the total guaranteed amount. The amount
should cover the maximum loss that can occur to the company due to individual or
collective fraud.
• Positions policy– This policy is similar to a collective policy (actually an
improvement over it). Instead of the names of the individual, the positions are listed
in the policy with the duties and the amount guaranteed for their behaviour. The
advantage of this policy is that it need not be reinstated if the person is replaced by
another . Moreover, the amount guaranteed is usually associated with the positions
and not the people. If the policy does not distribute the amount over different
positions, but floats the single amount over all positions, it is floating policy.
• Blanket policy – As the name suggests, this policy covers the entire staff of an
organisation. No name or position is shown in the policy. The policy is suitable for
organisations with large staff.
• Excess floating policy – This is a mix of the floating and cumulative policies. The
individual amounts are bundled with the names of each employee but for unforeseen
to unusually big losses, an additional floating amount is fixed. Thatis why the policy
is known as an excess floating policy.
In Fidelity Guarantee, an intangible thing is insured unlike other insurance policies. Hence
it is very difficult to assess the role involved. The value and risk involved can be assessed
by physical examination of the property and security arrangements in fire policy,
machinery policy, etc. In FGI (Fidelity Guarantee Insurance) various forms are required to
be filled to estimate the trustworthiness of the employer.
Employers’ form – This forms the basis of contract between the employer and the
insurer. It is similar to proposal forms in other policies
Applicants’ form – This is an important form to look into the moral hazard involved. The
applicant fills the form and discloses the details of the extent of debts, private income, past
employment and details of his life insurance policy and whether the applicant has ever
been declared bankrupt or insolvent. Besides there are other general details like name,
age, address, marital status, position in organisation, remuneration, etc.
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Private referee’s form– The applicant names two persons who can be referred to verify
his character. This is not very significant. The authenticity is doubtful, as the two people
are the applicant’s choice.
Previous employers form – This is an important form, usually referred to while
underwriting the policy. It contains the applicant’s employment details for the previous 5
years and is filled by respective employers. The form also contains the reasons for the
applicant leaving the previous jobs.
Collective proposals – The employer fills this proposal form for collective, floating and
blanket policies. As in the employers’ form, he gives information about the whole group
instead of the individual. He may categorise the people according to their responsibilities
or work and give information about each category to ease his work. The system of
supervision and the enquiries made by the employer about the applicant before hiring are
also contained in the proposal form.
The name of the employee leaving the organization is dropped from the policy. If he
rejoins the organisation again, he is not automatically included in the list. He is treated as
a new employee and all the formalities required to include a new employee in the list are
carried out.
• While acts of dishonesty are covered, loss due to inefficient accountancy, are not
compensated.
• Forgery, embezzlement, fraud
Other important terms related to FGI
• Performance risk: The performance of the work entrusted to the employee is
guaranteed under this policy. If the employee does not carry out his responsibilities,
the pecuniary losses suffered by the principal are reimbursed under this policy. This
is more a branch of credit guarantee policy than FGI.
• Service security policies: When a new employee joins an organisation, the
employer first spends money and time in training him suitably for the job. In return,
the employee should render a minimum period of service specified. If he leaves
before that, the expenditure on his training is futile and the organisation suffers.
Service security policies cover such losses.
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• Counter guarantee: A counter guarantee is not required because of the principle of

subrogation and therefore the insured executes this guarantee to the insurer.
• Hazardous risks: The following are considered as hazardous risks:
- Collection agents whose financial limits are disproportionately high compared
to their remuneration and the security deposit they give.
- Jewellery travelers
- Cashiers in eating houses, cinema houses and other places of entertainment
- Estate agents
- Treasurers of friendly societies or associations
- Employees of bullion merchants
Different types of bonds are issued to indemnify the principal if the insured fails to
discharge his duties. They are in the nature of guarantee or performance bonds though
their scope is restricted and legally defined.
Some examples are:
Court bonds: Liquidators, Receivers and Managers appointed by court of wards require
these bonds since the court holds them liable if there is any lapse on their part in
discharging their duties.
Custom bonds: Businessmen who are liable for payment of customs duty for their
imported goods may store them in bonded warehouses temporarily and give these bonds.
They will pay duty when they finalise their transactions in the market. Similarly importers
with export obligation also can offer these bonds till they fulfill their obligation.
Administration bonds: Bonds can also be issued for other administrative purposes in a
variety of situations.
13. Money in Transit Insurance

Money shall mean and include Cash, Bank drafts, currency notes, cheques, postal orders
and Current Postage stamps. The policy is divided into two sections:
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Section – I
This section provides for loss of money in transit by the insured or insured’s authorized
employees occasioned by Robbery, Theft, and any other fortuitous cause. Money is
differentiated into three categories:
(a) Money for Wages/ Salaries/ Petty cash in transit from bank to premises till paid out
or otherwise kept in locked safe/strong room on the premises.
(b) Money other than (a) in the personal custody of the Insured/ employees while in
transit between premises and bank/post office.
(c) Money other than (a) and (b) collected by Insured/employees during collection round
upto 48 hours from the time of collection.
Section – II
This section covers money loss by Burglary, Housebreaking, Robbery or Hold up whilst
retained at Insured’s premises in safe(s) or strong room. The underwriting factors for
premium calculation for this policy include maximum distance and areas through which the
money will be passing, how it is to be carried, mode of transit, whether accompanied by
armed guards, number of persons carrying money, the maximum amount carried at any
one time. The estimates of annual carryings form the basis of premium.
Exclusions
The policy does not cover the loss or damage in respect of:
(a) Shortage due to error or omission.
(b) Loss of money entrusted to any person other than the insured or an authorized
employee of the insured.
(c) Loss of money where the insured or his employee is involved(except loss due to
fraud or dishonesty of the cash carrying employee occurring whilst in transit and
discovered within 48 hours).
(d) Loss occurring in the premises after business hours unless the money is kept in the
locked safe or strong room.
(e) Loss occasioned by riot, strike and terrorist activity.
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(f) Theft of money from unattended vehicle.

(g) Loss of money from the safe by use of original keys to the safe or any duplicate
there of belonging to the insured (unless such leys are obtained by force or threat).
(h) Loss due to War
(i) Loss due to ionizing radiations, radio active contamination, nuclear weapons
material.
(j) Consequential loss or legal liability of any kind.
However, on payment of extra premium, the policy can be extended to cover Riot & Strike.
14. Horse / Donkey / Mule / Pony Insurance

These are some of the animal policies which are commonly taken for the well being of the
animals. The eligible age of the animals for insurance coverage is 2-8 years. The policy
essentially covers death due to accident, or disease contracted/occurring during the policy
period. Some of the exclusions include:
• Pleuro pneumonia
• Haemmorrhagic septicaemia
• Anthrax and foot & mouth disease
• Theilariasis
• Pleuropneumonia
• Total or partial disability
• 15 days waiting period for diseases in respect of non-scheme animals
• Overloading, unskillful treatment or use for purpose other than stated in the policy
However, diseases like Canine Distemper, Hepatitis, Leptospiropsis and Rabies will be
covered only when proper vaccination or immunization is given.
15. Kidnap & Ransom Insurance

Kidnap and Ransom Insurance or K&R Insurance is designed to protect individuals and
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corporations operating in high-risk areas around the world, such as Colombia and Peru.
K&R insurance policies typically cover the perils of kidnap, extortion, wrongful detention
and hijacking. K&R policies are Indemnity policies – they reimburse a loss incurred by the
insured. The policies do not pay ransoms on the behalf of the insured. The insured must
first pay the ransom, thus incurring the loss, and then seek reimbursement under the
policy. Losses typically reimbursed by K&R polices are ransom payments, Loss of
Ransom-in-transit and additional expenses, such as medical expenses. The policies also
typically indemnify Personal Accident losses caused by a Kidnap. These include Death,
Dismemberment, and Permanent Total Disablement of a kidnapped person. They also
typically pay for the Fees and Expenses of Crisis Management Consultants. These
consultants provide advice to the insured on how to best respond to the incident. Policies
typically require clients to restrict the knowledge of the existence of the coverage. The
policies may be written to cover families and corporations. Some policies include kidnap
prevention training.
Kidnap, Ransom and Extortion insurance provides numerous benefits and services to the
applicant and the insured. Kidnap, Ransom & Extortion Insurance provides coverage for
kidnappings and other events through a combination of financial indemnification and
expert crisis management.
A basic policy can cover items such as ransom payment, loss of income, interest on bank
loans and medical/psychiatric care. Besides insurance, companies can also utilize crisis
management teams and employee training in what to do in a hostage situation to minimize
losses due to kidnap or ransom. The Kidnap, Ransom and Extortion insurance covers
named employees for individual or aggregate amounts, with deductibles requiring the
insured to participate in about 10% of any loss. Kidnap and Ransom insurance plans
provide assistance to the family and business with regard to independent investigations,
negotiations, arrangement and delivery of funds, and numerous other services vital to a
safe, speedy and satisfactory resolution. Generally extortionists do not discriminate. Any
company of any size and any of its employee can be a target for extortion threats. People
tend to associate business extortion and kidnapping with global companies. The fact is
radical groups and criminals exist everywhere.
Kidnap, Ransom and Extortion Insurance in such situations helps to manage the costs
associated with an extortion threat against products, proprietary information, computer
system or employees that can push a small to medium-sized company to its financial
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limits. These risks may not look like everyday exposures, but too often they are. And when
they happen, one may need financial assistance to meet extortion demands and the
extensive costs associated with negotiation and recovery. Due to globalization of
economies, multinational companies need to prepare for the possibility of attacks on their
employees and facilities virtually anywhere in the world.
16. Package Policies

Package insurance policies are developed for individuals and business establishments to
meet their insurance requirements under a single simplified package. These policies
contain generally more than five sections out of which some are compulsory sections and
the policyholder may opt other sections in addition to the basic sections. Three such
policies are discussed in detail.
16.1 Householder’s Insurance

This is a comprehensive package policy designed to meet the insurance requirements of a
householder. The main advantage of this policy is the wide coverage and discounts
available upto 20% of the premium.
Key Benefits are the following:
• Comprehensive cover available, which covers both structure and / or contents of the
home
• Coverage up to 10 years for only structure, 5 years for only contents and 5 years for
structure & content
• Cover against Fire and allied perils, Burglary & Theft and cover for Terrorism and
Additional expenses of rent for alternative accommodation.
Coverage
The policy covers either for only the building (structure), or only the contents (belongings)
or both.
The policy covers the losses to the structure and contents due to any natural and man-
made calamities.
The calamities covered are:
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(a) Fire
(b) Lightning
(c) Impact Damage
(d) Aircraft damage
(e) Explosion / implosion
(f) Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation
(g) Riots, Strike, Malicious and Terrorism Damage
(h) Subsidence and Landslide including Rockslide
(i) Bursting and/or overflowing of water tanks, apparatus and pipes
(j) Missile testing operations
(k) Leakage from automatic sprinkler installations
(l) Bush Fire
(m) Earthquake
The contents of the home are also covered against loss due to burglary or an attempted
burglary / housebreaking including theft. It also covers loss of jewellery, silver articles and
precious stones kept under lock and key, up to 25% of the total content sum insured or Rs.
1 Lac, whichever is lower.
Optional covers
The policy also provides additional coverage of the following:
Additional expenses of rent for alternative accommodation: If one is forced to shift into an
alternative accommodation because of damage due to insured peril, the policy will cover
the insured against the additional rent. The maximum coverage is up to 1 Lakh for up to
6 months. This cover is available only if the structure of the house is insured ad covered.
Exclusions
The policy however, does not cover the following losses :
• Willful destruction of property.
• Loss, damage and destruction caused by war, wear and tear etc.
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• Losses if the house is unoccupied for more than 30 days, without prior notice to the
company.
• Cash, bullion, painting, works of art and antiques.
Calculation of the Sum Insured
The home insurance policy insures the structure of the house for its reconstruction value
(and not for market value). Reconstruction value is defined as the cost incurred to
reconstruct the home if it is damaged. On the other hand, market value is a combination of
cost of land, demand & supply scenario, etc. Sum insured is calculated by multiplying the
built up area of the house with the construction rate per sq. feet.
• For example: If the house has a built up area of 1000 sq. feet and the construction
rate is Rs 800 per sq. feet, the sum insured for the house structure is Rs 8 Lakh.
However, this value can be revised appropriately if expensive material - like marble
flooring, etc. - has been used in the construction. If the house has lawn / garden
surrounded by a perimeter wall, the construction rate can be revised to include the
cost of construction of this wall.
Home Contents
For the valuation of the contents of the house such as furniture, durables, clothes,
utensils, jewellery, etc. are to be valued on market value basis i.e. the current market
value of similar items after depreciation.
Claim Process
• Upon intimation of the loss to the company, and after providing the relevant
information, which includes the policy and other details regarding the claim, the
claim request is authenticated and is escalated to the company's claims department.
• After receiving the intimation of the loss, the company's claims department validates
and registers the request, and then the company appoints a surveyor within 48
hours.
• The insured is required to submit all the relevant documents to the surveyor.
• The surveyor then submits the Final Survey Report (FSR) along with the documents
within 7 days.
• On receipt of documents, the claims department processes the claim within 7 days.
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16.2 Shopkeepers Insurance

The Premium table of a Householder’s policy shown as an example:
(a)
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(b) Shopkeepers Package Insurance Policy
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Long Term Policy For Dwellings:

Long Term Policies shall be issued to house/flat owners only based on either of the
following 2 methods subject to the conditions below:
(a) The policy shall be issued for a minimum period of 3 years.
(b) Mid-term inclusion of perils shall not be allowed.
(c) Premium for entire policy period shall be collected in advance.
Method A: Premium shall be charged in full without any discount. However sum insured
under the policy shall be deemed to have increased by 10% of the origional sum insured
at the end of every 12 months period.
OR
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Method B: There shall not be any automatic increase in sum insured as in method A.
However appropriate discounts shall be allowable on applicable gross premium as per
table below:
Duration of Policy Premium to be charged
3 years policy 3 years premium in advance less 15% discount
4 years policy 4 years premium in advance less 20% discount
5-7 years policy 5-7 years premium in advance less 25% discount
N.B. Mid-term increase in sum insured shall be allowed on pro rata basis for the balance
period.
16.3 Jewellers’ Block Insurance

The Jewellers Block insurance is a package policy devised to cater to the needs of the
jewellers.
Policy Coverage
This policy is divided into 4 sections as under:
Section – I
This section covers loss or damage to property whilst contained in the premises where the
insured’s business is carried on/or at other premises where the insured property is
deposited by fire, explosion, lighting, burglary, housebreaking, theft, riot and strike, hold-
up, robbery, and Malicious damage only. Property kept in the bank lockers can also be
covered provided separate register is maintained to record all deposits/ withdrawals from
the locker.
Section – II
This section covers loss or damage to property insured carried outside the specified
premises for the purpose of insured’s business by any cause whatsoever, except the
causes excluded specially.
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Section – III
This section covers loss or damage to the property insured by any cause whatsoever,
except those specifically, whilst in transit in India by:
1. Insured Post parcel
2. Air Freight
Section – IV
This section covers loss or damage to office furniture, fixture, fittings, and the property
being used in connection with the insured’s business by Fire, Explosion, Lightning,
Burglary, Hold-up, Robbery, Housebreaking, and Theft only. Air conditioners, refrigerators,
generators, closed circuit TV can be also covered under this section.
The policy also covers damage caused by burglars and /or thieves to the premises and or
landlord’s furniture and fixtures for which the insured is legally responsible as tenant and
such indemnity would be subject to a maximum of 1% of the sum insured under Section
IV.
Classification of risks
The risks are classified as under:
Class – I: Having 24 hours watchman for the premises employed by the insured
Class – II: Common watchman for 24 hours for the Building or separate night watchman
for insured premises
Class – III: All others
The policy can also be extended to cover perils like earthquake, and STFI perils by
charging additional premiums.
16.4 Title Insurance

With the growing importance and need felt for Title Insurance, being a popular policy sold
in the developed markets, and growing complexities and litigations with regards to
ownership, the IRDAI has decided to constitute a Working Group on ‘Title Insurance’ to
study the scope of ‘Title Insurance’ in the Indian Market, as per its notification Ref:
IRDA/NL/ORD/MISC/11/16/2016, dated 10thJune 2016.
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The terms of reference of the Working Group are as under:

(a) To study the need and scope for “Title Insurance“ in the Indian market vis-à-vis the
existing practices in the international market.
(b) To identify the insurable risk and define the compensation structure
(c) To suggest the design of the product and suggest the framework for assessment of
risk, pricing, reserving and accounting with actuarial inputs keeping in mind the long
term sustainability of the product on stand-alone basis.
(d) To suggest policy wordings in line with Indian conditions both from content and from
legal perspective and suggest the mechanism for policy servicing.
(e) To ascertain the availability of reinsurance support in the domestic and international
markets.
(f) To assess the availability and accessibility of local revenue records, ascertain the
status of digitization of land records in various states and availability of legal
expertise to support the underwriting and claims management efforts of the insurer.
(g) To examine any other aspect relevant to “Title Insurance”.
Coverage of Title Insurance as available in other Countries

Title insurance is a form of indemnity insurance predominantly found in the United
States which insures against financial loss from defects in title to real property and from
the invalidity or unenforceability of mortgage loans. Title insurance is principally a product
developed and sold in the United States as a result of an alleged comparative deficiency
of land records in that country. It is meant to protect an owner's or a lender's financial
interest in real property against loss due to title defects, liens or other matters. It will
defend against a lawsuit attacking the title, or reimburse the insured for the actual
monetary loss incurred, up to the dollar amount of insurance provided by the policy.
Historical Background of Title Insurance
The first title insurance company, the Law Property Assurance and Trust Society, was
formed in Pennsylvania in 1853. The vast majority of title insurance policies are written on
land within the United States.
Typically the real property interests insured are ownership or a mortgage. However, title
insurance can be purchased to insure any interest in real property, including an easement,
lease, or life eastate.
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Types of Title Insurance Policies

There are two types of policies –
(i) Owner’s Policy and
(ii) Lender’s Policy
Just as lenders require fire insurance and other types of insurance coverage to protect
their investment, nearly all institutional lenders also require title insurance [a loan policy] to
protect their interest in the collateral of loans secured by real estate. Some mortgage
lenders, especially non-institutional lenders, may not require title insurance. Buyers
purchasing properties for cash or with a mortgage lender often want title insurance [an
owner policy] as well. A loan policy provides no coverage or benefit for the buyer/owner
and so the decision to purchase an owner policy is independent of the lender's decision to
require a loan policy.
Title insurance is available in many other countries, such as Canada, Australia, the United
Kingdom, Mexico, New Zealand, Japan, China, Korea and throughout Europe. However,
while a substantial number of properties located in these countries are insured by U.S. title
insurers, they do not constitute a significant share of the real estate transactions in those
countries. They also do not constitute a large share of U.S. title insurers' revenues. In
many cases these are properties to be used for commercial purposes by U.S. companies
doing business abroad, or properties financed by U.S lenders. The U.S. companies
involved buy title insurance to obtain the security of a U.S. insurer backing up the
evidence of title that they receive from the other country's land registration system, and
payment of legal defense costs if the title is challenged.
Coverage
The American Land Title Association ("ALTA") forms are almost universally used in the
country though they have been modified in some states. In general, the basic elements of
insurance they provide to the lender cover losses from the following matters:
1. The title to the property on which the mortgage is being made is either
• Not in the mortgage loan borrower,
• Subject to defects, liens or encumbrances, or
• Unmarketable.
2. There is no right of access to the land.
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3. The lien created by the mortgage:

• is invalid or unenforceable,
• is not prior to any other lien existing on the property on the date the policy is
written, or
• is subject to mechanic's liens under certain circumstances.
As with all of the ALTA forms, the policy also covers the cost of defending insured matters
against attack.
Construction loan policy
In many States, separate policies exist for construction loans. Title insurance for
construction loans require a Date Down endorsement that recognizes that the insured
amount for the property has increased due to construction funds that have been invested
into the property.
Comparison with other forms of insurance
Title insurance differs in several respects from other types of insurance. Where most
insurances are contracts where the insurer indemnifies or guarantees another party
against a possible specific type of loss (such as an accident or death) at a future date, title
insurance generally insures against losses caused by title problems that have their source
in past events. This often results in curing of title defects or the elimination of adverse
interests from the title before a transaction takes place. Title insurance companies attempt
to achieve this by searching public records to develop and document the chain of title and
to detect known claims against or defects in the title to the subject property. If liens or
encumbrances are found, the insurer may require that steps be taken to eliminate them
(for example, obtaining a release of an old mortgage or deed of trust that has been paid
off, or requiring the payoff, or satisfying involuntary liens such as abstracts of judgment
and tax liens) before issuing the title policy. In the alternative, it may except from the
policy's coverage those items not eliminated.
Title plants are sometimes maintained to index the public records geographically, with the
goal of increasing searching efficiency and reducing claims. In some States title plants are
required to index the real-property records geographically and also maintain a name file
for judgments, probates and other general matters.Title insurance premiums are not
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principally calculated on the basis of actuarial science as is true in most other types of
insurance. Instead of correlating the probability of losses with their projected costs, title
insurance seeks to eliminate the source of the losses through the use of
the recording system and other underwriting practices. As a result, a relatively small
fraction of title insurance premiums are used to pay insured losses. Substantial portion of
the premiums is used to finance the title research on each piece of property and to
maintain the title plants used to efficiently do that research. There is significant social
utility in this approach as the result conforms with the expectations of most property
purchasers and mortgage lenders. Generally, they want the real estate they purchased or
lent money on to have the title condition they expected when they entered the transaction,
rather than money compensation and litigation over unexpected defects. This is not to say
that title insurers take no actuarial risks.
Losses incurred include
There are several matters that can affect the title to land that are not disclosed by the
recording system but that are covered by the policies. Some examples are lack of
capacity, competency, or legal authority of a party (e.g. deeds executed by minors or
mentally incompetent persons)forged instruments (in some cases), impersonification
corporate instruments executed without proper corporate authority and errors in the public
records, undisclosed (but recorded) prior mortgage or lien, undisclosed (but recorded)
easement or use restriction, erroneous or inadequate legal descriptions, lack of right of
access, deed not properly recorded
Cost of Title Insurance
The cost of title insurance has two components:
• Premium charges and
• Service fees.
Title insurance premium rates are based on five cost considerations, including those
relating to:
1. Maintaining current title information on property local to that operation, i.e., title plant
2. Searching and examining the title to subject properties
3. Resolving or clearing defects to title
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4. Covering title defects

5. Allowing for a reasonable profit
The cost varies depending on the value of the property. One important fact is that premium
has to be paid only onceand then the coverage continues for so long as one has interest in
the covered property. If the insured should die, the coverage automatically continues for
the benefit of the heirs. If the property is sold, giving warranties of title to the buyer, the
coverage continues. Likewise, if a buyer of the property has taken a mortage loan to
finance the purchase, the title insurance continues to protect the insured’s security interest
in the property.
SUMMARY
• The insurance industry is developing rapidly, not only in the scope of activities
covered but also by the various new insurance covers that are being introduced.
• One area that saw rapid growth in a short span is miscellaneous insurance
• The risks covered by miscellaneous insurance are classified into four main
categories concerning person, property, pecuniary risks, and liabilities.
• Crop insurance has been introduced in India to provide a boost to the agriculture. All
farmer’s including sharecroppers, tenant farmers growing notified crops in notified
areas are eligible for coverage.
• Pradhan Mantri Fasal Bima Yojana (PMFBY), is primarily an Area Yield Index based
scheme, where losses (in reference to Pre-Notified Threshold Yield) for a notified
area are determined based on requisite number of sample Crop Cutting Experiments
(CCEs) under the General Crop Estimation Survey (GCES).
• Restructured Weather Based Crop Insurance Scheme (RWBCIS) is primarily
envisaged as a scheme for those crops for which historical yield data is not available
or the yield estimation process does not exist, but are also exposed to climatic risks
and production loss
• Aviation industry is vulnerable to risks of devastating losses. If a single aero plane
crashes, lives of hundreds of people are lost along with the aircraft besides the
damage caused to the place where the accident occurs.
• Personal accident insurance provides protection to the insured person financially, if
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he is injured. This policy provides monetary compensation in case of death or

disablement resulting from accidental injury arising out of external, violent and
visible means.
• Travel Insurance covers travel related accidents also. While travelling outside India,
individuals face risks such as loss of baggage, accidents involving injuries, illnesses
and medical emergencies requiring hospitalization treatment
• While playing a sport like golf, if a person accidentally injures other persons, then he
is responsible for the other person’s injuries.
• Burglary insurance is as common in business houses as fire insurance. It involves
forceful and illegal entry into the business premises for the purpose of stealing.
• This policy covers the baggage carried during a journey and temporary stay in any
hotel or rest house during the course of the journey.
• This is also referred to as bankers’ blanket cover, and it provides insurance against
fire perils, burglary, cash in transit, fidelity guarantee and marine insurance.
• Plate &glass insurance covers the damages caused to glasses only the actual
breakage of glass.
• Fidelity Guarantee covers the employer against the direct pecuniary loss that may
be caused to him due to dishonest employees in the course of employment. Fidelity
Guarantee insurance is non-tariff.
• Animal insurance policies essentially covers death due to accident, or disease
contracted/occurring during the policy period.
• Kidnap and Ransom Insurance or K&R Insurance is designed to protect individuals
and corporations operating in high-risk areas around the world,
• Package insurance policies are developed for individuals and business
establishments to meet their insurance requirements under a single simplified
package.
• Title insurance is a form of indemnity insurance predominantly found in the United
States which insures against financial loss from defects in title to real property and
from the invalidity or unenforceability of mortgage loans.
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REVISION QUESTIONS
SECTION – A
1. Miscellaneous insurance policies cover losses concerning
(a) person (b) property
(c) pecuniary risks (d) liabilities
(e) all the above
2. Workmen’s compensation policy takes care of the liability of the
(a) Employer (b) Owner
(b) Tenant (d) Mortgagee
3. Crop insurance in India to all loanee farmers is
(a) compulsory (b) not obligatory
(c) optional (d) voluntary
4. Which of the following losses are not covered by the personal accident policy
(a) natural death (b) disability
(c) accidental death (d) suicide
5. For items of high sentimental value, a burglary policy can be issued as a
(a) floater policy (b) declaration policy
(c) valued policy (d) open policy
6. Which of the following does constitute “money’
(a) bank notes (b) coins/ currency
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(c) stamp papers (d) jewelry & ornaments

(e) all the above
7. Which of the following losses are not covered by the Plate and Glass
insurance policy?
(a) willful breakage (b) superficial damages
(c) scratches (d) cracked or imperfect glass
(e) all the above
8. Fidelity Guarantee policy covers the employer against pecuniary losses
caused by
(a) natural calamities (b) servants
(c) dishonest employees (d) customers
9. The D&O insurance policy is aimed to protect the interests of the
(a) policyholders (b) shareholders
(c) customers (d) employees and creditors
(e) all of the above
10. Which statement regarding the liability of the insurance company for a D&O
policy is true
(a) The underwriter is liable when the policy is in force
(b) The underwriter is liable even after the policy is cancelled or lapsed.
(c) only (a)
(d) only (b)
(e) both (a) & (b)
(f) neither (a) or (b)
(g) none of the above
11. Personal accident policies cover the risk of
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(a) Unemployment (b) Sickness / illness

(c) Accidental injuries (d) None of the above
12. Personal Accident policies are
(a) Valued policies (b) Indemnity policies
(c) Unvalued policies (d) Open policies
13. Disability income policies pay for
(a) Disability arising out of sickness
(b) Disability arising out of sickness / accident
(c) Disability arising out of employment injuries
(d) Hospitalization only for injuries
14. Personal liability insurance policies cover damages to properties and injuries
to other people due to
(a) Negligence (b) Willful misconduct
(c) War losses (d) Burglary
15. The fire insurance policy in India does not provide for compensation for losses
arising out of
(a) Theft (b) Aircraft damage
(c) Implosion or explosion (d) Lightning
16. Workmens Compensation policy indemnifies the losses of the
(a) Worker (b) Employer
(c) Government (d) Surveyor
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17. Golfer’s indemnity policy provides protection against losses or damages to

the
(a) Only golf players
(b) Golf players & golf equipment
(c) Only golf equipment
(d) Golf players & golf equipment & liability losses
Answers
1. (c) 2. (a) 3. (b) 4. (a) 5. (a) 6. (b) 7. (d) 8. (e) 9. (a) 10. (a)
11. (a) 12. (c) 13. (e) 14. (e) 15. (c) 16. (e) 17. (c)
SECTION – B
1. What are the risks covered under miscellaneous insurance policies ?
Ans: The risks covered by miscellaneous insurance are classified into four main
categories concerning :
• Person
• Property
• Pecuniary risks and Liabilities.
2. What was the rationale behind the introduction of the Workmen’s
Compensation Insurance?
Ans: The objective of this Act is to take over the liability of the employer under the Act in
return for payment of appropriate premium to the insurer. It provides compensation
for workers for death and disability due to accident arising out of and during the
course of employment for which the employer is liable under the Workmen’s
Compensation Act, 1923. The Act thus provides a comprehensive protection for the
timely payment of compensation to the injured employee. The compensation amount
is directly proportional to the wages drawn by the employee.
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If the accident has been caused directly because of:

• the influence of intoxicants consumed by the worker
• his willful removal or disregard of any safety guard or other device meant for
his safety or
• his willful disobedience to any express order or rule meant for his safety
then the employer is only liable if it results in death and not otherwise.
3. Outline the salient features and the objectives of the crop insurance scheme ?
Ans: The objective behind the crop insurance policy was, first to provide insurance
coverage and financial support to farmers in the event of natural calamities, and
pests & diseases, and secondly, to encourage the farmers to adopt progressive
farming practices, high value inputs and higher technology in agriculture and to help
stabilise farm incomes, particularly in disaster years.
The Salient features of the scheme are :
The crops in the following broad groups in respect of which (i) the past yield data
based on Crop Cutting Experiments (CCEs) is available for adequate number of
years, and (ii) requisite number of CCEs are conducted for estimating the yield
during the proposed season are covered under the scheme:
(a) Food crops (Cereals, millets & pulses)
(b) Oilseeds
(c) Sugarcane, cotton & potato (annual commercial/annual horticultural crops)
Other annual commercial/ horticultural crops subject to availability of past yield data
will be covered over a period of three years. However, crops, which are covered next
year, will have to be specified before the close of preceding year.
All farmers including sharecroppers, tenant farmers growing notified crops in notified
areas are eligible for coverage.
The scheme covers the following groups of farmers:
a. On a compulsory basis: All farmers growing notified crops and availing
Seasonal Agricultural Operations (SAO) loans from financial institutions, i.e.
loanee farmers.
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b. On a voluntary basis: All non-loanee farmers growing notified crops who opt
for the scheme.
4. Define the scope of Aviation insurance policy?
Ans: The most common coverages of aviation insurance are:
• Aircraft liability insurance - Hull coverage
• Personal accident
Aircraft Liability Insurance:
The liability in case of aviation insurance is divided into two categories:
• Passenger liability
• Death and injury to third parties
There are some policies that cover both these categories as well as property
damage with a single limit to cover all three of them (like floating policies in fidelity
guarantee). The aircraft liability insurance also provides coverage of medical
payments for injuries sustained while travelling in or entering or alighting from the
aircraft. This policy coverage is available only if the policy includes passenger bodily
injury liability. Some policies also provide for Hull coverage which include coverage
of the body and machinery of the aircraft. Some policies provide open perils
coverage both on ground and in flight whereas others restrict the open perils
coverage to ground only. In-flight policies do not cover crash or collision. They cover
perils of fire, lightning or explosion in air.
5. How is “insurance of a person” policy different for life insurance policy?
Ans: While in life insurance a claim can be made only on the death of a person or the
attainment of a specific age, ‘insurance of person’ policy provides cover against any
personal accident or specified diseases. Secondly, the Life Insurance Corporation of
India provides the former policy, while the latter is provided by the General
Insurance Corporation of India. Like life insurance the amount to be awarded in case
of accident is pre-decided in the policy. Personal accident insurance is not a
contract of indemnity. The coverage is linked to the income of the insured.
Generally, sum insured is restricted to 5/6 times of annual income or 50/60 times of
monthly income in case of salaried employees. The Schedule of the policy specifies
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the amount to be paid in case of death of the insured, total or partial loss of
eyesight, amputation or irrecoverable loss of limbs without physical separation.
Personal insurance also covers many insurances like personal accident insurance,
disability insurance, baggage, medical, individual liability covers for professionals
like doctors, architects, etc.
6. How is “Burglary” defined in a Burglary insurance policy?
Ans: Burglary is defined as forceful and illegal entry into the business premises for the
purpose of stealing. ’Forceful entry’ is the prerequisite for burglary. It is necessary to
differentiate it from theft, robbery or housebreaking. Robbery requires a forceful
personal contact. It is an aggravated form of burglary where force is used against a
person.
7. What is the cover available for loss in a burglary policy?
Ans: Burglary insurance is not only for the goods owned by the person but also for the
goods he is responsible for like those held in his trust. It also includes the
relationship of bailment or agency regarding the goods. The policy with wider cover
excludes the items that are specifically covered under other policies.
The main policies available under the burglary insurance are:
(i) Burglary business premises insurance policies.
(ii) Burglary private dwellings insurance policies.
(iii) Combined fire and burglary insurance policies.
(iv) All risk insurance policies.
(v) Baggage insurance policies.
(vi) Jewellery and valuables insurance policies.
8. Discuss the scope of cover available under a Banker’s Indemnity Insurance
Ans: A banker’s blanket cover provides insurance against fire perils, burglary, cash in
transit, fidelity guarantee and marine insurance. This policy provides comprehensive
insurance cover to the banking sector.
Coverage: This policy covers the direct losses of money and/or securities
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discovered during the period specified in the policy. More specifically, it covers the
following losses:
Premises: By fire, riot and strike, burglary or house breaking or hold up resulting in
loss to money/securities at the premises.
Transit: Lost, stolen, mislaid, misappropriated or made away either due to
negligence or fraud of employees of the insured whilst in transit.
Forgery: Loss by bogus, fictitious or forged or raised cheque/drafts/FDRs or forged
endorsements.
Dishonesty: Loss of money and/or operations due to dishonesty.
Hypothecated goods: By fraud and/or dishonesty or criminal act of the insured
employees. Registered postal sending ñ Loss of parcels by robbery, theft or by other
causes to the parcels insured with the post office.
Appraisers: Infidelity or criminal acts by appraisers on the approved list.
Janata agents: Infidelity or criminal acts by Janata agents/Chhoti Bachat Yojana
Agents/ Pygmy collectors.
9. Enumerate the exclusions of this policy?
Ans: The policy categorically excludes losses due to:
1. Default of Director or partner of the insured other than salaried
2. War and allied risks
3. Acts of God
4. Incendiaries
5. Direct or indirect nuclear reactions
6. Acts of omission by the concerned employee after discovery of a loss in which
the said employee was involved
7. Losses of money, securities or personal property of the insured, the nominal
value and description of which have not been ascertained by the insured
before loss
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8. Trading losses
9. Losses sustained or discovered beyond the period specified in the policy.
10. Discuss the coverage and exclusions of a Plate Glass Insurance
Ans: The policy specifically indemnifies damages to glass, lettering or ornamentation
described in the Schedule caused by breakage or by accidental chemical spills or
acids. The policy also covers repairer replacement of sashes or frames, boarding up
or protecting windows in the event of unavoidable delay in replacements, and
removal of fixtures or other obstructions to replace the glass. Policies also cover
breakage of other than ’regular’ glass, such as neon signs, half-tone screens,
memorial windows, glass bricks, and fluorescent lights.
However, the policy excludes the following risks:
• Fire or explosion
• Earthquakes
• Riots, strikes, war and kindred risks
10. Why is Fidelity Guarantee Insurance policy becoming a necessity?
Ans: Fidelity Guarantee Insurance (FGI) is a necessity in today’s scenario because of
increasing frauds.
11. Enumerate the different types of Fidelity Guarantee Insurance policies
available?
Ans: The different Fidelity Guarantee Insurance policies include
• Individual policy - where the behaviour of only one person is guaranteed. The
individual’s name is written in the policy.
• Collective policy - The behaviour of more than one individual (usually the
whole staff) is indemnified in the single policy. The Schedule of such a policy
contains the names of all the individuals whose behaviour is guaranteed. .
• Floating policy or the Floater - The problem with the collective policy is the
assignment of the amount of guarantee to each individual. It is difficult to
estimate the amount of loss that an individual can create alone or with others.
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• Positions policy - This policy is similar to a collective policy (actually an

improvement over it). Instead of the names of the individual, the positions are
listed in the policy with the duties and the amount guaranteed for their
behaviour.
• Blanket policy - As the name suggests, this policy covers the entire staff of an
organisation. No name or position is shown in the policy. The policy is suitable
for organisations with large staff.
• Excess floating policy - This is a mix of the floating and cumulative policies.
The individual amounts are bundled with the names of each employee but for
unforeseen and unusually severe losses, an additional floating amount is
fixed. That is why the policy is known as an excess floating policy.
12. Enumerate the risk exposures of the Directors and Officers and the available
insurance policy to insure these risks?
Ans: Directors and Officers are exposed to potential risks that might come in the form of:
• Misrepresentation of the firm’s financial status
• Lack of diligence and failure of supervision
• Conflicts of interest
• Imprudent decisions and Mismanagement of funds
D&O insurance policy enables the directors to work peacefully with the knowledge
that somebody else will take care of the losses in case the company fails to fulfill all
its obligations. It offers a broad protection to the insured. Though not mandatory,
most of the top corporations in the west purchase D&O insurance.
13. Define accident as given in the Personal Accident policy.
Ans. Accident is defined as any injury caused by accidental, violent, external, and visible
means resulting in death or disablement.
Personal Accident insurance or PA insurance is an annual policy which provides
compensation in the event of injuries, disability or death caused solely by
violent, accidental, external and visible events.
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14. Is the Personal Accident insurance, a contract of indemnity? Give reasons for
your answer.
Ans. No, it is not a contract of indemnity because on some conditions being fulfilled the
Capital Sum Insured (CSI) is payable to the injured. For example, if within twelve
months of its occurrence the injury be the sole cause of death, or of total and
irrecoverable loss of both the eyes, or loss of use of two hands or two feet, the
capital sum insured shall be payable to the insured. Thus, the contract is based on
agreed value of loss. Different compensations for different classes of insured negate
the principal of indemnity.
15. How is the Sum Insured or Limit of Indemnity fixed?
Ans. The sum insured is usually fixed in multiples of the annual earnings of the insured,
for example, at least five times the annual income in most cases. For Group /
Personal Accident Insurance, sometimes two years annual salary is taken.
16. Can a person recover anything under a Personal Accident policy, if he dies a
natural death?
Ans. No, if the insured dies a natural death due to disease or old age or due to his
intentional act like suicide, or even when death results due to War, Seizure, Capture,
Mutiny and so on, he is not entitled to recover anything under the policy.
17. Mention the Conditions or Situations when only 50% of the CSI is Payable in
the PA Cover?
Ans. If the injury to the insured within 12 calendar months of its occurrence becomes the
sole and direct cause of the total and irrecoverable loss of:
• the sight of one eye or of the actual loss by physical separation of one hand or
one entire foot
• total and irrecoverable loss of one hand or one foot without physical
separation
then 50 % of the CSI is payable to the insured.
18. How is compensation for loss of capacity assessed with the help of the
Schedule?
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Ans. If the injury immediately, permanently, totally, and absolutely disables the insured
person from engaging in any employment or occupation of any description, then a
lumpsum equal to 100% of the CSI stated in the Schedule is payable to the insured.
If the injury becomes the cause of the total and irrecoverable loss of use or of the
actual loss of any other part of the body, then a percentage of the CSI as indicated
in the Schedule is payable to the insured.
19. What is the compensation payable in case of temporary total disablement in a
PA cover?
Ans. If the injury is the sole and direct cause of temporary total disablement, then so long
as the insured is disabled in any employment or occupation a sum at the rate of one
per cent (1%) of the CSI as stated in the Schedule is paid per week, but in any case
not exceeding Rs. 5,000/- or 25% of the monthly salary whichever is lower for a
period not exceeding 100 weeks in respect of any one injury. The Schedule may
differ from insurer to insurer.
20. What is the liability of the Insurance Company, when the insured dies outside
his/ her residence under a PA cover?
Ans. In the event of death of the Insured Person due to accident as defined in the policy
outside his/her residence, the company shall reimburse expenses incurred for
transportation of Insured’s dead body to the place of residence subject to a
maximum of 2 % of CSI or Rs.1,000 whichever is less. This will be in addition to any
other compensation for death payable under the policy.
21. How is Cumulative Bonus determined under a Personal Accident cover?
Ans. The compensation payable under the policy for death, loss of limb(s), or sight and
for permanent total disablement arising out of accidental injuries shall be increased
by 5% in respect of each completed year, during which the policy is in force, prior to
the occurrence of an accident for which CSI shall be payable and if no claim has
been made earlier.
22. What are the exceptions under a PA policy?
Ans. The Personal Accident policies contain exceptions like death, injury or disablement,
directly or indirectly caused by, arising out of, or resulting from, or traceable to
(a) Intentional self injury, suicide, insanity or influence of intoxicating drinks or
drugs or
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(b) In the case of women, by childbirth, pregnancy, etc.

(c) Whilst engaging in aviation or ballooning.
(d) Whilst mounting or dismounting from a balloon or aircraft otherwise than as a
passenger
(e) War, invasion, act of foreign enemy, hostilities, civil war, rebellion, revolution,
seizure, capture, arrests, restraints and detainment.
(f) Ionizing radiation, contamination from combustion of nuclear fission.
23. Discuss the nature and scope of the Personal Auto Insurance cover?
Ans. A policy of motor vehicle insurance is, in the ordinary course, a combined insurance.
It insures the damage of the motor vehicle and its accessories, liability for damage
for property, death of or injury to the assured himself or spouse and it also insures
the motor vehicle against the risk of liability for injury to, or the death of third parties
caused by the driver’s negligence.
24. Discuss the ‘Property accident aspect’ of the motor insurance policy.
Ans. In the motor vehicle insurance policy, if the motor vehicle is insured, the owner will
be indemnified for any loss or damage caused to it by accident. Motor insurance
being a contract of indemnity, the insured is entitled to indemnity only, and that too
in the manner stated in the policy. Medical expenses up to a limit are also payable.
If the insured car is damaged, the insurer is entitled at his option to repair or replace
the car or any part thereof or pay any amount of the loss or damage, in cash not
exceeding the sum insured or the value at the time of loss whichever is less. If the
part is not locally available or is exorbitantly costly to obtain from abroad, the insurer
often limits the liability to paying in cash the catalogue price issued by the
manufacturer or his agent in India together with the cost of fitting such part.
25. What are the different types of policies available and what is the limit of
indemnity under those policies?
Ans. The terms of the policies define the nature and extent of the indemnity provided by
the policy. There are two types of policies namely:
(a) third party liability policy.
(b) comprehensive policy.
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The third party liability insurance is a compulsory under the Motor Vehicles Act. It is
often said that ‘a motor car policy is a unique combination of several types of
general insurances’.
For example, a private motor car comprehensive policy indemnifies the assured
against loss or damage to the insured car by accidental external means, by fire, self
ignition, external explosion, lightning, frost, burglary, house-breaking or theft, and by
malicious acts. Thus it is very clear that the insurer is liable to make good the loss of
a motor car to the owner of the car, for loss of car means loss to the owner of the
car.
26. Describe the ‘Personal Accident Aspect’ of the Personal Auto insurance
policy?
Ans. The personal accident aspect of the policy throws upon other risks, which an insured
is likely to face. Besides, ensuring his personal safety under an ordinary policy, the
extension clause indemnifies the assured for the injury caused to him whilst he is
driving a motor car not belonging to him or hired to him and also any person driving
the insured car on the insured’s order or with his permission.
Further, by paying extra premium, he may get extra cover over and above the
general cover under the standard policy like:
(a) Accidents to his wife and other specified relatives or friends;
(b) Loss or damage due to earthquake or flood, etc.
The policy indemnifies the insured to the use of the insured car. However, it extends
to the insured not only when he is driving his own insured car but also when he is
driving a private car not belonging to him nor hired by him.
27. Mention the conditions in a motor vehicle policy to make the insurer liable?
Ans. Some of the conditions in a motor vehicle policy to make the insurer liable are:
(a) The insured will maintain the vehicle in a good state of repair and efficient
condition.
(b) He takes all reasonable steps and precautions to avoid accidents and to select
competent and sober drivers .
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(c) He takes all reasonable steps to safeguard the car from loss or damage.
28. Mention the provisions and conditions to be adhered to, under the Motor
Vehicles Act with respect to third party insurance?
Ans. The Motor Vehicles Act has made it statutory and obligatory for a third party
insurance cover to be taken by every owner of a vehicle. The Act specifically states
that no person shall use except as a passenger or cause or allow any other person
to use a motor vehicle in a public place, unless there is in force in relation to the use
of the vehicle by that person or other person, as the case may be, a policy of
insurance complying with the requirements of the Act. Thus, third party insurance is
a must for running a motor vehicle in a public place. The following are some of the
important provisions to be adhered to in case of third party insurance, namely:
(i) It applies to any person other than a passenger.
(ii) What is prohibited is the user by himself or allowing another person to use.
(iii) Such use should be of a motor vehicle.
(iv) Such vehicles should be used in a public place.
(v) The using or causing of use by the other person should be without a policy of
insurance.
(vi) The policy of insurance should comply with the provisions of the Act.
29. What are the personal risks, a person can insure against?
Ans. A person can insure himself against the risk of death, personal injury or damage,
deterioration or destruction of property, and also against the risk of incurring liability
to third parties.
30. What is meant by Third-Party liability?
Ans. Third party liability is the liability which may arise by an insured’s own conduct or in
using his property, but still the risk of liability arising out of the use of the property is
not covered by an insurance of that property. Liability policies are generally
expressed as providing indemnity against ëliability in lawí.
31. What is the meaning of liability in /at Law?
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Ans. The phrase ‘liability’ in Law is invariably understood and primarily used to cover the
liability arising out of negligence. For example, the liability of a building contractor to
a third party arising out of the faulty design of a structure was held covered though
there was no negligence.
Similarly, in a householders’ comprehensive insurance policy, the word ’accident’
covered nuisance liability which had occurred without the negligence on the part of
the assured.
32. What is the different insurance coverages offered in liability insurance?
Ans. Under the ’liability insurance category the following liability policies are covered:
• Public liability insurance,
• Liability arising in connection with professional negligence,
• Compulsory insurance,
• Employer’s liability insurance,
• Guarantee insurance.
33. Explain briefly each of the above mentioned liability insurance policies?
Ans. Liability insurance policies are generally expressed as providing indemnity against
liability in law. The various liability insurance policies are discussed at length below.
Public liability insurance: ‘Public liability’ does not mean liability of the state or its
agencies. It means liability as imposed by law as opposed to self-imposed liability as
in contract. The Public Liability Insurance Act, 1991, is intended to provide
immediate relief to the persons affected by accidents occurring while handling any
hazardous substance and for matters connected therewith and incidental thereto. In
India this policy appears as a sequel to the famous Bhopal Gas Leak case.
Professional Negligence: There are standard policies for professional indemnities
cover for accountants, insurance agents, solicitors, and lawyers. These policies also
cover the risk of loss by their own negligence. The law has made these
professionals liable in respect of any loss or injury due to the negligence in the
conduct of their professional duties.
Compulsory Insurance: For the welfare of the employees, social welfare legislations
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have been passed in England and in India making it compulsory for employers to
insure for safety of the workmen.
The Indian Act makes it compulsory for the employer to insure his workmen by
providing certain benefits to them in the event of their sickness, maternity and
employment insurance. The employees insured under the Act are entitled to
(a) Sickness benefit
(b) Maternity benefit
(c) Disablement and Dependent’s benefit.
Employer’s Liability: Though in olden days the liability of the employer has been
extended in the law of torts by vicarious liability, in regard to his liability towards the
employees, a number of defences were recognized, substantially reducing his
liability towards his employee. For example, the doctrine of common employment,
the defence of volenti non fit injuria were vital defences. But, in due course of time,
the liability of the employer was extended due to the development of the industrial
and labour welfare measures and legislations. Now the employers are tempted to
take out insurances against such liabilities.
Guarantee Insurance: Guarantee business of insurance companies assumed great
importance in the modern times. Earlier this was done by contracts of guarantee by
which a friend or a relative of the promisor or employee used to stand as a surety for
the due performance of the promise by the principal debtor or for the honesty of an
employee. As the number of contracts increased, it became increasingly difficult to
find sureties, and as a result, chances of employment and business had to be lost.
In such a situation, the insurance companies developed for themselves considerable
amount of ‘guarantee business.’ There are two methods by which this guarantee
was given, namely:
(i) the insurance company or the underwriter stands as a surety for the due
completion of a contract or fidelity of an employee; and / or
(ii) the underwriter insures the promisee or employer against the loss arising by
non-performance of the obligator or the dishonesty of the employee.
The first type of contracts are simple guarantee contracts and only the second type
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involve an element of insurance. The main types of policies included in guarantee

insurance are:
(i) Insurance for performance of contract;
(ii) Insurance of debts;
(iii) Fidelity policies.
A contract of guarantee insurance is a contract whereby the insurer undertakes to
indemnify the insured from the loss caused as a result of the breach of contract or
infidelity.
Insurance for Completion of Contract: The subject matter of such contract is due
performance of a contract. A enters into a contract with B but doubts whether B
would complete the contract. In such a case A may insure B’s due performance of a
contract. These are generally taken in cases of contracts of employment.
Insurance for Repayment of Debt: A creditor may insure the repayment of debt,
which he advanced or will advance in future. Such policies sometimes cover non-
payments from specified causes only and in such cases only the causes for non-
payment become relevant. When the creditor insures the repayment of a debt, on
default by the debtor, the creditor can straightaway claim the money from the
insurer. Insurance being a contract of indemnity, the insurer will be subrogated, on
payment to the insured, to all the rights of the creditor against the debtor.
Fidelity Policies: These are the most common types of guarantee policies and are
made usually for a term of one or more years. These arise generally out of the
contract of employment where the employee has an opportunity to be dishonest. The
risk covered is generally restricted to losses occurring while the employee is
engaged in a specified capacity. Even in the employment, the risk covered may vary
according to the specific terms of the policy in each case. For example, some are
restricted to losses arising by ‘embezzlement’ or ‘fraud’.
Fidelity policies may be combined with liability policies, which are normally restricted
to liability incurred through the negligence of the employee while the former policies
are mainly intended to cover losses caused to the employer by the employee ís theft
or embezzlement of money or securities. A fidelity insurer, like a fidelity guarantor, is
entitled to subrogation.
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34. Discuss the scope of cover available under the Travel Accident insurance
cover.
Ans. The scope of the Travel Accident cover extends to all domestic travellers
irrespective of the their age and income group. The benefits under this policy of
insurance are very large and wide in depth for all those who frequently travel and
face the various unforeseen risks of journey.
35. Which modes of transport are covered under this policy cover?
Ans. This cover is available to travellers by all modes: Road/Rail/Water/Air including by
their own mode of transport.
36. What is the basic objective of this insurance policy cover?
Ans. This cover is valid for transit period subject to maximum of 60 days.
The cover includes incidental local travel also. The basic objective of this policy is to
provide relief in case of accidental death and loss and /or damage to accompanied
baggage during the travelling within the country.
37. Who are the people covered under the policy cover? Can PA also be covered
besides the available cover?
Ans. This policy is designed to provide cover for the insured, spouse, and dependant
children only. Compensation under the Personal Accident will be in addition to all
other existing covers or insurance covers insured might be holding.
38. What are the other Causes of Loss against which the policy extends its cover?
Ans. The policy covers reasonable and actual emergency incidental expenses upto Rs.
1000/- arising out of an accident resulting in a valid claim under a PA section.
Besides, the loss or damage to accompanied baggage arising out of fire, storm,
tempest, hurricane, flood, inundation, riot, strike, terrorism, malicious damage,
accident, theft or burglary.
39. How is the limit of Indemnity fixed for this cover?
Ans. The limit of indemnity under this cover depends on the sum insured and otherwise
as stipulated in the Schedule. The sum insured per article is Rs. 500/- unless
otherwise declared and claim of sum insured per article above Rs. 500/- should be
settled on claimed value basis without applying depreciation and average.
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40. What is the underwriting factors to be taken into consideration for fixing the
price?
Ans. The pricing of the policy depends up on the number of persons as mentioned in the
Schedule. In case of more than 8 persons, an additional premium of Rs. 40/- per
head is charged. Service tax is charged extra. The cancellation of journey is to be
intimated to the concerned authorities within 2 days of the schedule journey.
Sometimes, extension of the cover will be granted subject to revised dates chosen
by the insured, but not beyond a period of 60 days.
41. What are the general exclusions under the Travel Accident cover?
Ans. The general exclusions under the Travel Accident cover may be summarized as
follows:
• Loss of articles of jewellry
• Jewellery made up of fully/ partially/ semi precious metal/ stones/
• Money
• Securities
• Manuscripts
• Deeds
• Bonds
• Bills of Exchange, Promissory notes
• Stocks or share certificates
• Stamps and travel tickets or travellers cheques
• Business books and documents
Recoveries in baggage claims based on Subrogation principle may be waived if
uneconomical.
42. Mention the category of people who can avail the All-risks policy cover.
Ans. This policy is suitable for people owning jewellery or valuables, which are prone to
accidental loss or damage.
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43. Discuss the salient features of the all risks policy.

Ans. The policy covers valuables like jewellery, ornaments, paintings, work of art, and
similar art effects of sentimental value, etc.
The scope of cover is limited to loss or damage due to fire, riot, strike, terrorist act,
burglary, housebreaking, larceny, theft, and accidental loss or damage.
44. What are the benefits available under this policy?
Ans: The policy pays for any loss or damage to the property insured caused by insured
perils. The amount of claim payable would be limited to the sum insured or market
value at the time of loss, whichever is lower.
45. Mention the exclusions of this cover.
Ans. The main exclusion of this cover is as follows:
In case of paintings or work of art, other than damage by fire, partial losses are not
covered.
46. What are the requirements under this policy?
Ans. Some of the important requirements of this policy are:
• Completed proposal form should give full and accurate information.
• All items to be covered should be fully described for easy identification in
future.
• Unless each of the items is valued separately, the claim for each item will be
limited to 5% of the total sum insured.
• Cover is not given freely on account of its vulnerability to loss and moral
hazard.
47. Mention the people who are eligible for the cover under the Sportsmen
Insurance.
Ans. Amateur sportsmen pursuing Cricket, Golf, Lawn Tennis, Badminton, Squash,
Angling, etc., and persons using sports guns can avail this policy.
48. What is the scope of coverage in the Golf Indemnity policy?
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Ans. The policy is given to amateur sportsmen (not to professionals) for covering their
sports equipment, personal effects, legal liability to third parties and personal
accident risks. The cover can also be made available in respect of named members
of insured is family residing with him.
49. What are the losses covered under the said policy?
Ans. The following losses are covered under the policy:
• Loss or damage to sports equipment, accessories, and wearing apparel to the
extent of Rs. 2000 per person selected. The limit can be extended on payment
of additional premium.
• Loss or damage to personal effects and wearing apparel while these are left in
clubhouses, sports pavilion, etc. caused by fire, burglary, house breaking, or
theft to the extent of Rs. 1000 per person for each sport selected.
• Legal liability of the insured and named members of the insured’s family to the
public while engaged in or practicing the sport, up to a limit of Rs. 500,000 for
any one accident.
• Accidental bodily injury to the insured and to the named members of the
insured’s family while engaged in or practicing the sports up to Rs. 15,000. or
Golf, the insurer will pay the insured at the rate of Rs. 200 in respect of each
hole.
50. Can sportsmen staying abroad avail this policy?
Ans. No, the sportsmen staying abroad cannot take this policy. The geographical limit is
usually India. But, however, the cover can be extended for events worldwide.
51. State the unique features of this policy.
Ans. This is a unique policy designed especially for amateur sportsmen. The premium
depend upon the number of sports selected and the number of family members
included. Some of the benefits offered by this policy are not covered by any other
policy and therefore it is strongly recommended for amateur sportsmen.
52. How is a burglary policy beneficial for a commercial business unit?
Ans. The policy covers the following:
500
• Stock in trade
• Goods held in trust or on commission
• Fixtures and fittings, plant and machinery that is movable property
The policy offers protection against burglary and housebreaking. Forceful entry is
the chief characteristic of burglary. Other crime perils like theft, larceny, robbery, etc.
are not covered under this policy.
The policy requires proper care of the insured property. If the cash in the safe is
insured, the safe should be locked and keys of the lock should not lie anywhere near
the safe.
53. What is the Relevance of Micro Insurance in today’s, scenario?
Ans.
• MI comes from the need for inclusive economic growth i.e. the poor also getting a
fair deal when the Indian Economy grows rapidly
• Micro Finance is increasing in Rural India through Banks, NGOs and SHGs.
• The vast credit off-take can be protected by micro insurance only in rural India.
• The large population of the rural India, rural finance and technology can be
seamlessly integrated for viable business and distribution models for MI
• MI is widely popular in other developing countries all over the world due to inability
of large insurers to tackle the small needs of rural poor.
• Public sector Insurance can fit existing policies for filing newer ones without
damaging their existing financial well being
• Understanding the exact needs of various States/ regions by market research can
help to evolve the correct MI product
• In India, MI products should have simplicity, affordability and proximity of services.
• Our option in PSUs is to link our Bancassurance partners and the like and gather
experience and data to evolve the best product.
• The Ideal package product should be savings oriented (No Claim Bonus), protective
of credit, life, disability and properties including livestock.
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54. Enumerate the role of intermediaries in procuring general insurance business?

Ans.
(i) Fast developing distribution channel.
(ii) Corporate agents bancassurance and brokers are Strong intermediaries
(iii) Intermediaries are bound by the code of conduct as per IRDAI
(iv) They have to adhere to the functions stated by IRDAI
(v) Link between the insured and insurer
(vi) Have to be fair to the interest of insured and insurer
(vii) Provides services to the policy holder
(viii) Should be updated with the latest covers available in the market and happenings in
the international market
(ix) Should have sound knowledge regarding the underwriting philosophy, risk retention
capacity and solvency margin of various insurers
(x) Should play a role in claims administration and management of insured
55. Explain the Concept of input cost in Rural Insurance.
Ans.
(i) It is used in those classes of insurance where the value of the subject matter is
increasing frequently due to change of status/growth.
(ii) In plantation insurance the Sum Insured shall be based on the cost of cultivation i.e.
input cost or cost of raising /development of the insured plant.
(iii) Where the insurers do not have up-to-date information / expertise in change of value
of the subject matter.
(iv) Insurers collect relevant information from experts in that field like State/Central
Agricultural Department, NABARD, and Agricultural Universities.
(v) For input cost the items generally considered are -
• Cost of Land Preparation including Pit making.
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• Cost of Seeds/Seedlings.
• Cost of manures/fertilizers.
• Cost of pesticides etc.
(vi) For subsequent years of operation for plantation crops additional costs such as cost
of fertilisers, manures, irrigation, cost of pesticide, insecticide, other plant protection
chemicals, labour charges will be added to the first year cost and thus the sum
insured for subsequent years will be the applied.
(vii) Stage wise valuation table of the plantation is to be prepared for future assessment
of loss.
(viii) The Input cost may be derived for each proposal by the experts as stated
hereinabove/from any reputed experts of the relevant field.
(ix) Feasibility Report from the State/Central Government Agricultural Institutions/
Universities to be obtained.
(x) The premium charging as well as claim payment are purely based on the concept of
input cost.
56. Elucidate the scope of cover in Credit Risk Insurance.
Ans. Two types of risks are covered – Commercial and Political
1. Commercial risk refers to the payment risk related to the buyer including
nonpayment due to insolvency default etc.
2. Political risk refers to the payment related to the country of the buyer
Political risk refers also to transfer difficulties due to economic events like export
license cancellation and war
3. Policy excludes Inter company sales
Policy excludes also transactions with Government Institutions
Excludes private individuals
If the defaulter is a subsidiary or other department of the same company, these are
excluded from the scope of the policy
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SECTION – C
Case Studies
Case study 1.
Govind Rao, a dealer in timber, supplied timber to companies on a contractual basis. He
insured his business with Unity Insurance Company. Govind Rao had different payment
arrangements with each of his clients. While some clients were asked to pay in cash,
others were allowed credit.
Green Earth Public Ltd was one of the companies that purchased timber from Govind Rao.
Govind Rao received fully paid shares of the company as payment for the timber sold to it.
By financing the company during its time of need, Govind Rao had also become an
unsecured creditor of the company.
On 10 April 2000, Govind Rao and Green Earth signed a deal for 1000 teak wood logs.
The delivery of the timber was to take place the next day. Unfortunately, that night there
was a short circuit at the godown where the timber was stored, and the entire consignment
was destroyed in the fire. Govind Rao filed a claim with the insurance company for the
loss he had incurred. Unity, however, rejected his claim and refused to pay for the loss,
alleging that the timber which was destroyed was sold by the insured to
Green Earth and, therefore, Govind Rao no longer had any claim over it.
Questions for discussion:
1. Is Govind Rao entitled to receive compensation from the insurance company for the
loss caused by the fire?
2. What is insurable interest? What are the policy requirements for an insurance
interest?
Ans. Issue 1. After having finalized the sale of the timber to Green Earth Public Ltd.,
Govind Rao has no insurable interest in the timber since it has become the property of the
buyer, that is, Green Earth.
Insurable interest is the legal right of the owner of a property to insure the property. One of
the conditions of an insurance policy is that the policyholder should have an insurable
interest throughout the period of the policy. Further, during the tenure of the policy, the
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policyholder may lose his insurable interest by way of transfer of ownership, etc. In such a
situation, he is no longer entitled to claim for loss to the insured property as the sold
property no longer belongs to him.
Moreover, a shareholder or creditor of a company cannot insure the assets of a company,
since the assets belong to the company. The company, which is an artificial person, has
an insurable interest in the company’s assets. Thus, in the given case, the timber has
become the property of Green Earth and Govind Rao is not entitled to receive any
compensation from the insurance company for the loss to the timber due to the fire.
Issue 2. The owner of a property has the legal right to insure his property if its loss or
damage is likely to affect him financially. This legal right of the owner is called insurable
interest. The absence of an insurable interest renders an insurance policy void because
one of the conditions of the policy is that the policyholder maintains an insurable interest
throughout the period of the policy. Instead of making the existence of an insurable
interest a precondition for obtaining coverage, insurance policies, instead, limit the
payment on any claim to the extent of the insured’s interest. In addition to this, proof of
loss forms that accompany insurance policies require the insured to specify all interests
that he may have in the property. Limiting the payment of claims to the extent of an
insured’s interest and requiring the insured to specify all interests in the property is
essential for claims adjusting. If it were possible for an insured to be able to collect more
than the interest he has in the insured property, it would serve as an incentive for the
insured to cause deliberate destruction to his property. Also, an insured’s interest can
change due to circumstances such as marriage, divorce, or additional mortgages. This can
create opportunity for false claims if the amount recovered by the insured as insurance is
not limited to the insured’s actual interest.
By identifying all interests in the property, an adjuster is able to treat all parties fairly,
without compromising on the insurer’s rights. It also enables the adjuster to identify other
coverages.
Case study 2
Shankar Raman joined the Railways in 1975. He started out as a mechanic and worked in
different capacities from 1975 to 1998. As a mechanic, he had to use solvents to remove
engine grease from engine parts and tools as well as from his hands and clothing.
After some years he got promoted as supervisor. However, his exposure to solvents did
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not stop there. As a supervisor, he continued to inhale solvents during the daily
inspections.
After some time, Raman experienced rashes, dizziness, breathlessness, and disturbed
sleep patterns. Because of his problems, he even made the life of other members in his
family difficult.
Raman usually maintained a good rapport with his peers and superiors. But in 1990, he
had problems with his immediate superior PawanSarkar. Sarkar even allegedly waged a
campaign of harassment and intimidation against Raman. Despite his problems, Raman
never complained against Sarkar to higher authorities. Unable to bear the harassment,
Raman thought of quitting the job. But his obligations tied him down. So he faced all kinds
of problems without making an issue of it. In 1995, Raman began to suffer from weight
loss, headaches, nausea, anxiety, memory loss, and other health problems. He even
sought psychiatric treatment for depression in 1995.
One of the psychiatrists attributed Raman’s mental problems to job stress. In 1998, unable
to continue with the organization any more, Raman decided to quit the job.
Even after one year of quitting the job, Raman could not recover completely. He
approached Ayurvedic doctors and used herbal medicines. Unfortunately all his attempts
were rendered futile.
Raman then claimed compensation from the railways for the ailments he had contracted
during the tenure of his service and the financial burden he had to bear in the process of
undergoing treatment for these ailments. The railways forwarded Raman’s claim to its
insurer Fair Insurance Company. The insurer, in turn, appointed a claims adjuster to carry
out the necessary investigations and to decide on the claims amount it had to pay Raman.
The claim adjuster surveyed the workshop premises where Raman used to work, spoke to
Raman’s colleagues and subordinates, and noted down a few things to discuss later with
the management. The claims adjuster even obtained the addresses of the doctors who
had treated Raman and had detailed discussions with them about Raman’s health
problems. Later, while giving the management his report on what the claim amount should
be, the claims adjuster stressed on some vital aspects of Raman’s job which, if suitably
modified would not only help Raman come back to work without causing any further harm
to his health, but would also help the railways lower the disability expenses they were
required to pay Raman.
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Questions for Discussion:

1. Claims adjusters handling workers’ compensation cases must investigate them
diligently. Discuss, how well the adjuster investigated Raman’s compensation case.
2. How will the compensation adjuster’s report to the railways’ management help
control disability expenses in future?
Ans. Issue 1. There is no real investigation into workers’ compensation cases that only
involve medical expenses. The claims adjuster takes the policyholder’s word as proof that
the accident happened on the job and that the injury is work-related.
The adjuster usually conducts an investigation if the accident involves lost time from work.
In such cases, he obtains statements from the claimant, the employer, and any witnesses
present. With the help of these statements, the adjuster tries to establish whether the
injury is work-related or not, if the relationship between the employee and the employer
might have prompted exaggerated claims by the claimant, and whether the injury was
preexistent or not. The adjuster must also obtain documentation of the earnings of the
employee in order to calculate the employee’s disability compensation accurately.
Issue 2. For compensation adjusters, controlling disability expenses is probably the most
important issue. Cases in which the claimant returns to work promptly and does not lose
any time from work are relatively simple and straightforward for the adjuster to handle. The
biggest problem that compensation insurers face is from cases which involve disability
extending over a long period of time. Compensation insurers cannot simply stop paying
compensation because they believe that the disability should have ended. Once the
insurer accepts a case as being compensable, he cannot end disability payments except
by an agreement with the claimant to do so or through an order of the compensation
commission. If the claimant disagrees with the insurer, it may take months to resolve the
case before the compensation commission. The decision of the compensation commission
is generally in favour of the claimant. The insurer can stop payment if the commission
allows stoppage of payment to the claimant and rules in favour of the insurer. However, in
such cases, the claimant need not reimburse past payments.
Adjusters can control disability expenses by insisting that the treating doctor gives reasons
as to why the claimant cannot perform his job. This is necessary because many physicians
certify disability without understanding the physical demands of the claimant’s work. For
almost any kind of impairment, there are jobs, or certain aspects of a job, that can be
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performed by the affected person. Therefore, the physician cannot assume a disability
purely on the basis of an impairment.
Adjusters and employers can work together to modify the job of an employee by removing
the most physically demanding parts from the job. On their road to recovery, claimants can
be given work that have limited duties. The claims adjuster can also control disability
expenses by constantly encouraging claimants to return to the job. In the process, they
can find out from them the aspects of their work which they are still unable to perform and
suggest the required modifications in the job to the employer, which can help the claimant
to come back to work quickly.
Case Study 3.
Hemant Patel, a real-estate broker, lived in Delhi with his wife and two children. He owned
a bungalow in Karol Bagh which was insured with Elite Insurance Company, New Delhi,
for Rs 35 lakhs. On Dec 31st 1999, Hemant went to the local club with his family to attend
a New Year party. When they returned home in the early hours of the next day, they found
that their house had been burgled and many valuables had been taken away. While the
police investigation was going on, the insurer sent his surveyor to look into the cause of
the loss, the compliance of the insured with the terms of the policy, and the amount of loss
suffered by the policyholder. During the course of investigation, the surveyor observed
significant discrepancies in the statements given by the insured. These discrepancies
pertained to the list of items reported to have been stolen by the insured and the mismatch
between the true value of these items and the amount supposedly involved in the burglary.
When the surveyor submitted his report to the insurance company, he mentioned that the
financial condition of the insured was not good before the burglary and he had increased
the insurance coverage on his house just a few days before the burglary took place.
Hemant’s claim form was therefore rejected by the insurance company on grounds of
fraud. Hemant filed a lawsuit against the insurance company.
Questions for Discussion:
1. Was Hemant eligible to receive the claim amount for the reported loss that he had
suffered? Why do insurers make payments for suspicious claims?
2. What are the precautions that a loss adjuster has to take while handling claims for
loss caused by theft?
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Ans: Issue 1. Hemant failed to give convincing replies to the questions posed by the
surveyor. Even the information he supplied was full of discrepancies. Further, he
increased the value of the insurance coverage on the house, which proves that the
insured’s motive behind obtaining insurance was purely to obtain financial gain rather than
protection against risk. Therefore, Hemant is not eligible to receive the claim amount for
the reported loss. Insurers often make payments towards suspicious claims for fear of
being blamed for tardiness in claim settlement. The fear of loss of goodwill, and the need
to maintain good standing with the insurance regulators is also responsible for the insurers
making hasty settlements of suspicious claims.
Issue 2. An adjuster should thoroughly review relevant policy provisions while handling a
claim for loss due to theft. If the policyholder has theft coverage for the type and location
of property concerned, then the verification of the loss becomes a very difficult task for the
adjuster. While verifying a theft claim, both the theft itself as well as the amount of loss
due to theft have to be verified. Since little or no evidence remains after a theft, it is easy
for a dishonest insured to fabricate claims. Even if a theft has truly occurred, there is no
evidence to prove that there was a thief involved in the incident, or to prove the existence
of the property involved in the theft, or even to prove the true value or quantity of the
property involved. The statements of the insured about the nature, quantity and value of
the property that has been allegedly stolen are accepted as evidence in courts. The failure
of the insured to provide receipts to validate his claim cannot form the basis for denial of
the claim by the adjuster.
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CHAPTER – 8
LIABILITY INSURANCE

1. Introduction
2. Basis of Legal Liability
3. Historical background and evolution of Liability insurance
4. Fundamental Principles of Insurance applicable to Liability insurance
5. Scope of Liability Insurance Policies
6. Summary
7. Questions
• Explain the need and importance of liability insurance in today’s world
• Describe the basis for liability on the ground of intentional tort.
• Explain the justification of liability on the basis negligence
LIABILITY INSURANCE
• Discuss the coverage and scope of personal and public liability insurance
policies
• Describe the benefits and advantages of professional and product liability
insurance policies.
1. Introduction
Liability Insurance, of late in India, is visibly making a mark in the corporate sector as well as in
other sectors. In the Western countries, liability insurance is very popular and commonly opted
by individuals, professionals and corporates. The liability generally arises out of negligence or
breach of duty.
The purpose of Liability insurance is to provide indemnity to the insured in respect of financial
consequences of legal liability. Whenever liability arises under Civil Law, compensation
(damages) becomes payable. Besides this, there may be legal costs awarded against the
insured and also legal costs of defence of the claim incurred by the insured.
2. Basis of Legal Liability

Each person has legal rights. A legal wrong is a violation of a person’s legal rights, or a failure
to perform a legal duty owed to a certain person or to society a whole.
Legal wrongs can be of three broad classes:
• Crime is a legal wrong against society that is punishable by fines, imprisonment or
death.
• Breach of contract is a class of wrong where the one of the parties of the contract fail
to perform the promise, or duty as the provisions of the contract.
• A tort is a legal wrong for which the law allows a remedy in the form of money
damages. The person who is injured or harmed (called the plaintiff or claimant) by the
actions of another person (called the defendant or tortfeasor) can sue for damages.
Civil Liability may arise as under :
(i) Law of Tort due to negligence, bodily injuries and/or damage to the property of third
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parties may be caused for which damages become payable.

Torts generally can be classified into three categories:
• Intentional torts
• Strict liability (absolute liability)
• Negligence
(ii) Statutory law – liability to pay for relief for personal injuries and/ or damage to property
of third parties under any statutory laws or acts.
(iii) Law of contract – liabilities arising in the discharge of professional duties due to
negligence.
Liability arises mainly under the Law of Torts. Tort means ‘Civil Wrong’ arising out of a breach
of duty, for which damages are recoverable under law.
2.1 Intentional Tort

Legal liability can arise from an intentional act of omission that results in harm or injury to
another person or damage to the person’s property. Intetional Tort takes numerous forms,
such as libel, slander, assault, battery, patent or copyright infringement etc.
2.2 Strict / Absolute liability

Strict liability means that the liability is imposed regardless of negligence or fault. Some
common situations in which strict liability applies include:
• Blasting that injure another person
• Manufacturing of explosives
• Owning wild or dangerous animals
• Crop spraying by airplanes
• Occupational injury and disease of employees under a workers compensation law
2.3 Negligence
Negligence is also the reason for the liability loss exposures. Negligence typically is defined as
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the failure to exercise the standard of care required by law to protect others from an
unreasonable risk of harm. The standard of care is based on the care required of a reasonable
prudent person. The standard of care required by law is not the same for each wrongful act. Its
meaning is complex and depends on the age and knowledge of the parties involved, court
interpretations over time, skill, knowledge, and judgment of the claimant and tortfeasor,
seriousness of the harm, and other factors. In simple words, negligence means “absence of
care”.
2.4 Essentials of Negligence

Negligence can be established when the following conditions are satisfied:
(a) Existence of legal duty of care towards the injured party.
The first requirement is the existence of a legal duty to protect others from harm. For example,
a motorist has a legal duty to stop at a red light and to drive an auto safely within the speed
limits. A manufacturer has a legal duty to manufacture safe product. A physician has a legal
duty to enquire into allergies before prescribing a drug. To be guilty of negligence, there must
first be a legal duty or obligation to protect others from harm.
(b) Breach of that duty or failure to perform that duty
The second requirement is the failure to perform the legal duty required by law, that is failure
to comply with the standard of care to protect others from harm. Your actions would be
compared with the actions of a reasonably prudent person under similar circumstances. If your
conduct falls short of this standard, the second requirement would be satisfied. The
defendant’s coduct can be either positive or negative act. For example, driving at high speeds
in a residential area or running a red light are examples of positive acts that reasonably
prudent person would not do. A negative act is simply the failure to act. In other words, you fail
to do something a reasonably prudent person would have done. For example, if you injure
someone because you failed to repair the faulty brakes on your car, you could be found guilty
of negligence.
(c) Injury or damage as a consequence of the breach
The third requirement is damage or injury to the claimant. The injured person must show
damage or injury as a result of the action or inaction of the alleged tortfeasor. For example, a
speeding motorist may run a red light, smash into your car, and seriously injure you. Because
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you are injured and your car is damaged, the third requirement of negligence has been
satisfied. For the injury caused, the law recognizes the payment of compensatory and punitive
damages. (Explained later in detail)
(d) Casual connection between the breach of duty and injury or damage
The final requirement is that a proximate cause relationship must exist. In other words a
proximate cause is a cause unbroken by any new and independent cause, which produces an
event that otherwise, would not have occurred. That is, there must be an unbroken chain of
events between the negligent act and the infliction of damages. For example, a drunken driver
who drives past a red light and kills another motorist would meet the proximate cause
requirement.
2.5 Damages
In all liability claims the compensation that is awarded through the judiciary procedures is
called as damages. The term ‘damages’ means the pecuniary compensation awarded by a
court of law for breach of contract or for tort.
Claims for damages for personal injury (fatal or non-fatal) fall into two categories:
1. Compensatory Damages are awards that compensate injured victims for the losses
actually incurred. Compensatory damages include Special damages and General
damages.
(a) Special Damages relate to expenses that can be determined and documented
such as
(i) actual loss of earnings
(ii) medical, nursing or other expenses
(iii) funeral expenses
(b) General Damages comprise damages for losses that cannot be specifically
measured or itemized such as :
(i) pain, suffering and distress
(ii) loss of enjoyment of life and loss of amenities
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(iii) loss of recreational ability

(iv) loss of reduced expectation of life
(v) prospective loss of income
(vi) future medical expense
(vii) loss of opportunity in the job market
(viii) loss of companionship of a spouse
(ix) disfigurement
2. Punitive Damages are awards designed to punish people and organizations so that
others are deterred from committing the same wrongful act. Awards for punitive
damages are often several times the amount awarded for compensatory damages.
2.6 Defenses Against Negligence

Certain legal defenses can defeat a claim for damages. Some important defenses include the
following:
(i) Contributory negligence
Contributory negligence means that if the injured person’s conduct falls below the standard of
care required for his or her protection, and such conduct contributed to the injury, the injured
person cannot collect damages. In other words, it means that under common law, if you have
contributed in any way to your own injury, you cannot collect damages. For example, if a
motorist on an expressway suddenly slows down without signaling and is rear-ended by
another driver, the failure to signal could contribute contributory negligence, the first motorist
cannot claim damages for injuries if contributory negligence is established.
(ii) Comparative negligence
This rule allows an injured person to recover damages even though he or she has contributed
to the injury. Under this law, if both the plaintiff (injured person) and the defendant contribute to
the plaintiff’s injury, the financial burden of the injury is shared by both parties according to
their respective degrees of fault.
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(iii) Last clear chance rule

As per this rule, a plaintiff who is endangered by his or her own negligence can still recover
damages from the defendant if the defendant as a last clear chance to avoid the accident but
fails to do so. For example, a jaywalker who walks against a red light is actually breaking the
law. But if a motorist has a last clear chance to avoid hitting the jaywalker fails to do so, the
injured jaywalker can recover damages for the injury.
(iv) Assumption of risk
The assumption of risk doctrine is another defense, that can be used to defeat a claim for
damages. Under this doctrine, a person who understands and recognizes the danger inherent
n a particular activity cannot recover damages in the event of an injury. For example, assume
you are teaching a friend with a severe vision impairment to drive a car, and he negligently
crashes into a telephone post and injures you. He could use the assumption of risk doctrine as
a legal defense if you sue him for damages.
(v) Res ipsa loquitur
An important modification of the law of negligence is the doctrine of res ipsa loquitur,
meaning, “the thing speaks for itself”. Under this doctrine, the very fact that the injury or
damage occurs establishes a presumption of negligence on behalf of the defendant. It is then
up to the defendant to refute the presumption of negligence. In other words, that is the
accident or injury would not have occurred if the defendant had not been careless. Examples
of res ipsa loquitur include the following:
(i) A dentist extracting the wrong tooth.
(ii) A surgeon leaving a surgical sponge in the patient’s abdomen.
(iii) A surgical operation performed on a wrong patient.
To apply the doctrine of res ipsa loquitur, the following requirements must be met:
(i) The event is one that normally does not occur in the absence of negligence.
(ii) The defendant has exclusive control over the instrumentality causing the accident.
(iii) The injured party has not contributed to the accident in any way.
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3. Historical background and Evolution of Liability

insurance
Public Liability insurance originated in the U.K. in 1875, when the first policy was issued to
cover TPL arising out of the use of horse driven carriages, later for lifts, boilers, building
contracts etc. The Employers’ Liability insurance was a result of the Employers’ Liability Act,
1880 and Workmen’s Compensation Act, 1897. The Products liability insurance can be traced
to the early 20th century, when public liability covers were extended to cover ‘ food and drink’
risks, ‘dermatitis’ risks, etc. The National Insurance (Industrial injuries) Act, 1946,(UK)
introduced a social insurance scheme for industrial accidents and diseases. In India the ESI
Act and WC Act cover the same
4. Fundamental Insurance Principles Governing Liability

Insurance
These liability policies are also basically governed by all the fundamental principles of
insurance contracts such as:
• Insurable Interest: insured has insurable interest in the financial loss that arises when he
has to pay damages under the law.
• Indemnity: the policy will indemnify the insured to the extent of damages and costs
awarded, and legal costs incurred, subject to limits of liability (AOA;AOY).
• Subrogation: rights are transferable to insurer.
• Contribution: all insurers pay ratable share of loss.
• Utmost good Faith: insured to disclose all material facts.
Let us now discuss in detail some of the important liability policies.
5. Scope of Liability Insurance Policies

Liability insurance mainly comprises the following policies:
(i) Personal Liability insurance
(ii) Policy under the Public Liability Act, 1991
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(iii) Public Liability for industrial and non-industrial risks

(iv) Products liability
(v) Professional indemnities for Doctors and Solicitors etc.
(vi) Employers Liability ( Workmen’s Compensation policy)
(vii) Directors’ and Officers’ Liability policy
Liability insurance covers are granted as a part policy cover in other insurance policies such as
in Motor insurance policy, Marine, hull, and Aviation insurance and also in Householders’ and
shopkeepers comprehensive policies. Extensions of liability cover are also available under
material damage policies such as in Contractors’ All Risks policy, Erection All risks policy and
in Boiler Explosion, which come under the broader title of engineering insurance policies.
Let us discuss some of the policies in detail.
5.1 Personal Liability Insurance

Personal liability insurance provides protection against the legal liability, which arises due to
insured’s personal acts. The insurance company will pay for legal defence to third party
damages or injuries up to policy limit. Except legal liability, which arises due to automobile
accidents and professional liability, most other personal acts are covered under personal
liability insurance.
The personal liability insurance covers damages caused to properties and injuries to other
people due to the negligence of the insured.
Under this policy, the insurance company is bound to defend the insured should the matter go
to court of law. It can also settle the matter out of court by negotiating with parties for a
settlement within the policy limit. Personal liability policy offers very wide coverage.
The following instances of loss, damages or injuries caused by an insured individual come
under the purview of personal liability insurance in which coverage will be available up to the
policy limit.
• Accidental fire to neighbours house as a result of insured’s negligence
• Accidental injury to a third party while playing
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LIABILITY INSURANCE
• Damaging costly antique accidentally belonging to neighbour

• Injuring another person while riding a bicycle.
Some examples of specific applications of the law of negligence are given hereunder.
(a) Property owners
Property owners have a legal obligation to protect others from harm. However the standard of
care owed to others depends upon the situation. Three groups have been traditionally
recognized for understanding personal liability such as:
— Trespasser is a person who enters someone’s land or property without permission and
he has no right to occupy land or property. The person has no licence to enter or
remain.
— Licensee is a person who enters or remains on the premises with the occupan’s
expressed or implied permission. Examples of licensees include door-to-door sales
persons, solicitors for charitable organizations, etc. The property owner or occupant is
required to warn the licensee of any unsafe condition or activity on the premises, which
is not apparent or open, but there is o obligation to inspect the premises for the benefit
of the licensee.
— Invitee is a person who is invited onto the premises for the benefit of the occupant, such
as customers in a store, mail carriers, and garbage cleaners In this case, in addition to
warning the invitee of any dangerous condition the owner has an obligation to inspect
the premises and to eliminate any dangerous condition revealed by the inspection. For
example, in a store, an escalator may be faulty. The customers should be warned about
the faulty escalator by a sign board, and the escalator must be repaired, otherwise on
jury, the owner may become legally responsible,
(b) Owners and operators of automobiles
The owner of an automobile who drives in a careless and irresponsible manner can be held
liable for property damage or bodily injury sustained by another person. Therefore owners
should exercise reasonable care while operating the automobile. However, with respect to
liability of the owners who are not the operators of the vehicle, the general rule is that the
owners are not liable for the negligent acts of the operators. However, in some circumstances,
the owner is responsible for the negligent acts of the operators, in case they happen to be
close relatives, or friends, or if an agency relationship exists.
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5.2 Public Liability Insurance for Industrial Risks

This policy is mainly for all industrial units exposed to liability arising out of accidents during
the course of their business operations.
As the prevailing public law is stringent and the courts are awarding huge sums arising out of
liabilities, it is prudent to take such an insurance cover even in cases where it is not
mandatory.
The main benefits of the policy are –
1. The following additional covers can also be obtained-
(a) Pollution risks: caused by a sudden, unintended and unexpected cause which
takes place at a specific time and place during the policy period.
(b) Transportation risks: outside the premises arising out of an accident directly
caused by dangerous materials or hazardous substances while being transported
by rail, road, or pipeline.
(c) Cover for multiple units: Non manufacturing premises of the insured such as
offices, depots, go-downs etc. located at different places, incidental to insured’s
business activities can be covered.
(d) Technical collaborators liability: This can be included in the main policy subject
to reinsurer’s approval.
2. Discounts are offered for opting for higher excess.
How does the Policy Work
1. This policy indemnifies against amounts one is legally liable to pay as damages to the
third party victims of an accident which include:
(a) Compensation for accidental death, bodily injury or disease to third parties.
(b) Damage to or loss of property belonging to third parties arising out of an accident,
including legal costs incurred with the prior consent of the insurer.
(c) Legal and civil liabilities of the directors and officers of the company.
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2. The Policy covers all amounts one is legally liable to pay the third party during the policy
period including legal costs and expenses subject to the limit of indemnity terms and
conditions of the policy.
3. Policy cannot be issued for unlimited liability.
This policy is suitable for all industrial units exposed to liability arising out of accidents during
the course of their business operations.
Premium
• Premium rates are fixed for the four hazard groups classified.
• Premium payable further depends on the limit of liability and annual anticipated turnover.
• Insurance companies at their discretion may permit mid term increase/decrease in the
limit of indemnity during the policy period.
• All policies subject to a minimum excess which is applied on the limit of indemnity per
any one accident.
• Discounts are offered for opting for higher excess.
5.3 The Public Liability Insurance

As a follow up of Environment Protection Act of 1986, Public liability Insurance is mandatory in
respect to those who handle hazardous substances by virtue of Public Liability Insurance Act
of 1991. The names of hazardous substances and the quantity of each, is listed in the ‘Act’
and the quantity of the substance can be as low as one kilogram for Act purposes.
How does the Policy Work?
1. It is a modified version of public liability (Industrial) policy and the term ‘handling’ is wide
enough to include baileys or any other intermediaries and transport operators. The
transport operators who transport substances like liquefied petroleum Gas, certain
acids, hexane and other toxic substances are required to compulsorily obtain Public
liability policy.
2. The policy benefits will accrue only to third parties who may suffer personal injury or
damage to their property as a direct result of handling of the ‘hazardous’ substances.
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3. Courts can pass awards against insurance companies direct as privities is created by
the compulsory insurance policy.
4. The sum insured is based on annual turnover of those handling the substances, with a
minimum sum fixed by the act at Rs. 3 crores. The annual freight receipts of a transport
operator would be their limit.
5. The Act also provides (and therefore enshrined in MV Act) that the drivers operating
road vehicles carrying the ‘hazardous substances’ have to possess a special
endorsement on their driving license.
6. If there is any shortfall between the award of a Court and the claim payable under the
policy, same is met out of Environment Protection Fund maintained by the Central Govt.
The insurance is compulsory. Heavy penalties are imposed, which includes prosecution, for
violation of the Act. The compensation payable for bodily injury or property damage is based
on the capacity of the parties to pay compensation.
If however there is any shortfall between the award of a Court and the claim payable under the
policy, the same is met out of Environment protection fund maintained by Central Govt.
The transport operators who transport substances like liquefied petroleum gas, certain acids,
hexane and other toxic substances are required to compulsorily obtain Public liability policy.
Premium
The rate of premium is based on annual turnover of an industry to that of sum insured
selected, as provided for in the Act. In addition to the gross premium arrived at, as above, the
proposing party is required to contribute equal amount towards environment protection fund
maintained by the Central Government. The fund is collected along with the premium and
remitted to the Central Government. While the premium element is subject to Service tax, the
fund is not.
5.4 Product Liability Insurance

Product Liability commonly arises out of
1. Tort or common law
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2. Statutory law – quite often it is absolute or no fault liability

3. Contract
The risk associated with insurance does not end with production. It is a phenomenon that
continues even after the production. Thus if a third party gets injured because of the insured’s
product, the producer or the manufacturer would be liable to pay the damages. Product liability
insurance covers the damages arising in such cases. And the damages arising or the
compensation that is required to be paid in such case is huge. Hence all the industries that are
exposed to such risks should go for product liability insurance cover, even if it is not mandatory
for them to avail this cover.
Inclusions and Exclusions
The product liability insurance covers all the damages that may arise due to the defects in the
product. It includes accidental death or disease or injury caused to the third party due to any
defect in the product.
If the domestic sales of the manufacturer are insured then the exports can also be covered.
That is, if a manufacturer sells his goods both in the domestic as well as the foreign market, he
cannot insure only the exports.
Vendor’s liability extension and technical collaborator’s liability can be included in the policy on
payment of additional premium. Similarly, products manufactured by sub-contractors /
licensed manufacturers under their own brand name can also be covered under the same
policy.
Premium
To charge the premium according to the risk associated with the products and the size of the
damage that might arise from their being defective, the industries are classified into seven
groups. The rate to be applied on the annual gross turnover is specified for each group. For
exports, additional premium is charged based on total exports turnover to each country. All
policies are subject to a minimum excess of Rs. 2000 or ½% of limit indemnity per any one
accident (except for exports to USA/Canada which have double these limits).All extensions
carry additional rates. For the policies involving large sums, discounts are offered.
Benefits
The policy covers all the claims arising out of accidents, injury, diseases or pollution due to
defects in the product covered under the policy during the policy period.
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The employees of the insured are also covered under the policy. Indemnity is also extended to
officers, committees and members of insured’s welfare associations and personal
representatives of the estate. The policy covers all the incidental expenses like costs, fees and
expenses incurred in investigation, defence and settlement of claim made against the insured,
cost of representation at any inquiry or other proceedings in respect of matters that have direct
relevance to the claim made against the insured. But the amount should not exceed the overall
limit stated in the policy.
Covered Risks
The policy pays for all the claims that arise out of the acts and/or omissions committed during
the policy period. The claims must be first made in writing during the policy period itself. The
claim also covers legal costs and expenses incurred, with the prior consent of insurer and
subject to the limits of indemnity.
Major exclusions
• Criminal act or violation of law or ordinance
• Services rendered while under the influence of intoxicants or narcotics.
5.5 Professional Indemnity Insurance

We have gone through the various insurance covers available to producers. Besides
production, another industry that is significant is the service industry. And the service industry
faces no lesser risk. The counterpart of the product liability insurance in the service industry is
the professional indemnity insurance. As the product liability cover provides protection against
liabilities that may arise due to the product, professional indemnity insurance covers the
professionals against all the liabilities that may arise due to the negligence or failure in
providing the service. That is why this policy is also called Errors and Omissions Insurance
(E&O Insurance) or malpractice insurance.
Professional liability insurance is an important insurance cover. In certain cases like physicians
or surgeons, it benefits not only the insured but also the client. In the absence of such
insurance cover surgeons fearing liability arising from failure of treatment would have refused
very critical cases. This means that the doctor would not be available when he is required the
most.
Initially the policy was designed for professionals like doctors, lawyers, architects or engineers
but now the policy is widening its scope to accommodate emerging professions. The policy
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now includes various professions like psychiatrists, marketing or technology consultants,

software designers, environmental consultants, insurance agents, brokers etc.
The professional liability insurance differs from other liability insurance policies in a few ways.
These are as follows:
1. Usually only one major insuring clause is written under professional liability insurance
and no distinction is made between bodily injury and property damage liability. There is
usually a maximum limit for each claim, but there is no limit per occurrence. Consider a
situation where the claim limit in the policy is $1 million and the aggregate limit $4 million
and the patient as well as his family claims damages for the same error. The maximum
that would be paid for the claims would be $2 million. The other liability insurance
policies usually specify the ‘per occurrence limit’ as well.
2. Professional liability insurance is not restricted to accidental acts, faulty diagnosis or
faulty performance is also covered. Deliberate acts giving unintended results are also
covered in the policy. But illegal and criminal acts are not covered.
3. Professional liability policies usually cover the damage caused to the property in the
custody or care of the insured as well.
4. The professional liability policy usually excludes the agreement guaranteeing the results.
For example, if a surgeon guarantees the success of an operation and fails, the liability
arising on account of it would not be covered in the policy. This is particularly in contrast
to the product liability policies that cover the claims arising out of the breach of warranty.
For example, if a shopkeeper says the product is good for a certain purpose and the
product causes any harm during use, the claims arising would be covered by the
product liability policy.
5. In professional liability insurance an extended reporting period endorsement is usually
added. This signifies that the claims for errors committed during the term of the policy
will be covered even if claims are made after the expiry of the period of the policy.
6. Professional liability insurance does not allow the settlement of the claim without the
prior approval of the insured. The consent to pay the claim is equivalent to admission of
guilt for the professionals that might affect their reputation. Hence a professional might
insist on the insurer to defend the suit even if the insurer finds it less expensive to pay
the claim. The new policies however do not retain this restriction, as they believe that
few suits do not affect the reputation of established professionals.
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The professional liability insurance provides a broad coverage including all the liabilities that
may arise due to error of omission in rendering the service by the insurer or any of his/her
employee (however a nurse is not included as an insured in the medical liability policy). But it
cannot substitute the general liability insurance as it covers only the acts that come under the
purview of professional service. Other things causing the damage are not covered in this
policy. For example, injury caused to a patient from the furniture in the doctor’s clinic would not
be covered by the professional liability policy.
The professional liability insurance policy for doctors and chartered accountants is discussed
in brief.
(a) Professional Indemnity Policy for doctors and Medical Practitioners
This policy is for the doctors who are registered with the IMA (Indian Medical Association). All
acts of the insured that results in any legal liability to the third party will be indemnified in the
policy.
• The acts of qualified assistants and employees of the insured who are named in the
policy are also covered in the policy
• The acts of qualified assistants and employees of the insured who are named in the
policy are also covered in the policy
• The claims should relate to the acts or omissions committed during the period of the
policy
• The limit of the indemnity granted under the policy for Any One Accident (AOA) Any One
Year (AOY) (per accident per policy year) will be identical
• No short period policies are permitted
• All claims for compensation must be legally established in a court of law. Jurisdiction
applicable will be Indian courts.
Medical practitioners are classified into 21 categories under this policy. The last category is an
open category for other practitioners.
Major exclusions
Criminal acts, services rendered under the influence of intoxicants or narcotics, third party
public liability, claims under cosmetic plastic surgery, hair transplants, punch grafts, flap
rotations, etc. Even judges are not above the law
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Today when we talk about professional liability insurance we have in mind, physicians,
surgeons, lawyers, engineers and even accountants. But do you know even brokers and
agents have been charged in US, Canada and other countries for what has now come to be
termed as ‘malpractice for acts of commission and omission’. Here is some more news on the
subject. In the US, in 1984 a Virginia Judge was convicted for putting behind the bars two
persons for a non-jailable offence. Later the US Supreme Court also held that judges were
liable in such cases. Now you have judicial malpractice insurance that does not come cheap –
only $800 for coverage for a million dollar.
(b) Professional Indemnity Errors & Omissions Insurance for Chartered Accountants/
Financial Accountants/ Management Consultants/ Lawyers/ Advocates/ Solicitors/
Counsels
Just like the policy for doctors and medical practitioners, this policy indemnifies errors and/or
omissions while rendering services by accountants/lawyers as well as their partners and
employees named in the policy. These include chartered accountants, financial accountants,
management consultants, advocates, solicitors or counsels, insurance brokers and agents.
In normal course all claims for compensation have to be legally established in a court of law.
5.6 Directors and Officers Insurance – Scope and Future

Though Directors’ and Officers’ (D&O) liability insurance has been in existence for ages, it has
come into the fore only in the past few years. Today’s business scenario is characterised by
extreme volatility and a slew of big-ticket litigation fiascos like Enron and Tyco. The onus of
protecting the interests of shareholders and customers is thus on the directors and officers.
They are also answerable to employees and creditors of the firm, not to mention the
government and other regulatory bodies.
Directors and Officers are exposed to potential risks that might come in the form of:
— Misrepresentation of the firm’s financial status
— Lack of diligence and failure of supervision
— Conflicts of interest
— Imprudent decisions and
— Mismanagement of funds
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The risk of claims is accentuated in case of a merger, acquisition, takeover or liquidation.

Directors, especially in banking institutions have been held individually responsible by the
institution, shareholders and regulatory authorities. D&O insurance was construed as ‘sleep
insurance’. It enables the directors to work peacefully with the knowledge that somebody else
will take care of the losses in case the company fails to fulfill all its obligations. It offers a broad
protection to the insured. Though not mandatory, most of the top corporations in the west
purchase D&O insurance.
Liabilities covered under D&O Insurance
Every insurer has his own proposal form, agreement conditions and list of exclusions. There is
no fixed standard. Therefore, directors should have a clear understanding of coverage items
that are most relevant to their profile and responsibilities. They should ensure that the policy
addresses their needs adequately. It is important that the director gets in touch with the
individual in the insurance company who is in charge of insurance maintenance. He should be
competent and trust worthy. In case he is found to be unsatisfactory, the advice of an
independent insurance expert will be necessary.
Exclusions
Every insurer would naturally look for more exclusions that would reduce his losses in case of
a claim. The board should ensure that the critical areas affecting a director exposure are not
excluded. It should keep an eye particularly on issues relating to securities laws, change of
control issues, payments and gratuities and litigation issues.
The claim period is another issue to be dealt with carefully. D&O policies normally respond to
claims made during the policy period. This poses a problem for directors whose policies are
cancelled, who retire or who are excluded from the surviving board in case of a merger. The
‘Notification’ provision allows the policyholder to maintain coverage for incidents that have the
potential of becoming claims later. It is valid even after the policy has been cancelled or
allowed to lapse. The underwriter is responsible for loss-coverage. In case of cancellation of a
policy, the ‘extended discovery’ provision allows the insured to purchase coverage for an
extended period of time of 12 to 24 months.
The Indian scenario
The Indian insurance industry offers a vast scope for D&O insurance. Awareness is on the
rise. However, underwriting and pricing face two problem areas. India has poor accounting
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standards. Also the huge proportion of family-managed businesses and the laws of bankruptcy
aren’t well defined.
Insurers will have to evaluate the company’s financial standing and assess the inherent risks.
Pricing takes into account factors like asset size and composition, financial history of the
company, organisational structure, claims history and amount insured. Information on some of
the parameters is not easy to find. Companies like Infosys, voluntarily roped in independent
credit rating agencies to evaluate their corporate governance. If others follow suit, the
underwriters will find it easier to assess the risk. The companies would benefit too, because if
the risks are not assessed accurately the pricing will be higher. With good corporate
governance ratings, a company actually pays lesser premium.
5.7 Workmen’s Compensation Insurance

An employer is exposed to the risk of job related accidents to his workers or employees.
According to Workmen’s Compensation Act, 1923 the employer is liable to pay compensation
in respect of
• Death
• Permanent or partial disablement, temporary disablement of the workmen involved in a
work related accident.
In India, Workmen’s Compensation Act was passed in 1923 and amended in 1934 and 1946
(and subsequently also). Today the it is renamed as Employee's Compensation Act, 1923,
amended again as Employees Compensation Act,2009. According to this Act, employer is
required to pay compensation to his workers who are injured during the employment period.
The employer may also be liable for third person injuries caused by an accident whether the
person is a workman or any other person under the Fatal Accidents Act, 1855.
The Insurer covers the employer’s liability under the Workmen’s Compensation Act through a
policy, which is known as Workmen Compensation insurance. Workmen’s compensation
policy is essential to every employer who employs ‘workmen’ as defined under the Workmen’s
Compensation Act in order to protect himself against the legal liabilities arising out of death or
bodily injury to this workman.
Scope of Coverage
Workmen’s compensation insurance provides coverage for all fatal accidents and injuries to
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workers during the working hours in an organisation. It also extends coverage through
reimbursement of medical, surgical and hospitalisation expenses including transportation costs
on payment of additional premium. It will pay medical expenses of workers up to policy limit
specified. The liabilities arising out of diseases that are defined u/s 3C of the workmen’s
compensation act are also covered. The sum insured is fixed on the basis of annual income
employees will earn during the policy period.
Exclusions
Workmen’s compensation insurance will not provide coverage for the following losses:
• Any accident or injury caused due to war, invasion, nuclear activities etc.
• Any employee who is not considered as ‘workman’ under Workmen’s Compensation Act
• Change in the policy provisions after the policy has commenced
• Removal of safety guards intentionally
• Intentional disobedience of orders, which are meant for employee’s safety
• Accident to a worker who is under the influence of alcohol or drugs
• It will not cover risks, which are not as per provisions of Workmen’s Compensation Act
(not during the course of employment. It is not 24 hour cover).
Workmen’s Compensation Act, 1923, renamed as Employee's Compensation Act, 1923,
and now as Employees Compensation Act, 2009
The Workmen’s Compensation Act 1923 had been framed on the model of the English
Employer’s Liability Act, 1880.The Act was later amended in 1934 and 1946 and in 2009. The
objective of this Act is to take over the liability of the employer under the Act in return for
payment of appropriate premium to the insurer. It provides compensation for workers for death
and disability due to accident arising out of and during the course of employment for which the
employer is liable under the Workmen’s Compensation Act, 1923.
The objective of this Act is to prevent any sort of delay in settlement of claims arising out of
employment injuries or death. In the event an employee is injured while at work, the employer
becomes liable to pay the compensation to him within a month of the accident. The Act
restricts the employer from delaying the payment. It requires the employer to deposit a
provisional amount with the employee or the Commissioner within a month even if he wishes
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to contest the claim for any reason. In case he fails to do so, interest at the rate of 6% would
be levied for the period of delay. Such penalty can be imposed to the maximum limit of 50% of
the compensation amount. Moreover, the Act states that the compensation amount is not liable
to any assessment, charge or attachment. The Act thus provides a comprehensive protection
for the timely payment of compensation to the injured employee.
The Act has specified the amount to be paid in the event of death, permanent, total or partial
disablement and in the case of temporary disablement. The compensation amount is directly
proportionate to the wages drawn by the employee.
If the accident has been caused directly because of:
• The influence of intoxicants consumed by the worker
• His wilful removal or disregard of any safety guard or other device meant for his safety
or
• His wilful disobedience to any express order or rule meant for his safety;then the
employer is only liable if it results in death and not otherwise.
Legal mechanism for settlement of claims under this Act is as under :
Employer’s liability for compensation is absolute in the following circumstances:
A. If personal injury is caused to a workman by accident arising out of and in the course of
his employment his employer shall be liable to pay compensation in accordance with the
provisions of this Chapter:
Provided that the employer shall not be so liable –
(a) in respect of any injury which does not result in the total or partial disablement of
the workman for a period exceeding three days;
(b) in respect of any injury not resulting in death or permanent total disablement
caused by an accident which is directly attributable to -
(i) the workman having been at the time thereof under the influence of drink or
drugs or
(ii) the wilful disobedience of the workman to an order expressly given or to a
rule expressly framed for the purpose of securing the safety of workmen or
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(iii) the wilful removal or disregard by the workman of any safety guard or other
device he knew to have been provided for the purpose of securing the
safety of workman.
B. If a workman employed in any employment specified in Part A of Schedule III contracts
any disease specified therein as an occupational disease peculiar to that employment
Amount of compensation
Subject to the provisions of this Act the amount of compensation shall be as follows namely: -
(a) where death results from the injury an amount equal to fifty per cent of the monthly
wages of the deceased workman multiplied by the relevant factor; or an amount of fifty
thousand rupees whichever is more;
(b) where permanent total disablement results from the injury an amount equal to sixty per
cent of the monthly wages of the injured workman multiplied by the relevant factor; or an
amount of sixty thousand rupees whichever is more.
Notice and claim
No claim for compensation shall be entertained by a Commissioner unless notice of the
accident has been given by the employer as soon as practicable after the happening within
two years of the occurrence of the accident or in case of death within two years from the date
of death.
Reference to Commissioners
The legal authority to settle claims under this Act is the Commissioner on any question arising
in any proceedings under this Act as to the liability of any person to pay compensation or as to
the amount of duration of compensation payable. Further, no Civil Court shall have jurisdiction
to settle decided or deal with any question which is by or under this Act required to be settled
decided or dealt with by a Commissioner or to enforce any liability incurred under this Act.
Appointment of Commissioners
The Commissioners are appointed by the State Government for Workmen’s Compensation for
such area as may be specified in the notification. Every Commissioner shall be deemed to be
a public servant within the meaning of the Indian Penal Code (45 of 1860).
Venue of proceedings and transfer
Where any matter under this Act is to be done by or before a Commissioner the same shall
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subject to the provisions of this Act and to any rules made hereunder be done by or before the
Commissioner for the area in which -
(a) the accident took place which resulted in the injury; or
(b) the workman or in case of his death the dependent claiming the compensation ordinarily
resides; or
(c) the employer has his registered office:
Powers and procedure of Commissioners
The Commissioner shall have all the powers of a Civil Court under the Code of Civil Procedure
1908 (5 of 1908) for the purpose of taking evidence on oath and of enforcing the attendance of
witnesses and compelling the production of documents and material objects.
Appeals
(1) An appeal shall lie to the High Court from the following orders of a Commissioner
namely: -
(a) an order as awarding as compensation a lump sum whether by way of redemption
of a half-monthly payment or otherwise or disallowing a claim in full or in part for a
lump sum;
(b) an order awarding interest or penalty under Section 4A;
(c) an order refusing to allow redemption of a half-monthly payment;
(d) an order providing for the distribution of compensation among the dependents of a
deceased workman or disallowing any claim of a person alleging himself to be
such dependent;
(e) an order allowing or disallowing any claim for the amount of an indemnity under
the provisions of sub-Section (2) of Section 12; or
(f) an order refusing to register a memorandum of agreement or registering the same
or providing for the registration of the same subject to conditions:
Provided that no appeal shall lie against any order unless a substantial question of law
is involved in the appeal and in the case of an order other than an order such as is
referred to in clause (b) unless the amount in dispute in the appeal is not less than three
hundred rupees:
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(2) The period of limitation for an appeal under this Section shall be sixty days.
(3) The provisions of Section 5 of the Limitation Act, 1963 (36 of 1963) shall be applicable
to appeals under this Section.
Recovery
The Commissioner may recover as an arrear of land revenue any amount payable by any
person under this Act whether under an agreement for the payment of compensation or
otherwise and the Commissioner shall be deemed to be a public officer within the meaning of
Section 5 of the Revenue Recovery Act, 1890 (1 of 1890).
SUMMARY
• Liability Insurance is visibly making a mark in the corporate sector as well as in other
sectors.
• In the Western countries, liability insurance is very popular and commonly opted by
individuals, professionals and corporates.
• The liability generally arises out of negligence or breach of duty.
• A legal wrong is a violation of a person’s legal rights, or a failure to perform a legal duty
owed to a certain person or to society a whole.
• Law of Tort due to negligence, bodily injuries and/or damage to the property of third
parties may be caused for which damages become payable.
• Legal liability can arise from an intentional act of omission that results in harm or injury
to another person or damage to the person’s property.
• Strict liability means that the liability is imposed regardless of negligence or fault.
• Negligence is also the reason for the liability loss exposures. Negligence typically is
defined as the failure to exercise the standard of care required by law to protect others
from an unreasonable risk of harm.
• In all liability claims the compensation that is awarded through the judiciary procedures
is called as damages.
• Public Liability insurance originated in the U.K. in 1875, when the first policy was issued
to cover TPL arising out of the use of horse driven carriages, later for lifts, boilers,
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building contracts etc.

• Personal liability insurance provides protection against the legal liability, which arises
due to insured’s personal acts.
• This policy is mainly for all industrial units exposed to liability arising out of accidents
during the course of their business operations.
• As a follow up of Environment Protection Act of 1986, Public liability Insurance is
mandatory in respect to those who handle hazardous substances by virtue of Public
Liability Insurance Act of 1991.
• Product liability insurance covers the damages payable if a third party gets injured
because of the insured’s product, the producer or the manufacturer would be liable to
pay the damages.
• Professional indemnity insurance covers the professionals against all the liabilities that
may arise due to the negligence or failure in providing the service.
• D & O insurance policy protects a company against potential risks that might come in
the form of misrepresentation of the firm’s financial status, lack of diligence and failure of
supervision, conflicts of interest etc.
• Workmen’s compensation insurance provides coverage for all fatal accidents and
injuries to workers during the working hours in an organization. This policy is renamed
as Employees Compensation insurance policy.
REVISION QUESTIONS
SECTION – A
1. Which policy is mandatory if your client is in hazardous industry dealing in
hazardous substance?
(a) Product liability (b) Professional liability
(c) Public Liability (Non-Industrial) (d) Public Liability Act Policy
2. For claiming compensation under W C policy, the accident should
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(a) Always be within factory premises

(b) Always be outside factory premises
(c) May be within or outside factory premises
(d) Always be at workers residence only
3. Generally Blood Stock Insurance relates to
(a) Blood Stock in Blood Bank.
(b) Testing of Blood.
(c) Indemnity in respect of death of a horse occurring from accident, illness of disease
etc.
(d) No such Insurance cover is available.
4. Under Mediclaim Policy the term “Medical Practitioner means” :
(a) A person who holds a degree/ diploma from recognized institution.
(b) Person who is registered by Medical Council of respective State of India.
(c) Both of above.
(d) None of above.
5. Under Liability Insurance the terms “AOA” relates to:-
(a) Assessment of Assets. (b) Against one Accident.
(c) Any one Accident. (d) Any other Accident.
6. Under Legal background “Trespassers” means: -
(a) A man found guilty of cutting trees.
(b) A man who enters in forest and passes through.
(c) A man who enters property without any right or permission.
(d) All of above
7. The time limit for appeal from National Consumer Forum to Supreme Court is:-
(a) 30 days from the Order of National Commission.
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(b) 60 days from the Order of National Commission.

(c) 90 days from the Order of National Commission.
(d) No time limit.
8. In W.C. cases we can go for appeal only on the ground of: -
(a) On quantum (b) Finding of facts
(c) Substantial Question of Law (d) None of the above
9. In Employers Liability Insurance which one of the following is not covered:-
(a) Personal negligence of the Employer.
(b) Negligence of Employees in the performance of their employment duties.
(c) The willful disobedience of the Workman.
(d) Personnel negligence of fellow employee.
10. In relation to Standard Mediclaim Policy which of the following statement is
correct-
(a) Condition with respect to number of beds must be observed in all the cases
(b) Condition with respect to number of beds is applicable only if the Hospital is not
registered with local authority
(c) Condition with respect of number of beds has been waived by IRDA
(d) None of the above is correct
11. The benefit of section 80D of Income Tax Act vide 2007 Budget has been-
(a) Scrapped (b) Increased
(c) Decreased (d) Kept unchanged
12. Which of the following expenses are not covered under Standard Mediclaim
Policy-?
(a) Expenses related to Psychological disorders
(b) Expenses related to Cancer
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(c) Expenses related to MTP

(d) Expenses incurred towards pace-maker in case of heart disease
13. Which one of the following expenses is not covered under Standard Mediclaim
Policy-?
(a) Expenses towards HIV Test of patient before operation which is covered under
this
(b) Registration Charges of Hospital
(c) Dialysis Charges in case of renal failure
(d) Angioplasty expenses
14. As per the Public liability act policy the compensation in case of an accident is
(a) Structured compensation (b) Unlimited liability
(c) As per sum insured (d) None of the above
15. Equal amount of premium collected under the PLI Act Policy goes to
(a) Prime Minister’s Relief fund (b) Environment relief fund
(c) Disaster management fund (d) None of the above
16. Claim settling authority incase of claims under PLI Act Policy is
(a) Divisional Manager/ Sr. Divisional Manager
(b) Regional Manager/ Chief regional Manager
(c) General Manager
(d) District Magistrate/ Collector
17. Claims under Public Liability Policy are in the nature of
(a) Legal liability (b) Agreed liability
(c) Vicarious liability (d) None of the above
18. Under Public Liability Industrial risks Policy pollution risk is
(a) automatically covered (b) cannot be covered
(c) can be taken as an add on cover (d) none of the above
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19. Premium rating for Public liability policy depends on

(a) Turnover, Limit of indemnity, No. of Units covered, Risk group
(b) Sum insured selected, location of the Risk, Surrounding Property, Past claims
experience
(c) Both of the above
20. Which of the following parties can bring an action against a director of a company
giving rise to a claim under the D&O policy
(a) Customers (b) Employees
(c) Regulator (d) All the above
21. What costs cannot usually be covered under a Product Recall cover
(a) Product Guarantee
(b) Cost of recovering defectives products sent out in the market
(c) Cost of advertising to the public
22. Claims under Product Liability policy can be paid in
(a) Foreign currency (b) Indian rupees only
(c) Foreign currency with RBI permission (d) None of the above
23. The retroactive clause under a liability policy provides that
(a) Under a claims made policy the loss should occur within policy period in case of
renewal without break
(b) The date of inception of cover and the time within which the legal proceedings
should be completed
(c) The period of keeping provisions for claim made under the policy
24. Liability policies are called long tailed policies because
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(a) Actual liability may arise long after expiry of the policy for claims arising during the
policy period
(b) Provisions for claims have to be maintained on the insurers books for a long
period
(c) Both of the above
25. Which one of the following statement is not correct in respect of Liability
Insurances
(a) Implied principle of Good faith is not applicable.
(b) Claims are paid to persons other than the insured
(c) The insurer provides indemnity to the insured in respect of his potential legal
liability.
(d) Legal costs of the insured incurred with the consent of the insurers are
reimbursed.
26. Which one of the following statements is not correct in respect of the liability
Insurance covers –?
(a) It covers Civil Liability arising under Common Law
(b) It covers Civil liability arising under Statutory Law
(c) It covers both (a) and (b)
(d) It cover neither of (a) and (b)
27. In Liability insurance policies
(a) Policy period and period of insurance are always different
(b) Policy period and period of insurance are always same
(c) Policy period and period of insurance may or may not be same
(d) There is no difference between the two
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28. If your client is in hazardous industry dealing in hazardous substances, which

policy would you suggest
(a) Public liability (Non industrial risk)
(b) Product liability
(c) Professional liability
(d) Compulsory public liability act policy
29. Under Personal Accident Policy Payment of Compensation in respect of death,
injury or disablement of the insured Directly or indirectly caused by Venereal
diseases or insanity is: -
(a) Covered subject to 2% of capital Sum insured.
(b) Covered subject to2% of Sum insured or 2,500/- whichever is less
(c) Full amount is payable.
(d) Not covered.
30. Under Pedal Cycle Policy Legal Liability for Bodily injury, property damage is:-
(a) Rs.5, 000/- (b) Rs. 10,000/-
(c) Rs. 15,000/- (d) Rs. 20,000/-
Answers
1. (d) 2. (c) 3. (c) 4. (c) 5. (c) 6. (c) 7. (a) 8. (c) 9. (c) 10. (b)
11. (b) 12. (c) 13. (b) 14. (a) 15. (b) 16. (d) 17. (a) 18. (c) 19. (a) 20. (d)
21. (a) 22. (c) 23. (a) 24. (c) 25. (a) 26. (c) 27. (c) 28. (d) 29. (d) 30. (b)
SECTION – B
Questions With Suggested Answers
1. What is meant by Third-Party liability?
Ans. Third party liability is the liability which may arise by an insured’s own conduct or in
using his property, but still the risk of liability arising out of the use of the property is not
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covered by an insurance of that property. Liability policies are generally expressed as

providing indemnity against ’liability in law’.
2. What is the meaning of liability in Law?
Ans. The phrase liability in/at Law is invariably understood and primarily used to cover the
liability arising out of negligence. For example, the liability of a building contractor to a
third party arising out of the faulty design of a structure was held covered though there
was no negligence.
Similarly, in a householders’ comprehensive insurance policy, the word ’accident’
covered nuisance liability which had occurred without the negligence on the part of the
assured.
3. What is the different insurance coverages offered in liability insurance?
Ans. Under the ’liability insurance’ category the following liability policies are covered:
• Public liability insurance,
• Liability arising in connection with professional negligence,
• Compulsory insurance,
• Employer’s liability insurance,
• Guarantee insurance.
4. Explain briefly each of the above mentioned liability insurance policies.
Ans. Liability insurance policies are generally expressed as providing indemnity against
liability in law. The various liability insurance policies are discussed at length below.
Public liability insurance:
‘Public liability’ does not mean liability of the State or its agencies. It means liability as
imposed by law as opposed to self-imposed liability as in contract. The Public Liability
Insurance Act, 1991, is intended to provide immediate relief to the persons affected by
accidents occurring while handling any hazardous substance and for matters connected
therewith and incidental thereto. In India this policy appears as a sequel to the famous
Bhopal Gas Leak case. Professional Negligence: There are standard policies for
professional indemnities cover for accountants, insurance agents, solicitors, and
lawyers. These policies also cover the risk of loss by their own negligence. The law has
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LIABILITY INSURANCE
made these professionals liable in respect of any loss or injury due to the negligence in
the conduct of their professional duties.
Compulsory Insurance: For the welfare of the employees, social welfare legislations
have been passed in England and in India making it compulsory for employers to insure
for safety of the workmen.
The Indian Act makes it compulsory for the employer to insure his workmen by providing
certain benefits to them in the event of their sickness, maternity and employment
insurance. The employees insured under the Act are entitled to
(a) Sickness benefit
(b) Maternity benefit
(c) Disablement and Dependent’s benefit.
Employer’s Liability: Though in olden days the liability of the employer was included in
the law of torts by vicarious liability, in regard to his liability towards the employees, a
number of defences were recognized, substantially reducing his liability towards his
employee. For example, the doctrine of common employment, the defence of volenti
non fit injuria were vital defences. But, in due course of time, the liability of the employer
was extended due to the development of the industrial and labour welfare measures and
legislations. Now the employers are tempted to take out insurances against such
liabilities.
Guarantee Insurance: Guarantee business of insurance companies have assumed great
importance in the modern times. Earlier this was done by contracts of guarantee by
which a friend or a relative of the promisor or employee used to stand as a surety for the
due performance of the promise by the principal debtor or for the honesty of an
employee. As the number of contracts increased, it became increasingly difficult to find
sureties, and as a result, chances of employment and business had to be lost.
In such a situation, the insurance companies developed for themselves considerable
amount of ‘guarantee business.’ There are two methods by which this guarantee was
given, namely:
(i) the insurance company or the underwriter stands as a surety for the due
completion of a contract or fidelity of an employee; and / or
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(ii) the underwriter insures the promisee or employer against the loss arising by non-
performance of the obligator or the dishonesty of the employee.
The first types of contracts are simple guarantee contracts and the second types
involves an element of insurance. The main types of policies included in guarantee
insurance are:
(i) Insurance for performance of contract;
(ii) Insurance of debts;
(iii) Fidelity policies.
A contract of guarantee insurance is a contract whereby the insurer undertakes to
indemnify the insured from the loss caused as a result of the breach of contract or
infidelity.
Insurance for Completion of Contract: The subject matter of such contract is due
performance of a contract. A enters into a contract with B but doubts whether B would
complete the contract. In such a case A may insure B’s due performance of a contract.
These are generally taken in cases of contracts of employment.
Insurance for Repayment of Debt: A creditor may insure the repayment of debt, which
he advanced or will advance in future. Such policies sometimes cover nonpayment
from specified causes only and in such cases only the causes for nonpayment become
relevant. When the creditor insures the repayment of a debt, on default by the debtor,
the creditor can straight claim the money from the insurer. Insurance being a contract of
indemnity, the insurer will be subrogated, on payment to the insured, to all the rights of
the creditor against the debtor.
Fidelity Policies: These are the most common types of guarantee policies and are made
usually for a term of one or more years. These arise generally out of the contract of
employment where the employee has an opportunity to be dishonest. The risk covered
is generally restricted to losses occurring while the employee is engaged in a specified
capacity. Even in the employment, the risk covered may vary according to the specific
terms of the policy in each case. For example, some are restricted to losses arising by
‘embezzlement’ or ‘fraud’.
Fidelity policies may be combined with liability policies, which are normally restricted to
liability incurred through the negligence of the employee while the former policies are
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LIABILITY INSURANCE
mainly intended to cover losses caused to the employer by the employees theft or
embezzlement of money or securities. A fidelity insurer, like a fidelity guarantor, is
entitled to subrogation.
5. Discuss the rationale for the existence and development of Worker’s
Compensation concept and programme.
Ans. Workers time and again are injured and become sick because of job-related accidents
and disease. Besides pain and suffering, these disabled workers also deal with other
mental tensions and agony such as loss of earned income, payment of medical bills,
partial or permanent loss of bodily functions or limbs or job separation.
Worker’s Compensation (WC) is a social programme that provides:
• Medical care
• Cash benefits
• Rehabilitation services to disabled workers from job related accidents or disease.
These benefits reduce the economic insecurity that may result from job related
disability.
6. State briefly the objectives of Worker’s compensation concept.
Ans. The following are the broad objectives of the worker’s compensation laws.
• Broad coverage of employees for job-related accidents and diseases. The
worker’s compensation covers most occupation or job-related accidents and
diseases.
• Substantial protection against loss of income. The cash benefits are designed to
restore a substantial proportion of the disabled worker’s lost earnings, so as to
enable the disabled worker to maintain the same standard of living.
• Sufficient medical care and rehabilitation services. The workers compensation
laws require employers to pay hospital, surgical, and other medical costs incurred
by injured workers, as well as rehabilitation services to restore the disabled
employees to productive employment.
• Encouragement of safety. The worker’s compensation laws encourage the firms to
reduce job-related accidents and to develop effective safety programmes.
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Experience rating is used to encourage firms to reduce job-related accidents and

diseases, because firms with superior accident records pay lower WC premiums.
• Reduction in litigation. Workers Compensation laws are designed to reduce
litigation by making prompt payment to disabled workers without requiring them to
sue their employer. The objective is to reduce or eliminate payment of legal fees
to attorneys and avoid delays in trials and appeals.
7. List out the occupations not covered under the Workers Compensation cover.
Ans. Although the WC law covers most occupations, some occupations are either not
covered or have incomplete coverage, namely:
• Farm workers
• Domestic servants
• Casual employees
• Concerns with numerical exclusions ( less than 3-5)
• Professional athletes
8. What are the eligibility requirements to receive Workers Compensation?
Ans. There are two principal eligibility requirements to be met to receive the worker’s
compensation benefits:
• The disabled worker should work in a covered occupation.
• The worker must have a job-related injury or disease.
This means the injury or disease must arise out of and in the course of employment.
However, now the meaning of the term has been broadened so as to include the
following:
• An employee who travels is injured while engaged in activities that benefit the
employer.
• The employee is injured while performing specified duties at a specified location.
• The employee is on the premises and is injured while going to the work area.
• The employee has a heart attack while lifting some heavy material.
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LIABILITY INSURANCE
9. What are the benefits provided under the Workerís Compensation Insurance?
Ans. The Worker’s compensation insurance provides four principal benefits:
• Unlimited Medical Care: Generally medical care is covered in full. But medical care
being expensive, and to hold down costs, some employers prefer tying up with some
managed care organizations such as HMO’s, and PPO’s.
• Disability Income: The disability income is paid after the worker satisfies a waiting period
that usually ranges from 3 to 7 days. If the injury lasts or the worker is disabled after
certain number of days or weeks, benefit is given from retrospective date of injury.
The weekly cash benefit is based on a percentage of the injured workerís weekly wage
typically 2/3rd , and is subject to minimum and maximum payments. Disability is
classified into four categories:
— PT (Permanent total)
— TT (Temporary total)
— TP (Temporary partial)
— PP (Permanent partial)
Temporary total disability claims are the most common and account for majority of cash
claims.
• Death benefits: The death benefits are paid to the eligible survivors, if the worker dies as
a result of a job-related accident or disease. Two types of death benefits are paid:
— Burial allowance
— Weekly income benefits are paid to eligible survivors.
Weekly incomes are a percentage of the diseased worker’s wages (2/3rd) and is paid to
the spouse for life or until she/ or he remains, and also to a dependant child until a
specified age.
• Rehabilitation services: In most cases, rehabilitation services are also provided to
restore disabled workers to productive employment. Besides weekly benefits, boarding
and room, travel, books and equipment charges are also given and also training
expenses.
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10. Who is an Employer as defined under the Worker’s Compensation Act?

Ans. An Employer is a person who employs workmen. A workman engaged by the employer
for casual duties (casual not by time) is not a workman within the meaning of the
Workmen’s Compensation Act,1923. Those engaged in the insured’s business,
profession, or occupation are workmen.
11. Why do you advice all Employers to take the policy?
Ans. The liability of an employer is made absolute by the statute for the death of or bodily
injuries or occupational diseases sustained by the workmen “arising out of and in course
of employment”. Hence this policy is suggested to all the employers in their interest.
12. How and when does liability arise under a product liability?
Ans. Liability arises out of
1. Tort or common law
2. Statutory law ñ quite often it is absolute or no fault liability
3. Contract
Product liability insurance covers the damages arising in such cases. And the damages
arising or the compensation that is required to be paid in such case is huge.
Hence all the industries that are exposed to such risks should go for product liability
insurance cover, even if it is not mandatory for them to avail this cover.
13. What is the scope of cover available under a professional liability policy?
Ans. Professional indemnity insurance covers the professionals against all the liabilities that
may arise due to the negligence or failure in providing the service. That is why this policy
is also called Errors and Omissions Insurance (E&O Insurance) or malpractice
insurance.
14. Who are defined as professionals?
Ans. Initially the policy was designed for professionals like doctors, lawyers, architects or
engineers but now the policy is wider in its scope to accommodate emerging
professions. The policy now includes various professions like psychiatrists, marketing or
technology consultants, software designers, environmental consultants, insurance
agents, brokers, etc.
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15. How is the professional liability cover different from other liability covers?
Ans. The professional liability insurance differs from other liability insurance policies in a few
ways. These are as follows:
(1) While other liability insurance policies usually specify the ’per occurrence limit’,(
there is usually a maximum limit for each claim) there is no limit per occurrence in
case of a professional liability policy. Further, no distinction is made between
bodily injury and property damage liability.
(2) Professional liability insurance is not restricted to accidental acts: faulty diagnosis
or faulty performance is also covered. Deliberate acts giving unintended results
are also covered in the policy..
(3) Professional liability policies usually cover the damage caused to the property in
the custody or care of the insured as well.
(4) Professional liability insurance does not allow the settlement of the claim without
the prior approval of the insured.
16. Is a doctor also equally liable for the negligence of his assistant and nurse?
Ans. The doctor’s professional liability policy protects the doctor for the acts of the qualified
assistants and the employees of the insured who are named in the policy are also
covered in the policy subject to the following:
• The claims should relate to the acts or omissions committed during the period of
the policy
• The limit of the indemnity granted under the policy for Any One Accident (AOA)
Any One Year (AOY) (per accident per policy year) will be identical
17. What is the protection assured under a crime insurance policy?
Ans. There are two types of financial protection that are available against the losses caused
by crime. They are fidelity and surety bonds and burglary, robbery and theft insurance. A
bond is a legal instrument in which a third person (surety) ensures the performance of
contract properly by the principal or the obligator. A fidelity bond deals with assurance of
bonafide behaviour by an employee during the course of his employment. In fidelity
bond, the surety assures the employer of trustworthiness and honesty of the employee
and agrees to pay the damages that arise due to the dishonest acts of that employee.
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18. Differentiate between a fidelity bond and crime insurance?

Ans. While in a bond contract the surety is required to pay for any losses, he also reserves
the right to recover it from the defaulting principal. In case of an insurance contract, the
insurer is prepared to pay for the loss and works on the principal of spreading this loss
over the group of insured people. Secondly, the matter covered by bonds is under the
control of the insured and the losses covered by insurance are matters outside the
control of the individual. Thirdly, while the insurance contract is cancellable, usually, by
either of the party, the bonds cannot be cancelled until all the obligations of the principal
are fulfilled. Lastly, insurance contract involves two parties, whereas bonds involve
three.
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CHAPTER – 9
UNDERWRITING CONCEPTS, INSURANCE
CONTRACT CONDITIONS & WARRANTIES
1. Introduction
2. Definition of Underwriting
3. Objectives of Underwriting
4. Principles of Underwriting
5. Underwriting Process
6. Need for Underwriting
7. Underwriting Authority
8. Underwriting Activities
9. Underwriting Policy
10. Underwriting Guides
11. Underwriting Results
12. Underwriting Considerations In Special Policies
13. General Insurance Contract Conditions and Warranties
14. Summary
15. Questions
• Comprehend the need and importance of underwriting in selection of risks
• Describe the principles and process of underwriting
• Explain the role of underwriting authorities and activities
• Evaluate the underwriting guidelines and results
• Discuss the underwriting considerations with regards to special policies
• Describe general insurance contract conditions and warranties
1. Introduction
Underwriting as an art began in the United Kingdom since Victorian times. A group of
sailors or marine traders began the practice to insure against the perils involved in sea
voyage, which included the insuring of the goods in transit against known perils such as
piracy, weather perils, and loss of goods destroyed in voyage. However, the practice of
underwriting has evolved with times and the insurance model took shape. In the early days
of marine insurance, the details of a ship or cargo to be insured were described in a slip.
This slip was taken to Lloyd’s and the person, who was to carry the risk read the details,
then signed the slip under the details of the risk. In this way, the person carrying the risk
became known as underwriter. Thus, the genesis of the insurance business also evolved
from the United Kingdom and the first insurers were the Lloyd’s industries.
2. Underwriting Defined
Underwriting can be defined as “assumption of liability”. Underwriting involves the
selection of policyholders after thoroughly evaluating all hazards, establishing prices and
then determining the terms and conditions of the insurance policy.
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UNDERWRITING CONCEPTS, INSURANCE CONTRACT CONDITIONS & WARRANTIES
The term ‘Underwriting’, refers to the formal acceptance of a risk by the insurance
company for a price, which is termed as ‘Premium’. It is a process by which an insurance
company decides as to whether it can accept the proposed risks and if yes, at what price,
terms and conditions. Underwriting is an art and science. It is a science because it is
based on actuarial principles and an art because, it involves an underwriter’s judgment
based on his careful analysis of a host of factors including physical hazards, morale
hazards, past loss data, future loss forecasting, projected law of large numbers, estimate
Probable Maximum Loss (PML), Expected Maximum loss (EML), governmental
regulations, etc.
Underwriting is also often called as selection and classification of risks in a logical manner
as per organizational objectives. While selection signifies the underwriter’s decision to
accept the proposed risk, classification means specification of class of accepted risks to
determine rate, terms and conditions.
The insurer shall consider the following for each of its products:
(i) Develop guidelines for the underwriting procedure and basis for accepting business,
rejecting or loading premiums;
(ii) Set a criteria for the use of further risk assessment, exclusions and reinsurance;
(iii) Have in place methods for monitoring emerging experience, and amending the
underwriting techniques when necessary;
(iv) Ensure that the underwriting approaches are consistent in the in head office
including all branches.
Of the many facets of insurance, underwriting has always been considered one of the
most critical features. During the 1950s, there were specialists who worked as
underwriters and covered almost every type of insurance. The years since then have seen
underwriting emerge as an art in itself.
The importance of underwriting can be well understood by the fact that even though
several activities of an insurance company such as marketing, accounting, claims
processing etc. are sometimes outsourced, underwriting is an area over which the
company always retains complete control.
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Once the risk involved is deemed acceptable, underwriting then fixes the rate of premium,
and subsequently, all other terms involved. There are certain guiding objectives and
principles that the underwriter must follow.
‘Underwriting’ in its real sense is being practiced after the de-tariffing and the subsequent
removal of control on pricing from 01.01.2008. Each risk shall be assessed on its own
merit. Gone are the days when rates were quoted blindly based on the tariff or the internal
guidelines of the insurer, without actually assessing and evaluating the risk proposed, for
fixing of premium.
3. Objectives of Underwriting
The objectives of underwriting are three-fold:
• Producing a large volume of premium income that is sufficient to maintain and
enlarge the insurance company’s operations and to achieve a better spread of the
risk portfolio.
• Earning a reasonable amount of profit on insurance operations.
• Maintaining a profitable book of business (by ensuring underwriting profits) – that
contains all the policies that the insurer has in force.
• More spread – across the profile and geography.
4. Principles of Underwriting
Insurance is a concept of creation of a fund of premiums collected from various persons by
pooling all of their risks, from which the financial losses of those few who suffer from the
insured perils are compensated. The theory of probability, which can predict with a certain
degree of precision, the possibility of a certain event occurring that can give rise to a claim
provided there is sufficient data on past experience, is invariably the basis on which the
concept of underwriting rests.
The principles that guide an underwriter before accepting a risk are:
• Selecting insured’s who fit the company’s underwriting standards: only those
insureds whose actual loss experience does not exceed the loss experience
assumed in the company’s rating structure will be selected.
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• There should be proper balance within each rate classification: the underwriter must
be able to group insured’s in such a way that the average rate in the group is
enough to pay for all claims and expenses. Units with similar loss- producing
features are placed in the same class and charged the same rate.
• Charging equitable rates: the rates that apply to one group should not be charged to
another group as well. For example, in the case of Health insurance, charging the
same premium rate for people in the age group of 20-25 years and those in the age
group of 50-55 years will result in the younger lot subsidizing the older people.
• Each portfolio (fire, marine, health, etc.) to be self-sustaining without assuming any
cross-subsidy.
5. Underwriting Process
The underwriting process follows a series of stages, at the end of which the status of a risk
is decided. It is only after the risk has been weighed and all possible alternatives
evaluated that the final underwriting is done. When a proposal for insurance is received,
the underwriter has four possible courses of action:
• Accept the risk at standard rates
• Charge extra premium depending on the risk factor
• Impose special conditions
• Reject the risk.
Thus the objectives of underwriting can be expressed as follows:
1. Sell product equitable to Customer
2. Product should be deliverable to the Customer
3. The business and products to be financially feasible to the Insurance company.
Steps followed in Underwriting
The underwriter follows specific steps when evaluating a potential risk. These are as
follows:
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(i) Assimilating information about the applicant

The underwriter obtains this information from a wide variety of sources. The most
important sources are:
• The application or the proposal form: It contains specific information about the
applicant. For example, in Motor insurance, information regarding the age of the
vehicle, weight, purpose/usage, past claims history etc. will be given.
• The agent’s report: The agent does an evaluation of the prospective insured. The
agent must have first hand knowledge about the applicant’s operations and
reputation. It is the agent’s responsibility to screen the applicant initially according to
the company’s specified requirements.
• Government records: These records include information from civil and criminal
courts, property tax records, bankruptcy filings etc. These may be referred to if
required.
• Pre-insurance inspection report: For property insurance, this consists of a
physical assessment of the building or plant to be insured.
• Claim files: These are helpful when renewing an existing policy. The underwriter
can gain an insight into the policyholder’s character by reviewing the claim files or
through investigation.
• Reinsurers in the case of large risks.
(ii) Evaluating and making a decision

The underwriter can accept a proposal, reject it or accept it with certain modifications.
Some of the modifications that can be made are:
(a) Hazard can be reduced: For loss prevention and minimization, underwriters can
recommend certain changes that will safeguard against physical hazards. For
example, installing sprinkler systems and better fire-fighting equipment in offices will
reduce damages in case of fire. This advice can either be followed by the applicant
or rejected.
(b) Changing rating plans and policy terms: Sometimes a proposal that seems
unacceptable at one rate may become a desirable business under another rating
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plan or with Special Conditions such as ‘compulsory excess’. A rate that will fetch
the insurance company a decent profit as well as be acceptable to the applicant is
fixed on the basis of how the underwriter judges that particular case.
(c) Facultative reinsurance can be used: When the business is not covered by the
insurer’s reinsurance treaty or the amount of insurance needed exceeds the net
treaty capacity, the underwriter can transfer that excess to a facultative reinsurer. As
an alternative to this, the insurance can also be divided among several insurers.
(iii) Executing the decision

After perusing all the alternatives and making a decision, it now remains for the decision to
be put into action. There are three courses of action to be taken:
• The applicant should be briefed about the decision along with all the modifications
made. If any application has been rejected, the underwriter must convey this
decision to the agent in such a way that it does not further damage any business
relations they may have.
• The underwriter is also in charge of preparing the documents, which include a binder
or a policy work sheet to be sent to the policy writing department and also issue of
certificates of insurance.
• The final step is concerned with recording information about the applicant and the
policy for accounting, statistical and monitoring purposes. Information like the
location, coverages, limits, risk features etc. must be coded, as these are essential
for the purpose of rate making, financial accounting and business evaluations.
(iv) Monitoring the activities

The underwriter must always be alert to any change in the loss exposures of the insured’s.
This type of monitoring usually takes place when policy changes and losses are brought to
the underwriter’s attention. Premium audit and loss control reports also help to review
individual policies.
When a claim is made or after a premium audit has been carried out, the underwriter can
contact the reinsurance personnel and secure first-hand knowledge of the insured. This
will help in uncovering any additional hazards, that will in turn help the underwriter to re-
evaluate the account and decide on its continued acceptability.
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The underwriter must also monitor the entire books of business and use premium and loss
statistics to determine what causes the problems that make a business deteriorate. This
will also help in finding out whether the underwriting policy is being complied with.
(v) Maintaining - records of business

This involves evaluating the profitability of all the business written during a particular
period of time, covering a specific territory and for a certain type of insurance. This
evaluation should be able to weed out any problems in that line of business. The insurer’s
primary concerns are the development of adequate premium volumes, the coverage of
fixed costs, the loss ratio that develops and overhead expenses. For the purpose of
evaluation, the business can be subdivided on the basis of its class, size of the account,
the territory and producer.
The producer or agent’s records concerning premium volume, policy retention loss ratio
etc. must be evaluated. The goals that had been initially decided by the insurer and the
agent and the progression made towards these goals must be considered while
evaluating.
6. Need for Underwriting

The need for underwriting arises because of some basic reasons namely to avoid the
concept adverse selection and certain other hazards, to maintain fair prices and
subsidisation and to stay ahead of competition, to check Adverse selection. This term is
used for a situation where the insurance applicant presents a possibility of loss that is
higher than the average expected from a random sample of all applicants. It arises when
the information presented to the insurer and the actual material facts relating to the risk
are different. For example, flood insurance is more likely to be purchased by those
businesses that expect flooding rather than by all other businesses. Or people already
suffering from a disease or belonging to the high mortality rate group will be eager to claim
coverage while those enjoying good health may not go in for insurance.
Along with adverse selection there are certain types of hazards that an underwriter must
watch out for. These are –
• Physical hazards
• Moral hazards
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• Morale hazards
• Financial hazards
• Regulatory hazards
(i) Physical hazards

These are hazards that affect the physical characteristics of whatever is being insured. For
example a building made of wood represents a higher level of physical hazard than one
made of brick. An untrained driver, faulty fire- safety equipment are - examples of a
physical hazard.
(ii) Moral hazards

These hazards refer to the defects that exist in a person’s character that may increase the
frequency or the severity of loss. Such a character may tend to increase the loss for the
company.
(iii) Morale (attitudinal) hazards

The fundamental postulate of insurance is that the insured should always conduct himself
as if he is uninsured. However, if there is a situation of a wilful carelessness on the part of
the policyholder because of the existence of insurance, then it is a case of morale hazard.
(iv) Financial hazards

If the value of the risk is beyond the capacity of the insurer he may reject the risk, or share
the same.
(v) Regulatory hazards

These hazards refer to the regulatory interventions which the Regulatory Authorities insist
the companies to follow at the time of underwriting, which may relate either to the policy
coverage or pricing. For example low premiums, broad coverage, and issuance of non-
cancelable policies are some of the interventions which the underwriters may have to
necessarily comply with.
Thus, Underwriting helps in determining the expected loss potential of the proposed
insured and selecting a price in line with this expected loss. Insureds with an
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approximately equal loss potential are put into one group and charged the same rate. An
underwriter can also help an insurance company stay one step ahead of its competitors.
Some of the ways by which this is done is through lower premium rates, innovative
marketing strategies etc. The underwriter provides all necessary information and thus
helps the insurer make the best possible decisions.
(vi) Declined Risks

These are extra hazardous risks that should be rejected. Sometimes, a premium is fixed
after imposing restrictive conditions, clauses and warranties. The acceptance of such risks
is called‘ Accommodation’. Some examples of such risks are Ammunition works, Camphor
boiling works etc.
7. Underwriting Authority
Underwriting authority refers to the degree of autonomy granted to individual underwriters
or groups of underwriters. This authority will differ by position and experience. Different
insurance organisations have varying degrees of decentralisation. In India, the
underwriting authority vests with the insurance company. Post opening up of the insurance
sector, some private insurers are decentralizing certain classes of business like travel
insurance, where an insurance intermediary is allowed to issue(better to put it as
‘generate’) the policy.
Specialty lines like aviation and live stock mortality have retained centralized underwriting
authority, while some other insurers are delegating a considerable part of their authority to
selected brokers. Insurers who follow the decentralization system state that it eliminates
duplication and makes the most of the producers’ familiarity with local conditions. In
return, brokers receive a higher commission rate and a larger share in the profits.
The degree of decentralization permissible depends upon several factors like the line of
business involved, the experience and the track record of the producers. There may be
insurers who allow their brokers to issue personal lines policies and bill the policyholders.
This is certainly a significant amount of underwriting authority. Some other insurers may
permit a high degree of authority but restrict policy issuance only to the company, so that
control over the brokers’ activities is maintained.
There are also lines of business where the producer may have no underwriting authority at
all. These usually include very hazardous or specialised classes of business.
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8. Underwriting Activities
Underwriting activities can be divided into two types –
• Line underwriting where daily underwriting tasks are carried out; the underwriters
are usually located in regional offices of the insurer.
• Staff underwriting where the underwriter helps the management in formulating and
implementing underwriting policy. They are usually located at the Head Office.
(a) Line Underwriting Activities

The line underwriters take care of the following activities:
• Choosing insureds with care. This is an ongoing process – once an account is
accepted, it must be monitored to check on its continued acceptability. Corrective
action may be required in certain cases. Here, the underwriter must watch out for
adverse selection.
• Categorizing the risks involved. Insured’s having similar expected loss frequency
and loss severity are pooled together. Only then will the insurer be able to develop a
sufficient rate to pay for the losses incurred and to generate profit.
• A rate should be so set that it not only allows the insurer to make a profit but also is
competitive when compared to the rates of other insurers. The underwriter must
make this after thorough appraisal of the application.
• The underwriter allows the agent to issue certain types of policies and endorsements
by making use of an independent agency marketing system. The underwriter also
prepares quotations, files for the policy typist and assists the agent with drawing up
proposals.
(b) Staff underwriting activities

The staff underwriters take care of the following activities: -
• On the basis of research done and knowledge about the market, they put together
the company’s underwriting policy. They must determine the company’s capacity for
business. Capacity refers to the volume of premium that an insurer can safely write,
based on the policyholder’s retained earnings or surplus.
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• They update the rates and rating plans of the company. This is done to address the
effects caused by changing competition, inflation and loss experience. Examining
the operational costs and the profit requirements and combining them with the loss
costs decides the final rate.
• Preparing and updating the underwriting guides and bulletins that contain the
company’s underwriting policy. The guides also differentiate between acceptable
and unacceptable business.
• Underwriting audits are conducted to monitor the line underwriting activities. The
audit is a control tool used by the management to make sure that the underwriting
policy is being properly implemented. This is done through statistical analysis of
underwriting results and also through field audits.
• Staff underwriters also offer advice to other underwriters – by virtue of their own
experience in handling complex accounts.
• Staff underwriters also conduct training programs and other educational activities for
the benefit of line underwriters. They also act as instructors when there is a need for
information on a technical area on insurance.
9. Underwriting Policy
Underwriting policy formulation and implementation is one of the most important objectives
of the insurance management. This policy specifies the lines of risks to be accepted and
those to be avoided or rejected. Underwriting Policy is like the Constitution of a country. It
provides the frame work within which the company would develop products for the market.
It provides the framework for product development and differentiation according to the
needs of the customers and market development. The basic purpose of an underwriting
policy is to transform the objectives of the management into rules and guidelines that will
direct the company’s underwriting decisions. The underwriting policy decides the
composition of the book of business.
An underwriting policy must take into consideration several dimensions while devising
framework for expansion of market with new lines of business and with product
development and customization, by giving due considerations to micro and macro factors
such as – the corporate policy, lines of business, the territories involved and the rating
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plans, reinsurance and retention patterns, financial resources, in-house expertise, skill and
experience, levels of centralization/decentralization.
In formulating an underwriting policy, the corporate management should consider the
following :
— underwriting philosophy and objectives
— IRDAI directives
— underwriting stages – corporate underwriting and line underwriting
— risk management policy, process and techniques
— pricing of risks
— reinsurance policy and programme
— underwriting control
— underwriting results and solvency analysis
Thus, the objective of formulating an underwriting policy is to under write the future with
past loss experience and loss forecasting for the future within corporate philosophy,
regulatory norms and reinsurance treaty terms or clauses. Generally, corporate
underwriting philosophy involves penetration with profitability and the underwriting
objectives are business growth, profitability, solvency and liquidity.
However, any change in the underwriting policy must be evaluated on the basis of other
dimensions. Changes must also recognise the effects of certain limiting factors that
influence the underwriting policy.
These include:
• The capacity – the relation between the premiums written and the size of the
policyholders’ surplus is called the capacity.
• Capital & Reserves – It helps to gauge an insurer’s solvency.
• Skilled human resources – insurers require skilled personnel to efficiently market the
product, employ loss control efforts and adjust any loss that occurs. The insurer
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must ensure that there are enough personnel and that they are conversant with the
company’s policies.
• Insurers must also follow the rules and regulations laid down by the insurance
regulator in whose territory they operate. The impact of regulation varies from
country to country. They must obtain licenses for writing insurance by individual line
within each State, and all rates, rules and other documents must be filed with
Government regulators.
• Portfolios in which the company operates, e.g., exclusive health insurer/ECGC/other
than health, etc.
• Reinsurance sets limitations on what the underwriter can write. Reinsurance refers
to the contractual relationship by virtue of which, risks are shared with another
insurer.
Application of the underwriting policy

Once the underwriting policy is set, it must be communicated to all concerned, as well as
applied. Presently, IRDAI requires that it should be placed before the Board of Directors of
the Insurer and submitted to the Regulator with the board resolution. There should also be
a ‘Compliance Officer’ for the underwriting policy. Underwriting bulletins and guides are
utilised for this purpose. Once the policy is established, underwriting audits are conducted
to review the effectiveness of the policy.
Applying the provisions given in the underwriting policy involves communicating whatever
decision has been taken, to the agent. Data about the policyholder including the class,
location, risks involved and coverages must be coded, so that the information can be used
later.
10. Underwriting Guides

Underwriting guides outline the ways to realise the objectives stated in the policy
(basically ‘do’s and ‘dont’s). They contain the standards for acceptability and summarise
the underwriting authority requirements. The chief purposes of an underwriting guide are
as follows:
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• Supplying a basic framework for formulating underwriting decisions: underwriting

guides identify the principal factors that should be weighed when a particular type of
insurance is written.
• The underwriting guide is a means of making sure that the selection process is
uniform and consistent. Submissions that are identical in all respects must be
treated in the same way. The guides are also a means of informing individual
underwriters of a suitable approach to evaluate policyholders.
• Underwriting guides help to unite the insights of experienced underwriters, which will
help those less familiar with a particular line of business. The guides contain
significant observations that have been gathered on the basis of the insurer’s past
experiences.
• The guides enable routine decisions to be handled at lower levels of authority and
allow the experienced underwriters to concentrate on the more difficult cases.
11. Underwriting Results

Underwriting results are an indication of the effectiveness of the company’s underwriting
policy. Statistically, it is represented by the insurer’s combined loss and expense ratio.
Evaluation of results by the line, territory etc. will help identify all the problem areas.
Besides these, over the years, the entire insurance industry is cyclical in nature, thus
providing industry average performances against which any insurer can be measured.
The causal mechanism for this cyclic nature of the industry is yet to be determined.
Certain factors like inflation, regulation and competition have had a considerable impact.
For example slow regulatory response to requests for rate increase in times of inflation
could have been responsible for unsatisfactory underwriting results.
The evaluation of underwriting results based upon the combined loss and expense ratio is
complicated because of several factors, two of which are outlined below:
(a) Volume of Premium

The volume of premium and the underwriting policy have a direct relationship i.e. when the
existing underwriting rules are unduly tightened, it will usually result in a drop in premium
volume. In the same way, the relaxing of underwriting standards usually results in an
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increase in underwriting premium. The interpretation of the insurer’s combined loss and
expense ratio, both on an aggregate as well as a line basis, must be tempered by
considering the extent to which the insurer’s premium volume goals have or have not been
met.
For example, an insurer takes on a much stricter underwriting view than in the past,
resulting in a drop from 100 percent to 94 percent in the combined loss and expense ratio,
based on incurred losses and expenses to earned premium. If the written premium drops
by 24 percent during the same year, then an evaluation of the results using an expense
ratio that compares expenses to written premiums will reflect a deterioration of results,
with an increase in the combined ratio.
(b) Loss development delay

In some business lines, a significant time gap exists between a loss that has taken place
and the final settlement of a claim. Though there are reserves that are established as soon
as the loss is reported, a considerable amount of imperfection exists in the estimate of the
final loss costs. This is known as loss development delay. This has two major
characteristics:
• Changes in the reserves in the case of reported losses
• Changes in the reserves for incurred-but-not-reported (IBNR) losses.
In those lines of business, which are written on an occurrence basis and where there is an
extensive period of discovery between the time of loss and the consequent suit by the
claimant, the exactness of the current reported losses is greatly affected by the IBNR.
Many professional liability insurers have addressed this problem by changing to “claims-
made” forms and by introducing the claims-made commercial general liability policy.
If a policy has been written on an occurrence basis, the underwriter provides coverage for
only those injuries that occur during the period of the policy, even when such claims have
not been brought against the insured for many years after the coverage has expired. If the
policy has been written on a claims-made basis, the underwriter gives coverage only for
those claims made against the insured during the policy period. Therefore, on paper, a
claims-made policy does not cover losses that are unreported at the end of the policy
period. But, in practice, claims-made policies very often cover losses reported after the
policy period by virtue of “extended reporting periods.”
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Yet another way to appraise the functioning of the underwriting department is by setting
standards of performance with respect to several important areas of underwriting.
Standards of performance comprise the following factors:
(c) Standards of selection

There should be well-outlined selection rules in the underwriting guide. These rule should
help to decide what is the desirable, average and below average – type of insured. Each
branch of the insurance company must have an idea about the correct balance of all these
types of account.
(d) Desirable product mix

The underwriting guide should contain the desired product mix for new and renewal
businesses. Based on past performances, the product mix is decided. For example, if
liability losses are high, the product mix standard may require a reduction in manufacturing
classes, but an increase in writing in the service, mercantile and contractor classes.
(e) Standards of accommodating risks

All accommodated risks should be entered together along with the complete particulars
concerning the reason for accommodation. During underwriting audits, the evaluation of
these entries can determine whether they are being over used and also make sure that the
increased volume promised by the producer is duly followed up.
(f) Standards of pricing

The pricing standard consists of a procedure where all accounts that have deviated from
the manual premium by more than a selected percent are identified and recorded. Goals
are set for each branch so that the entire book will not deviate from the natural premium
by more than a set acceptable range.
(g) Retention and success ratio standards

The retention ratio is the percentage of business renewal. The success ratio is the ratio of
business written to business quoted. An unfavorable percentage of renewals indicate
serious deficits like unfavorable claims services, uncompetitive pricing etc. The renewal
rate should be monitored carefully and evaluation of any trends recognised.
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The success ratio standard is usually employed in commercial lines. Ratios that are too
high or too low require thorough investigation. Under the success ratio, a high ratio is
indicative of an inadequacy in rates; rates that are lower than other insurers; a broader
coverage when compared to other insurers or deterioration in selection criteria. A low
success ratio is indicative of very restrictive coverages; poor service; high rates and very
high selection criteria.
(h) Services to producers standards

Insurers must constantly evaluate their services. There should be a set of minimum
acceptable standards for certain services to producers. The performance of each branch
and region towards services to the producer is compared to the mandated level of
performance.
12. Underwriting Considerations in Special Policies

The factors influencing underwriting decisions in some of the general insurance policies
are summarized below for more insights.
(a) Engineering Insurance

Engineering insurance requires highly specialised and technical expertise in underwriting,
risk inspection, rating etc. A pre-acceptance risk inspection is conducted for most of the
proposals and an inspection report is prepared that deals with the inspection of motors,
generators, transformers, steam turbines, oil and gas engines, compressors, pumps,
refrigerating plant, external and internal examination of boiler and pressure vessels and
the loss of profits survey report.
Most classes of engineering insurance are controlled by tariffs and insurance companies
can fix the prescribed rates. In some cases, the proposals are referred to the Tariff.
When it comes to the question of engineering claims, the underwriter has to bear in mind
the following points:
• Early notification of a claim should be followed by an early visit by a surveyor.
• If liability exists under the policy, the company can give advice concerning the extent
and type of damage and the necessary repair work.
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• During repair, there are significant maintenance costs that occur and here the
company can fix a suitable proportion of costs.
• For whatever liability is incurred, the company has the right to approve the type of
repair from a safety aspect as well as with an eye on the future risk aspect.
There are also instances where acceptance of risk is subject to special considerations,
which are accepted by insurance companies. Some of these are listed below:
• Fire – consequential loss (fire) policy may be granted only to those clients whose
books of accounts have been regularly audited by a reputed firm of auditors, or
whose previous loss experience has been inspected and accepted.
• Motor vehicle – older vehicles are accepted, subject to inspection. Comprehensive
insurance on imported cars is allowed subject to the inclusion of an excess clause.
Vehicles like those belonging to the military will be covered only for third party risks.
• Marine and Cargo – ocean marine insurance is divided into three categories:
• Yachts – all sailboats and inboard powered boats including luxury vessels fall under
this category. The underwriting conditions can be grouped under three categories:
— Seaworthiness: This refers to the age, construction and maintenance of the
vessel. The older a vessel, the lower its value. The best way to obtain
information about a vessel is through a marine survey.
— Navigable waters and season: Underwriters restrict coverage to only the
area for which the yacht, equipment and the operator’s experience are
appropriate. This is done with the help of a navigation warranty, which limits
coverage when the vessel is under conditions that have not been agreed to by
the underwriter.
— Operator experience: Insurers also consider the policyholder’s experience
and training. For example, there are insurers who give credit for completion of
Power Squadron or Coast Guard Auxiliary courses. Membership in are
relevant organisation, such as a yacht club, is taken as an indicator of the
policyholder’s interest in his or her chosen field.
• Commercial hulls: As far as commercial hulls are concerned, the emphasis is again
on the physical characteristics such as construction of the ship, equipment and its
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maintenance, the area of operation etc. The safety regulations under which the ship
should be operated will be determined by the nation in which the ship is registered.
The quality of maintenance is verified by regular inspections.
In marine insurance, the acceptance of certain risks requires careful consideration. These
include:
• Asbestos/cement pipes and sheets (breakage is excluded)
• Transformers (breakage is excluded and excess imposed on all leakages)
• Refrigerators and air conditioners (risks of denting and scratching are excluded)
• Cargo in paper bags (tearing and bursting of bags is excluded)
• Glass (breakage, scratching and chipping are excluded)
• Sanitary ware (breakage, chipping and denting are excluded)
• Machinery (second hand) breakage is excluded
• Oil in second hand drums (leakage and contamination are excluded)
• Motor spare parts and ball bearing (theft, pilferage and non-delivery are excluded)
Motor vehicles (denting and scratching excluded)
• Watches (TPND, breakage is excluded)
(b) Cargo Insurance

In cargo insurance, the quality of the policyholder and the business reputation are of
utmost importance. The ports between which the goods will be shipped and the land
transportation to be used from warehouse-to-warehouse are also important underwriting
concerns.
In cargo insurance, there are again certain specifications that are followed.
• Normal rates for cargo carried on standard vessels (i.e. conforming to standards
prescribed by Tariff).
• Extra rates if vessel is over-aged.
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• Close scrutiny of tramp vessels – that includes the financial position of the owners,
the age of the vessel and its tonnage. If the vehicle does not fulfill the criteria, 1
percent extra premium is charged on the sum under marine cargo policies.
The above were the special instances where the underwriter makes exceptions for
accepting risks in special cases. This is because the basic principle of underwriting has
always been that the underwriting must neither be too firm nor too relaxed. Wherever a
risk can be accommodated after suitable adjustment, it must be done.
(c) Fire Insurance Policy Underwriting

Fire Underwriting Factors
• To assess fire hazard, factors to be considered are (COPE) that is Construction,
Occupancy, Protection and External Exposures. Construction catergories from
underwriter’s point of view include
• Code 1. Frame
• Code 2. Joisted Masonry
• Code 3. Non-Combustible
• Code 4. Masonry Non-Combustible
• Code 5 Modified Fire Resistive
• Code 6. Fire Resistive
The code 6 is the best from the underwriter’s point of view
• Other minor construction considerations include age of the building, height, openings
and divisions, fire stops (Firewall). Occupy any can be either Single occupancy or Multiple
occupancy. Occupy any affects the frequency and severity of losses. Fire insurance rating
depends upon sources of Ignition, Combustibility of Contents and Damageability, Hazards
in a property risk (house keeping, heating and air-conditioning equipment, common
electrical equipment and lighting and smoking materials). Fire protection may be private or
public, which consists of three elements: Prevention, Detection - Smoke and heat
detectors, Alarm, Sprinkler systems and Extinguishments. Fire Exposures depend upon
the number of floors, openings in between floors, dimensions of corridors and rooms,
location of fire hydrants and the length of hose reels, maintenance of electrical wiring
equipment and fire escape route.
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(d) Motor Insurance Policy Underwriting

Private Passenger Automobile Underwriting Factors
• The underwriting factors for automobiles or vehicles especially with regard to liability
risks are very complex in nature due to unpredictability in the number of third party
claims, accidents by young and inexperienced drivers or drunken drivers, badly
maintained vehicles and bad roads. Besides the following factors are also to be
considered by the underwriters in the issuance of auto policies :
• Age of operators
• Age and type of automobile
• Use of the automobile
• Driving Record
• Territory
• Gender and Marital Status
• Occupation
• Personal Characteristics
• Physical condition
Example of Underwriting Factors for Fire Loss of Profits Policy (FLOP)
Before Fire After Fire (Amount in Rupees)

Turnover/Sales 5,00,00,000 2,50,00,000
Variable expenses (70%) 3,50,00,000 (70%) 1,75,00,000
Standing Expenses (20%) 1,00,00,000 (40%) 1,00,00,000 (Fixed)
Net profit (10%) 50,00,000 Net Loss (10%) 25,00,000
In this example, Standing charges and Net profit cover 30% of turnover. Loss of profit
policy is to cover the total of net profit and standing charges.
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Here,
Total of net profit and standing charges = Rs.1,00,00,000 + Rs. 50,00,000
= Rs.1,50,00,000
Turnover = Rs,5,00,00,000
Ratio between the two = 30%
Shortage in turnover of Rs.2,50,00,000 for interruption casued by loss is Rs.75,00,000
(30% of Rs.2,50,00,000) is payable by FLOP, provided
— policy issued for full SI
— claim under fire policy is admissible (irrespective of amount)
— Indemnity is for full period.
Taking this example, some of the important underwriting considerations of FLOP are as
under:
Commercial Automobile Underwriting Practice factors
Commercial vehicles are more exposed to risk and hence the unerwriting factors in
addition to those mentioned above include:
— Weight and type of vehicle
— Use of Vehicle: use for own purposes or for hire
— Radius of Operation
‘Local’: radius of 50 miles, ‘Intermediate’: radius of 51 to 200 miles, ‘Long distance’ :
excess of 200 miles
Vehicles are generally classified into different categories based on the function and need
such as 1. Trucks 2.Food Delivery 3.Specialized delivery 4. Waste Disposal 5.Farmer’s 6.
Dump and Transit Mix trucks and trailers 7.Contractor’s equipment
(e) Professional Indemnity Insurance Policy Underwriting

Users of professional services may financially suffer, or sometimes become victims of
professional negligence. Generally professionals include Advocates, Doctors Chartered
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Accountants etc. Hence, it is important that these policies are to be underwritten very
carefully. Professional indemnity cover is also available to insurance brokers and agents
on account of whose wrong advice to their clients, may be facing repudiation of a genuine
claim from an insurer.
(f) Commercial General Liability Underwriting

Products and Completed Operations Exposures or risks include manufacture, distribution
or sale of an unsafe, dangerous or defective products. On the other hand liability of
products or completed operations is related to negligence. Therefore, the underwriting
also calls for an understanding of the history of the product, history of defects and history
of claims for defective products.
Underwriting is of paramount importance to the insurance business. In fact, a sound
underwriting policy sets the agenda for profitable business by providing against loss and
ensuring returns.
13. General Insurance Contract Conditions and Warranties

These describe the various conditions which must be followed or eschewed by the insured
and may be quite detailed, depending on the nature of the risk and the extent and duration
of cover required. The conditions mention under what circumstances the policy would pay
and the precautions safeguards to be taken by the insured, e.g. duty of assured prescribes
that the insured must take all those steps necessary to mitigate the loss, as if he was not
in fact insured. Other terms and conditions would relate to arbitration, duty to disclose
material facts including any amendment/alteration in the risk or subject matter of
insurance. There are certain clauses such as cancellation, arbitration, jurisdiction etc.
which are recommended in every contract.
(a) Exclusion Provisions

1. Perils excluded
In general all insurance policies exclude some perils, which can cause higher losses.
Exclusions are the insurers way of drafting and limiting the agreement to make it
unambiguous and definite. In general, exclusions are made for three different reasons:
• To exclude perils that are uninsurable
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• To see that these perils are covered separately in another policy

• To cover these perils through separate endorsements on payment of additional
premium.
2. Uninsurable Perils
Losses arising out of war or a war like action or rebellion and nuclear risks are generally
excluded by all insurance because these losses are unpredictable and are often
catastrophic in nature. Similarly insurance companies also exclude normal wear and tear,
gradual deterioration, and damages due to insects etc., because these are non- accidental
and are normal losses.
3. Perils to be covered through separate policies
Some of the policies are specially designed for the perils, which are to be excluded from
coverage under normal insurance policies. This system helps to separate insurance for
personal risk and business risk. Like for example, perils arising out of use of personal
vehicles for business purposes are excluded from personal automobile coverage.
Separate policies have to be obtained for the two different risks.
4. Coverage through endorsement at extra premium
Certain perils, which are normally excluded from the policies, can be added to the normal
policy through endorsements, at the request of the insured. These endorsements are
normally undertaken at a higher premium than the normal policy premium. Like, for
example, damages due to earthquake are excluded from the normal property insurance
policies that are offered. And the insured can obtain coverage as an endorsement on
payment of an additional premium.
5. Excluded Losses
Most insurance policies differentiate between direct losses and indirect loses; they do not
cover indirect losses arising out of the peril, even though the peril itself is covered under
the policy. Commercial property insurance generally covers only direct losses arising due
to proximate causes. If the loss arises due to an unbroken chain of events caused by the
peril, which is insured, it qualifies under “direct loss”. Like, for example in case of loss due
to fire, losses arising as a result of fire fighting, viz. breaking windows, making holes on
the roof, are also considered as direct loss. But loss of income due to interruption in
business as a result of the fire is considered as indirect loss.
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If the assured wants to be covered against the indirect losses, he must obtain separate
policy for the same.
6. Property Exclusions
Property insurance is taken to cover the loss arising out of property damages. Property
insurance policies commonly exclude loss of money, bills, manuscripts, deeds, bullions
etc. Unless provided for, property insurance only covers the integral parts of the property
and excludes all its contents. For example, automobile policies cover any damage to the
vehicle but exclude damage to any property (goods, etc.) transported in the vehicle.
7. Exclusion of Locations
The property insurance policy agreements, in general, specify that the coverage is
available only if the property is within the limits of the location specified in the declaration.
Only a few insurers provide worldwide protection for the policy. Some insurers provide
partial coverage for some specific properties, if it is outside the boundaries of the specified
location.
The exception to the limitation of location is when the property is moved to a safe place for
the sake of safeguarding it from destruction. The removal is generally allowed for a limited
time and the coverage for the removal is generally broad with very few limitations.
Accidental damage during transit is also covered. Courts also allow coverage for thefts
during the removal process even though theft may be excluded from the insurance policy.
(b) Warranties
Warranty is a statement by which the assured undertakes that some particular thing shall
not be done or that some condition shall be fulfilled, or whereby he affirms or negates the
existence of a particular state of facts. Warranties can either relate to facts existing at the
time of the contract or relate to the future. It is an undertaking given by the insured either
voluntarily or at the instance of the insurer about something that will determine the
insurability of the risk. For example, in a Marine Cargo policy, a warranty may read
“Warranted that the condiments transported are packed in airtight containers”.
(c) Common Policy Conditions

Conditions are stipulations in the policy, which help in regulating the contract. These may
be implied or express conditions.
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1. Implied conditions
In the absence of express conditions, the insurance contract is subject to implied
conditions, which relate to
i. Good faith
ii. Insurable interest
iii. Subject matter of insurance
iv. Identification of the subject matter
Implied conditions can be expressed in a policy explicitly, or can be modified or excluded
by express conditions.
2. Express conditions
These are clearly stated on the policy. There are two types of express conditions,
(a) General conditions, which are applicable to all policies of that class and are
therefore, printed on the policy document.
(b) Special conditions, which are applicable only to that specific policy. The special
conditions are thus handwritten or typed or rubber-stamped on the policy. (e.g., type
of packing, compulsory excess, unloading survey, etc.)
All conditions whether expressed or implied are the operative clauses of a policy. They are
recited as conditions to be fulfilled by the insured for assuming the right to recover under
the policy. The conditions are further classified into the following types:
• Conditions precedent which precede the formation of the insurance contract. The
statements made in the proposal must be true and complete. The contracts also pre-
requires that the subject matter must be adequate in all respects, and should exist
when the contract comes into force. The fulfillment of the conditions is essential for
the validity of the contract.
• Conditions subsequent to validity of the policy are matters that are considered by
the parties as required for the continued validity of the policy. One of these is that
the insured would not transfer his interest in the property or the subject matter
without the consent of the insurer. The risk of the contract should remain constant
and should not be altered.
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• Conditions precedent to liability: The assured in the event of occurrence of a loss

must fulfil conditions, which are precedent to the liability of the insurer. Otherwise
the insurer is freed from honoring the claim even if the loss is covered by the policy.
These types of conditions include:
— Sending the notice of the loss to the insurer immediately on its occurrence
— Every claim, notice, and writ received by the insured on the subject matter
should be forwarded to the insurer
— The assured must co-operate fully in the investigation of the cause of loss by
the insurer
— The assured must not assume any liability or promise or offer to make any
payment to the third party.
— Loss minimization efforts – as if uninsured
— For life insurance, proof of age and death certificate are some such conditions
precedent to the liability of the insurer. The insurer cannot be held liable for
non-payment if these conditions are not fulfilled.
• Breach of Conditions: The policy ceases to be operative from the date of the
breach. However, if the insured complies with the requisite conditions, he can hold
the insurer liable for indemnification of the loss. Most of the conditions are framed to
deal with the claims settlements, action required at the time of the loss, etc.
• Provisions relating to Fraud: Generally insurance contracts mention that mis-
representation and concealment of any material fact or fraud will render the contract
void. This condition can be included as a warning or as a condition enforceable by
the court of law.
• Notice of loss: Most of the contracts of insurance require the assured to give an
immediate notice of any type of damage or loss, if possible. However, if it is not
practicable then the insured should report the loss within a reasonable time frame.
The purpose of this clause is to enable the insurer to inspect the loss and collect the
evidence needed to support the claim. Again it also ensures that the insured gets
the benefit of the policy quickly.
• Proof of loss: After property loss has occurred the insured has to submit a formal
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proof of loss and its amount within the stipulated time. Generally the insurance agent
or an adjuster helps the insured in doing so but the onus is primarily on the insured
to notify the insurer and substantiate the amount of loss.
However the insurer can take adequate time to investigate further if he wishes to.
Lastly, any legal suit must commence within 12 months of the occurrence of the
loss. The insurer has to settle the claim expeditiously after receiving all relevant
documents.
• Appraisal: Most property insurance contracts provide that if the parties to the
contract cannot agree on the amount of loss, an independent arbitrator can be
selected by both of them. This arbitrator can act as an impartial umpire and can
value the loss. Although the parties to the contract do not resort to this process
generally, it is mandatory in nature since it is a policy condition.
• Protection of property: Most insurance contracts contain provisions that require
the insured to take up reasonable steps for protecting the property from damage.
The failure of the insured to carry out the requirements of such provisions relieves
the insurer from any liability.
• Cancellation: All insurance contracts mention the conditions under which the policy
might be terminated and cancelled. In case of general insurance contracts, either of
the parties can cancel the policy. The notice for the same is given for 7, 10 or 30
days. This gives the insured time to obtain coverage elsewhere. Any advance
premium paid has to be returned to the insured. Where the insured opts for
canceling the policy he receives a lesser amount than what is otherwise available
calculated on the basis of short-period rates.
• Time limitations: As has been mentioned earlier the insured has to notify the
insurer on the loss suffered within the specified limits of time set forth. The event of
loss has to be notified, the proof of loss has to be submitted, and the claim amount
is to be paid.
Certain other types of time limits are also found in the insurance contracts. In case
of business interruption insurance, the payment is made on account of net profit lost
and necessary continuing expenses. The payment primarily depends on the length
of time for which the business was shut down.
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• Waiver of Breach: Where the insurer waives the breach of any of the conditions by
the insured the effect is the same as the condition being fulfilled by the insured.
In Barrett Bros. Ltd. v. Lickiss, the assured was involved in a motor accident. He had
received a notice, which was an intended prosecution for the above accident. The
insured had neither informed the insurer about the accident nor had he forwarded
the notice to them. The insurer on coming to know about the prosecution from the
police, instead of asking for the notices, merely asked for the reason why he had not
complied with the requisite condition. The letter of the insurer was considered as a
waiver of the breach by the insured. The fulfillment of the conditions mostly depends
on the conduct of the insurer, and sometimes is made redundant by his conduct.
(d) Assignment
The policy of insurance is a personal contract, and thus if the insured wants to transfer the
rights of the policy, he can only do so with the consent of the insurer. The transfer of rights
can be made through assignment of the policy. Assignment means transfer of the rights to
another person usually made through a written document.
When the property on which insurance has been obtained, is sold the existing policy
might be transferred to the buyer of the policy, with the permission of the insurer.
• Assignment of Proceeds of the Policy: Mere transfer of the rights of receiving the
benefits of the policy, which the insured is entitled to, does not require the approval
of the insurer. This is because it does not amount to the assignment of the policy or
its subject matter. The assignee thus only stands in the place of the insured for
receiving the benefits of the policy. Where due to a breach of a condition the insurer
declines to pay, the assignee cannot recover anything from the insurer.
• Premium: The consideration for assuming the risk, by the insurer is the insurance
premium. The payment can be in the form of a lump sum or in the form of a series of
periodical installments (in certain portfolios such as marine cum erection, marine
hull, etc.). The form of payment would be determined by the terms of the contract.
Under section 64VB of the Insurance Act 1938, the insurer is prohibited from
assuming any risk in India without receiving the premium in advance. Where the
payment is made in the form of a cheque against the cover note, the risk on the part
of the insurer only arises on receipt of the premium. In case the cheque bounces the
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insurer is not liable to pay anything. (but the procedures to be followed by the
insurer such as intimation of cancellation by RPAD, passing cancellation
endorsement, intimate RTO in case of motor insurance, etc.)
The insurer should actually receive the premium before he can assume the risk. The
insurer can assume risk if the amount is paid to the agent or a money order is
booked or is posted. It must also be noted that acceptance of the premium by the
insurer does not amount to conclusion of the contract (acceptance of the money as
‘advance deposit’ only saves the insurer. Otherwise, insurer is most likely to be held
liable in a legal proceeding).
(e) Return of Premium

The right to make a claim for the refund of premium arises:
1. For failures in consideration
2. By agreement
(a) The insured can claim for a refund of the premium if the insurer doesn’t run
any risk,
o Where the parties were never at consensus ad idem, i.e. were of one
mind. This is applicable for all branches.
o Where the contract is ultra vires.
o Where the contract is void ab initio due to fraud or misrepresentation by
the insured
o Where the risk was never attached, as for example insurance for
property, which was destroyed before the contract was made.
o Where the policy is illegal.
(b) In case the insurer has assumed risk and the contract becomes void
thereafter, the insurer cannot claim refund of the premium or any part there of.
(c) Where the insured commits a breach of warranty, owing to fraud or
misrepresentation, the insurer avoids the contract and has to return the
premium received; he can of course forfeit the premiums if the contract
provides so.
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(d) Premium amount can be refunded partially when the insurance contract is
terminated before the normal expiry date, either through mutual agreement or
by virtue of the right to terminate the contract (as may be contractual) at any
time.
(f) Deductibles Provisions

A deductible is that portion of the amount of an insured loss, which the insured agrees to
pay. It is common in almost all types of insurance policies to stipulate a definite amount of
money, which is to be borne by the insured. The insurer becomes liable for any amount
beyond the deductible amount stated in the contract.
• Deductibles
A deductible is a provision by which a specific amount is subtracted from the total loss
payment that otherwise would be payable. Deductibles are usually found in auto, property
and health insurance. Deductibles are not used in life insurance because the death of an
insured is always a total loss. It is also not used in personal liability insurance because
even for a small claim, the insurer must provide a legal defence. Deductibles may be
either compulsory or voluntary. Voluntary deductibles will fetch a discount in the premium.
(also known as ‘excess’).
The most common forms of deductibles are as under: -
• Straight deductibles, the simplest yet most effective type, apply to all types of
policies and involve subtracting the deductible amount from the aggregate loss to
determine the loss payment.
• Aggregate and calendar year deductibles, applies for an entire year, where the
insured absorbs all the losses occurring during the year, till the deductible limit. The
insurer pays for all the losses beyond that level.
• Franchisee deductible is expressed as a percentage of the total value of the
property. The liability of the insurer arises if the loss amount exceeds this amount.
(g) Co-insurance Provisions

Co-insurance has different meanings for different types of insurance policies. For property
related policies the insured bears a portion of the risk only when it is underinsured. The
main reason behind this is to ensure that the insured willingly protects the property
insured.
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Different meanings of coinsurance

1. Co-insurance is a method by which more than one insurer share a risk in agreed
proportion.
Example: An industry that is insured for Rs. 1000 crores with a premium of Rs. 50
crores is shared by three insurers.
Insurer share Sum insured Premium
A 40% 400 crore 20 crore
B 30% 300 crore 15 crore
C 30% 300 crore 15 crore
If and when a claim arises it is paid in the same proportion. Insurer A who is having
a larger share is the leader and he will issue policy and service the account.
2. Co-insurance also means sharing the loss by the insured. When a claim arises
under the policy the insured bears an agreed portion of loss. This may be expressed
as a percent or certain specified amount.
Example: Under a Mediclaim policy it may be agreed that in every claim the insured
bears 10% and the balance is paid by the insurer. This is also known as deductible
or excess. In some policies there will be compulsory deductible.
Along with compulsory deductible there can be provision for voluntary deductible,
which will result in reduction in premium depending upon the size of deductible.
Higher the deductible more will be the discount in the premium.
• Operational aspects
The losses are calculated and divided between the insurer and the insured on a pro-rata
basis. This depends on the ratio between the actual insurance carried and the amount of
insurance required. The amount to be collected from the insurer is thus calculated using
the following formula: -
insurance carried * loss
Recovery =
insurance required
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SUMMARY
• Underwriting as an art began in the United Kingdom since Victorian times.
• The term ‘Underwriting’, refers to the formal acceptance of a risk by the insurance
company for a price, which is termed as ‘Premium’.
• It is a process by which an insurance company decides as to whether it can accept
the proposed risks and if yes, at what price, terms and conditions.
• The objectives of underwriting are producing a large volume of premium income that
is sufficient to maintain and enlarge the insurance company’s operations and to
achieve a better spread of the risk portfolio.
• Earning a reasonable amount of profit on insurance operations, maintaining a
profitable book of business (by ensuring underwriting profits), contains all the
policies that the insurer has in force.
• The principles that guide an underwriter before accepting a risk are selecting
insured’s who fit the company’s underwriting standards.
• The underwriting process follows a series of stages, at the end of which the status of
a risk is decided.
• The need for underwriting arises because of some basic reasons namely to avoid
the concept adverse selection and certain other hazards, to maintain fair prices and
subsidization and to stay ahead of competition, to check adverse selection.
• Underwriting authority refers to the degree of autonomy granted to individual
underwriters or groups of underwriters.
• Underwriting policy formulation and implementation is one of the most important
objectives of the insurance management. This policy specifies the lines of risks to be
accepted and those to be avoided or rejected.
• Underwriting guides outline the ways to realize the objectives stated in the
policy.(basically ‘do’s and ‘dont’s)
• They contain the standards for acceptability and summarize the underwriting
authority requirements.
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• Rate making, also known as insurance pricing, has an important part to play in the
overall profitability of the company.
• Rate making involves the selection of classes of exposure units on which statistics
can be collected regarding the possibility of loss.
• Underwriting results are an indication of the effectiveness of the company’s
underwriting policy. Statistically, it is represented by the insurer’s combined loss and
expense ratio.
• Conditions describe the ways which must be followed or eschewed by the insured
and may be quite detailed, depending on the nature of the risk and the extent and
duration of cover required.
• Warranty is a statement by which the assured undertakes that some particular thing
shall not be done or that some condition shall be fulfilled, or whereby he affirms or
negates the existence of a particular state of facts.
REVISION QUESTIONS
SECTION – A
1. The term ‘underwriting’ for an insurance company implies
(a) cash flow income (b) asset generation
(c) assumption of liabilities (d) generating reserves
2. Personnel engaged in the underwriting department are called as
(a) underwriters (b) auditors
(c) sales executives (d) actuaries
3. ‘Producers’ of insurance business are
(a) agents (b) accountants
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(c) auditors (d) directors

4. Underwriting involves the
(a) selection of the policyholders (b) classification of hazards
(c) selection of agents (d) classification of policies
5. The objectives of good underwriting policy aims at achieving
(a) expansion of market
(b) ensuring a profitable book of business
(c) diversification
(d) investment in shares
6. Which of the following statements describe the principles of underwriting?
(i) selection and classification of policyholders
(ii) charging equitable prices
(a) (i) only (b) (ii) only
(c) Both (i) & (ii) (d) Neither (i) & (ii)
7. The process of underwriting involves essentially
(i) Acceptance of ’risk’ at standard rates/ loaded rates
(ii) Rejection of risk
8. Sources of information for underwriters for risk evaluation include
(a) proposal form (b) newspapers
(c) census records (d) financial records
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9. Stringent underwriting standards are a safeguard for

(a) Adverse selection (b) Selective selection
(c) Preferred selection (d) Group selection
10. Implementation of the underwriting guidelines is done on a daily basis by the
(a) Staff underwriters (b) Line underwriters
(c) Group underwriters (d) Board underwriters
11. The corporate policy that defines the objectives of the management
concerning the composition of the book of business is
(a) Investment policy (b) Underwriting policy
(c) Sales policy (d) Advertisement policy
12. Insurance pricing is generally referred as
(a) rate making (b) underwriting
(c) undertaking (d) documenting
13. Underwriting guides are issued by the staff underwriters to line underwriters
for
(i) Uniformity in pricing
(ii) Serving as ready reckoner
14. Underwriting results are represented by the
(a) solvency ratio
(b) combined loss and expense ratio
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(c) liquidity ratio

(d) profitability ratio
15. Underwriting results of property and liability insurance business is influenced
by
(i) premium volumes
(ii) reserves created for IBNR losses
16. The renewal business performance of an insurer is reflected in the
(a) Success ratio (b) Retention ratio
(c) Loss ratio (d) Incurred claims ratio
17. In general insurance business reporting considerable imprecision exists in the
estimate of final loss costs due to which of the following factors
(i) loss development delays
(ii) stringent underwriting standards
18. The underwriting practices necessary for implementing the underwriting
policy are described by means of
(a) Underwriting guides (b) Underwriting process
(c) Ratemaking policies (d) Underwriters
19. Individual underwriters or groups of underwriters for specialty lines operate
(a) Decentralized underwriting authority
(b) Relatively centralized underwriting authority
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(c) Standardized underwriting authority

(d) Centralized underwriting authority
20. Which of the following affects the underwriting and pricing of an insurance
product?
(a) Binding authority of the producer
(b) Reserve policy issuance of the company
(c) Contingency commission agreement
(d) Underwriting guides
21. Which of the following practices help to check adherence of the insurers to the
rating plans and pricing that they have filed?
(a) Financial audit (b) Field audit
(c) Underwriting audit (d) Market conduct examination
22. Which of the following is not the responsibility of the line underwriters?
(a) Classifying risks (b) Selecting insured
(c) Supervising the rate making process (d) Determining proper coverage
Answers
1. (c) 2. (a) 3. (a) 4. (a) 5. (b) 6. (c) 7. (c) 8. (a) 9. (a) 10. (b)
11. (b) 12. (b) 13. (c) 14. (b) 15. (c) 16. (b) 17. (a) 18. (a) 19. (b) 20. (b)
21. (c) 22. (b)
SECTION – B
Questions with Answers
1. ‘Underwriting is the heart of insurance operations’. Elucidate.
Ans. Underwriting is the process of evaluation and classification of risk. It is this core
function of the company that determines its financial soundness . It is rightly termed
as assumption of liability. With the issuance of every policy, the insurer makes a
future promise and is therefore undertaking a liability.
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Underwriting essentially involves the selection of policyholders after thoroughly

evaluating all hazards, establishing prices and then determining the terms and
conditions of the insurance policy. The underwriters aim to generate profits and
minimize losses through a well-balanced underwriting policy. The objectives of
underwriting include producing a large volume of premium income that is sufficient
to maintain and enlarge the insurance company ís operations and to achieve a
better spread of the risk portfolio, thereby earning a reasonable amount of profit on
insurance operations.
2. Enumerate some of the rate making methods by general insurers.
Ans: Rate making or insurance pricing involves the selection of classes of exposure units
on which statistics can be collected regarding the possibility of loss. The rates
charged must be enough to pay for any expenses or losses incurred, must not be
very high and must not be inequitable. The system of determining the rates must be
simple, stable and provide the insured with a strong incentive to adopt loss control.
Lastly the rates must increase when loss exposure increases. The various rate
making methods adopted by property and liability insurers follow a number of
methods to calculate premiums such as:
• Judgment rating method
Under this, each exposure is individually evaluated and the rate determined by
the underwriter’s judgment. This method is frequently used in ocean/ marine
insurance because the vessels, ports, waters and cargo carried are very
diverse.
• Class rating method
Under this method, exposures with similar characteristics are grouped
together and charged the same rate. Some of the major factors in life
insurance are age, health, gender etc. This method is also called manual
rating because the rates are published in a rating manual. There are two ways
of determining the class rates:
* The pure premium method: pure premium is that part of the gross rate,
which is utilized to pay losses and adjustment expenses.
* The loss ratio method: under this method, the actual loss ratio which is
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the ratio of incurred losses and loss-adjustment expenses to the earned

premiums is compared to the loss ratio that was expected and the rate is
adjusted accordingly.
• Merit Rating method:
Merit rating is a rating plan by which class rates (manual rates) are adjusted upward
or downward based on individual loss experience. Some of the merit rating plans
include:
* Schedule rating: Under this plan, each exposure is individually rated. A basis rate is
fixed for each exposure and this is then modified by debits or credits for undesirable
or desirable physical features.
* Experience rating: Under this rating plan, the class or manual rate is adjusted
upward or downward based on past loss experience. The insured’s past loss
experience is the basis for fixing the premium for the next policy period.
* Retrospective rating: In retrospective rating, the insured’s loss experience during
the current policy period determines the actual premium paid for that period.
3. Discuss the various hazards encountered in the process of underwriting.
Ans: The process of underwriting inherently has the danger of adverse selection and
hazards. These are:
• Physical hazards
• Moral hazards and Morale hazards.
Physical hazards include hazards that affect the physical characteristics of whatever
is being insured. Any harm to the tangible qualities of the subject matter of
insurance can be called a physical hazard, e.g. a building made of wood represents
a higher level of physical hazard than one made of brick; an untrained driver, and
faulty fire- safety equipment are examples of physical hazards.
Moral hazards refer to the defects that exist in a person’s character that may
increase the frequency or the severity of loss. Such a character may tend to
increase the loss for the company, e.g. a weak financial condition that may lead
certain people to wilfully cause loss and secure insurance money.
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Morale hazards include a situation of a wilful carelessness on the part of the

policyholder because of the existence of insurance. By such negligence and
indifference the possibility of loss is increased, e.g. careless acts like keeping the
door of one’s house open and going out, thereby increasing the possibility of a
burglary, or leaving the car keys in the car and increasing the risk of theft are
instances of morale hazard.
4. Outline the underwriting process.
Ans: The underwriting process essentially involves a series of stages, at the end of which
the status of a risk is decided. It is only after the risk has been weighed and all
possible alternatives evaluated that the final underwriting is done. When a proposal
for insurance is received, the underwriter has four possible courses of action:
• Accept the risk at standard rates
• Charge extra premium depending on the risk factor
• Impose special conditions
• Reject the risk
The underwriting process involves the following steps when evaluating a potential
risk:
• Assimilating information about the applicant from a wide variety of sources
such as application or the proposal form, the agent’s report, government
records, physical inspection report of the surveyor in case of property
underwriting and in the case of life insurance a physician ís report on the
applicant’s blood pressure, heart condition, urinary system, etc. are
considered claim files.
• Evaluating and making a decision, whether to accept a proposal, reject it or
accept it with certain modifications, such as changing rating plans and policy
terms.
• Executing the decision after perusing all the alternatives and making a
decision.
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If the proposal is accepted, then the applicant should be briefed about the decision
along with all the modifications made. If rejected, the underwriter must convey this
decision to the agent with clear, valid and sound reasons explaining why the
particular application has been rejected.
• Preparing the documents which includes the work sheet to be sent to the
policy writing department and also issue of certificates of insurance.
• Recording information about the applicant and the policy for accounting,
statistical and monitoring purposes, specially the details like the location,
coverages, limits, and risk features.
• Monitoring the activities as to any changes in the loss exposures of the
insureds, through regular premium audits and audit reports.
• Maintaining the records of business which involves evaluating the profitability
of all the business written during a particular period of time, covering a specific
territory and for a certain type of insurance.
5. Define the principles of underwriting.
Ans: The principles that guide an underwriter before accepting a risk are:
• Selecting insureds as per the company’s underwriting standards
• Striking proper balance within each rate classification, so that the average rate
in the group is enough to pay for all claims and expenses. Therefore, units
with similar loss- producing features are placed in the same class and charged
the same rate, ensuring that a below average insured is compensated for by
an above average insured.
• Charging equitable rates based on the risk factors, that is charging less for
younger persons and more for older people.
SECTION – C
Case Studies
1. A top equestrian, Vijay Mallay, insured his prize show horse, Karishma, for Rs. 2.5
lakhs. After a series of lack lustre performances, Karisma died suddenly from what
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appeared to be colic, a common killer disease of horses. However, the underwriters

settled the claim of Rs.2.5 lakhs although many observers felt that the settlement was
more than the horse was worth alive due to its poor performance just prior to its death.
During the same time, the CBI was involved in an investigation regarding horse killings
and related insurance fraud. They arrested one Mr. Abu Salim, who said that he was paid
to kill horses so that their owners could collect insurance proceeds. Further, Abu Salim
also revealed the names of his clients wherein Vijay Mallay also figured. During the trial,
the owner testified that Karishma had not died out of natural cause, but instead died of
electrocution which can be easily be disguised as colic.
From the information provided answer the following questions:
1. As a responsible underwriter how would you evaluate the risk factors while issuance
of such a policy?
2. Is moral hazard present in the case?
3. Can the company call back the insurance settlement for Rs.2.5 lakhs?
4. Identify the damage compensation liability of the owner.
Ans:
1. As a prudent underwriter, at the time of issuance of the policy, besides the cost of
the horse, the character of the owner, and his past loss record are some of the
factors to be considered.
2. The moral hazard in the present case is evident in the fact that the owner killed the
horse to get the insurance benefits.
3. The insurer has every right to order the restitution of the Rs. 2.5 lakhs insurance
settlement and also to pay for the cost of his incarceration.
4. The owner can be convicted for a clear case of fraud, with a liability of fine and
imprisonment as per the provisions of the Criminal Procedure Code . Further he is
also guilty of manipulating the cause of death with a willful intention to cheat the
company.
2. An example of the process of Underwriting for a Fire Insurance Policy
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Example of Underwriting a Fire Insurance Policy

Location: Whether you own or rent, where you live makes a difference. Insurance
companies track claims by geographic location and use the information to adjust
premiums accordingly. Based on past experience in your neighbourhood, they can
determine how likely it is you will need to make a claim. If you live in an area with a high
incidence of break-ins or vandalism, for example, your rate will be higher than what you
would pay in an area where those things are rare.
Fire hydrant/fire station proximity: Because fire is a major concern, it’s an advantage to
live near a fire hydrant or fire station. The closer you are, the better the chances of saving
your property in the event of fire. In urban areas, proximity usually isn’t a problem. But in
more remote or rural areas, the distance may be greater, influencing the cost of your
insurance.
Amount and types of coverage: The higher the amount of coverage you purchase, the
higher your premium will be. The type of package you choose – Comprehensive, Standard
or Broad – will also affect the cost of your insurance. Insurance coverage for a condo
owner will cost more than coverage for a tenant. With a condo, your policy may have to
cover your liability exposure for shared or common areas of the structure, which adds to
the cost of insuring it. Optional coverage for specific items like a bicycle, or jewellery, will
also mean a higher premium. Amount of your deductible. A standard deductible might be
Rs. 10,000. If you choose a higher deductible your insurance company may reduce your
premium.
Security features: An alarm system, smoke detectors, carbon monoxide detectors or
other security features will generally get you a discount and help reduce your insurance
premium.
Other factors for homeowners: If you own a home, these are some of the other
variables that may affect what it will cost to insure your property.
Replacement cost: One of the biggest factors is the size of your house. The bigger your
house and the more you have in it, the more it will cost to replace everything. Apart from
the square footage, the quality of construction may also be a factor.
Heating: With oil heating, you may have to pay more than you would with a forced-air gas
furnace or electric heat. The risk of leaks with oil tanks increases the potential for damage
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to your property as well as the potential for environmental hazards. Depending on the age
and condition of your oil tank, you may be encouraged to replace it.
Electricity: A variety of factors associated with your electrical system can affect the risk of
fire and, with it, the cost of insuring your property. Breakers pose less of a risk than fuses.
If the flow of electricity into your home is less than 100-amps, it increases the risk of
overloading and fire. Older types of wiring can also raise the level of risk, particularly if the
wiring has deteriorated.
Pipes: Lead or galvanized pipes are usually found in older plumbing, which increases the
risk of cracking, leaking or other damage. Copper or plastic pipes are considered less of a
risk.
Wood stove: Wood stoves can pose an increased risk of fire. Older model wood stoves,
especially if they have not been correctly installed or maintained, are a common source of
house fires and carbon-monoxide poisoning.
Roofs: Roofs that are older than 20 years increase the potential for leaks and other
damage. Some insurers will pay only depreciated values for roofs that are near the end of
their service life.
Other considerations: How you use your home, as well as some structural features, can
also affect your insurance cost. Here are a few examples: If you build or plan to build a
rental unit into your home. If you decide to operate a business from home. If you make any
other major changes to the structure or how it is used. If you have other structures on your
property (a swimming pool, pool house, guest house or storage shed) that are worth more
than 10% of the total insured value of your home. Finally, here are a couple of things that
normally do not affect the cost of your property insurance: The type of appliances (gas or
electric) typically does not affect the cost of your home insurance. The exterior (brick or
aluminum siding) is usually not a factor in calculating premiums, however, it is a factor
when calculating the building replacement cost (i.e., the cost to rebuild with materials of
like kind and quality, if the building were destroyed).
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CHAPTER – 10
GENERAL INSURANCE RATE MAKING
1. Introduction
2. Rate Making
3. Rating Manuals
4. Basic Insurance Terms
5. Fundamental Insurance Equation
6. Rate Making Process
7. Rate Making for Property and Liability Insurance
8. Operational Premium Issues
9. Considerations for Ratemaking and Pricing
10. Summary
11. Questions
After completion of the Chapter, the Student will be able to
• Explain the intricacies and nuances in insurance premium pricing process
• Describe the need and important of rating manuals

• Describe and define the meaning of important terms
• Evaluate the components of fundamental insurance equation
• Discuss the complex steps in insurance rate making process
• Examine the considerations in the ratemaking and pricing process
1. Introduction
In a free market society, an entity offering a product for sale should try to set a price at
which the entity is willing to sell the product and the consumer is willing to purchase it.
Determining the supplier-side price to charge for any given product is conceptually
straightforward. The simplest model focuses on the idea that the price should reflect the
costs associated with the product as well as incorporate an acceptable margin for profit.
The following formula depicts this simple relationship between price, cost, and profit:
Price = Cost + Profit

This is however, true in case of a tangible product. It is also to be noted that for many non-
insurance goods and services, the production cost is known before the product is sold.
Therefore, the initial price can be set so that the desired profit per unit of product will be
achieved.
However, Insurance pricing is different from most products as it is a promise to do
something in the future if certain events take place during a specified time period. For
example, insurance may be a promise to pay for the rebuilding of a home if it is burnt or to
pay for medical treatment for a worker injured while on the job. Unlike a can of soup, a
pair of shoes, or a car, the ultimate cost of an insurance policy is not known at the time of
the sale. This places the classic equation in a somewhat different context and introduces
additional complexity into the process of price setting for an insurance company.
2. Rate Making
Rate making, also known as insurance pricing, has an important part to play in the overall
profitability of the company. Rate making involves the selection of classes of exposure
units on which statistics can be collected regarding the possibility of loss. The underwriter
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must think about all aspects before deciding on the pricing of a policy. The rates charged
must have the following basic characteristics –
• The rate must be high enough to pay for any expenses or losses incurred.
• The rate must not be too high.
• The rates must not be inequitable i.e. if two exposures are similar as far as losses
are concerned, they should not be charged significantly different rates.
• The system of rating must be simple and understandable so that premiums can be
quoted promptly.
• The rates must not keep fluctuating i.e. they must be stable. Otherwise rate
consumers may look to the government to regulate the rates.
• The rating system must provide the insured with a strong incentive to adopt loss
control.
• The rates must change with the changing economic conditions- rates must increase
when loss exposure increases.
(a) Rate making methods

There are three fundamental rate making methods in property and liability insurance. They
are as follows:
• Judgment rating method
This method is used when the loss exposures are so diverse that it is not possible to
calculate a class rate. Therefore, each exposure is individually evaluated and the rate
determined by the underwriter’s judgment. This method is frequently used in ocean marine
insurance because the vessels, ports, waters and cargo carried are very diverse.
• Class rating method
Under this method, exposures with similar characteristics are grouped together and
charged the same rate. This is based on the assumption that any future loss to the insured
will be decided by the same set of factors. Some of the major factors in life insurance are
age, health, gender etc. This method is also called manual rating because the rates are
published in a rating manual. There are two ways of determining the class rates:
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• The pure premium method

Pure premium (burning cost) is that part of the gross rate, which is utilised to pay losses
and adjustment expenses. It is calculated by dividing the amount of incurred losses and
loss-adjustment expenses by the number of exposure units. Incurred losses include all the
losses -whether paid or not -that occur at the end of the accounting period.
Incurred losses and loss-adjustment expenses
Pure premium =
Number of exposure units
The final step in this method is to add a loading for expenses, underwriting profit and a
margin for contingencies. The expense loading, also known as the expense ratio is that
proportion of the gross rate available for expenses and profit. The final gross rate is
arrived at by dividing the pure premium by 1 minus the expense ratio.
Pure premium
Gross rate =
1-Expense ratio
• The loss ratio method
Under this method, the actual loss ratio –which is the ratio of incurred losses and loss-
adjustment expenses to the earned premiums- is compared to the loss ratio that was
expected and the rate is adjusted accordingly. The loss ratio that is expected is the
percentage of the premiums that are expected to be used to pay losses.
Rate change = Actual loss ratio - Expected loss ratio
(b) Merit Rating method

Merit rating is a rating plan by which class rates (manual rates) are adjusted upwards or
downwards based on individual loss experience. It is based on the assumption that loss
experience will differ significantly from individual to individual. The types of merit rating
plans are:
(i) Schedule rating: Under this plan, each exposure is individually rated. A basis rate
is fixed for each exposure and this is then modified by debits or credits for undesirable or
desirable physical features. The physical characteristics of the exposure to be insured are
very important in this plan. Schedule rating is used in commercial property insurance such
as for industrial plants. These buildings are evaluated on the following criteria:
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• Physical features of the building – its height, the materials used to build it, the area
surrounding it, etc.
• It’s use i.e. what for the building is being utilised for. For example, presence of
inflammable materials will increase the risk of a fire.
• The protective devices set up in the building. Rate credits are given for the presence
of a fire alarm, sprinkler system etc.
• The building’s exposure – this refers to the likelihood of the building being damaged
from a fire in the adjacent buildings. The greater the exposure, the higher will be the
charges applied.
• The maintenance of the building – debits are applied for poor maintenance and
housekeeping.
(ii) Experience rating: Under this rating plan, the class or manual rate is adjusted
upward or downward based on past loss experience. The insured’s past loss experience is
the basis for fixing the premium for the next policy period. If this loss experience is better
than the average for the class as a whole, the class rate is reduced and vice versa. This
system is usually used only for larger firms with a high volume of premiums.
(iii) Retrospective rating: In retrospective rating, the insured’s loss experience during
the current policy period determines the actual premium paid for that period. There is a
minimum and a maximum premium. When losses are small, a minimum premium is paid
and when losses are large a maximum premium is paid. Large firms use this system in
general liability insurance, burglary and glass insurance, workers’ compensation insurance
and auto liability and physical damage insurance.
3. Rating Manuals
The price the insurance consumer pays is referred to as premium, and the premium is
generally calculated based on a given rate per unit of risk exposed. Insurance premium
can vary significantly for risks with different characteristics. The rating manual is the
document that contains the information necessary to appropriately classify each risk and
calculate the premium associated with that risk. The final output of the ratemaking process
is the information necessary to modify existing rating manuals or create new ones. The
earliest rating manuals were very basic in nature and provided general guidelines to the
person responsible for determining the premium to be charged. Over time, rating manuals
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have increased in complexity. For some lines, the manuals are now extremely complex
and contain very detailed information necessary to calculate premium. Furthermore, many
companies are creating manuals electronically in lieu of paper copies. Before,
understanding the complex process of insurance pricing and ratemaking, it is important to
be familiar with some basic insurance terminology used in the pricing process for better
understanding.
4. Basic Insurance Terms

(i) Exposure
An exposure is the basic unit of risk that underlies the insurance premium. The exposure
measure used for ratemaking purposes varies considerably by line of business. For
example, one house insured for one year represents one exposure for homeowners
insurance. Annual payroll in hundreds of rupees or dollars represents the typical exposure
unit for workers compensation insurance. There are four different ways that insurers
measure exposures: written, earned, unearned, and in-force exposures.
• Written exposures: Written exposures are the total exposures arising from policies
issued (i.e., underwritten or written) during a specified period of time, such as a
calendar year or quarter.
• Earned exposures: Earned Exposures represent the portion of the written
exposures for which coverage has already been provided as of a certain point in
time.
• Unearned exposures: Unearned exposures represent the portion of the written
exposures for which coverage has not yet been provided as of that point in time.
• In-force exposures: In-force exposures are the number of insured units that are
exposed to loss at a given point in time.
(ii) Premium
Premium is the amount the insured pays for insurance coverage. The term can also be
used to describe the aggregate amount a group of insured’s pays over a period of time.
Like exposures, there are written, earned, unearned, and in-force premium definitions.
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• Written premium: Written premium is the total premium associated with policies
that were issued during a specified period.
• Earned premium: Earned premium represents the portion of the written premium for
which coverage has already been provided as of a certain point in time.
• Unearned premium: Unearned premium is the portion of the written premium for
which coverage has yet to be provided as of a certain point in time.
• In-force premium: In-force premium is the full-term premium for policies that are in
effect at a given point in time.
(iii) Claim
An insurance policy involves the insured paying money (i.e., premium) to an insurer in
exchange for a promise to indemnify the insured for the financial consequences of an
event covered by the policy. If the event is covered by the policy, the insured (or other
individual as provided in the insurance policy) makes a demand to the insurer for
indemnification under the policy. The demand is called a claim and the individual making
the demand is called a claimant. The claimant can be an insured or a third party alleging
injuries or damages that are covered by the policy. The date of the event that caused the
loss is called the date of loss or accident date(also sometimes called occurrence date).
For most lines of business and perils, the accident is a sudden event. For some lines and
perils, the loss may be the result of continuous or repeated exposure to substantially the
same general hazard conditions; in such cases, the accident date is often the date when
the damage, or loss, is apparent. Until the claimant reports the claim to the insurer (i.e.,
the report date) the insurer is unaware of the claim.
Claims not currently known by the insurer are referred to as unreported claims or incurred
but not reported (IBNR) claims. After the report date, the claim is known to the company
and is classified as a reported claim. Until the claim is settled, the reported claim is
considered an open claim. Once the claim is settled, it is categorized as a closed claim. In
some instances, further activity may occur after the claim is closed, and the claim may be
re-opened.
(iv) Loss
Loss is the amount of compensation paid or payable to the claimant under the terms of the
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insurance policy. The actuarial community occasionally uses the terms ‘losses’ and
‘claims’ interchangeably. This text uses the term ‘claim’ to refer to the demand for
compensation, and ‘loss’ to refer to the amount of compensation. This terminology is more
common in ratemaking contexts, particularly as the loss ratio is one of the fundamental
ratemaking metrics. The terms associated with losses are paid loss, case reserve,
reported or case incurred loss, IBNR/IBNER reserve, and ultimate loss.
• Paid losses: Paid losses, as the name suggests, are those amounts that have been
paid to claimants. When a claim is reported and payment is expected to be made in
the future, the insurer establishes a case reserve, which is an estimate of the
amount of money required to ultimately settle that claim. The case reserve excludes
any payments already made. The amount of the case reserve is monitored and
adjusted as payments are made and additional information is obtained about the
damages.
• Reported loss: Reported loss or case incurred loss’ is the sum of the paid losses
and the ‘current case reserve’ for that claim. In other words Reported Losses = Paid
Losses + Case Reserve.
• Ultimate loss: Ultimate loss is the amount of money required to close and settle all
claims for a defined group of policies. The aggregate sum of reported losses across
all known claims may not equal the ultimate loss for many years. Reported losses
and ultimate losses are different for two reasons. First, at any point in time, there
may be unreported claims. The amount estimated to ultimately settle these
unreported claims is referred to as an incurred but not reported (IBNR) reserve.
Second, the accuracy of case reserves on reported claims is dependent on the
information known at the time the reserve is set; consequently, the reported losses
on existing claims may change over time.
The incurred but not enough reported (IBNER) reserve (IBNER is also known as
development on known claims) is the difference between the amount estimated to
ultimately settle these reported claims and the aggregate reported losses at the time
the losses are evaluated. Therefore, estimated ultimate loss is the sum of the
reported loss, IBNR reserve and IBNER reserve:
Estimated Ultimate Losses = Reported Losses + IBNR Reserve + IBNER
Reserve
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• Loss Adjustment Expense: In addition to the money paid to the claimant for
compensation, the insurer generally incurs expenses in the process of settling
claims; these expenses are called loss adjustment expenses (LAE). Loss adjustment
expenses can be separated into allocated loss adjustment expenses (ALAE) and
unallocated loss adjustment expenses (ULAE)
LAE = ALAE + ULAE

ALAE are claim-related expenses that are directly attributable to a specific claim; for
example, fees associated with outside legal counsel hired to defend a claim can be
directly assigned to a specific claim. ULAE are claim-related expenses that cannot
be directly assigned to a specific claim.
For example, salaries of claims department personnel are not readily assignable to a
specific claim and are categorized as ULAE.
(v) Underwriting Expenses

In addition to loss adjustment expenses (i.e., claim-related expenses), companies incur
other expenses in the acquisition and servicing of policies. These are generally referred to
as underwriting expenses (or operational and administrative expenses).
Companies usually classify these expenses into the following four categories:
• Commissions and brokerage
• Other acquisition
• General
• Taxes, licenses, and fees
Commissions and brokerage are amounts paid to insurance agents or brokers as
compensation for generating business. Typically, these amounts are paid as a percentage
of premium written. It is common for commissions to vary between new and renewal
business and may be based on the quality of the business written or the volume of
business written or both.
Other acquisition costs are expenses other than commissions and brokerage expenses
paid to acquire business. This category, for example, includes costs associated with media
advertisements and mailings to prospective insured’s.
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General expenses include the remaining expenses associated with the insurance
operations and any other miscellaneous costs. For example, this category includes costs
associated with the general upkeep of the home office. Depending on the purpose, LAE
can be separated into numerous different components. For example, statutory financial
reporting separates LAE into defense and cost containment (DCC) and adjusting and other
(A&O) expenses. Taxes, licenses, and fees include all taxes and miscellaneous fees paid
by the insurer excluding federal income taxes. Premium taxes and licensing fees are
examples of items included in this category.
(vi) Underwriting Profit

As mentioned earlier, the ultimate cost of an insurance policy is not known at the time of
the sale. By writing insurance policies, the company is assuming the risk that premium
may not be sufficient to pay claims and expenses. The company must support this risk by
maintaining capital, and this entitles it to a reasonable expected return (profit) on that
capital. The two main sources of profit for insurance companies are underwriting profit and
investment income. Underwriting profit, or operating income, is the sum of the profits
generated from the individual policies and is akin to the profit as defined in most other
industries (i.e., income minus outgo). Investment income is the income generated by
investing funds held by the insurance company.
5. Fundamental Insurance Equation

Earlier in the chapter, the basic economic relationship for the price of any product was
given as follows:
Price = Cost + Profit

This general economic formula can be tailored to the insurance industry using the basic
insurance terminology outlined in the preceding section. Premium is the “price” of an
insurance product. The ’cost’ of an insurance product is the sum of the losses, claim-
related expenses, and other expenses incurred in the acquisition and servicing of policies.
Underwriting profit is the difference between income and outgo from underwriting policies,
and this is analogous to the “profit” earned in most other industries. Insurance companies
also derive profit from investment income. Making those substitutions, the prior formula is
transformed into the following fundamental insurance equation:
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Premium = Losses + LAE + UW Expenses + UW Profit

The goal of ratemaking is to assure that the fundamental insurance equation is
appropriately balanced. In other words, the rates should be set so that the premium is
expected to cover all costs and achieve the target underwriting profit. Thus, a rate
provides for all costs associated with the transfer of risk.
There are two key points to consider in regard to achieving the appropriate balance in the
fundamental equation:
1. Ratemaking is prospective.
2. Balance should be attained at the aggregate and individual levels.
(i) Ratemaking is Prospective

As stated earlier, insurance is a promise to provide compensation in the event a specific
loss event occurs during a defined time period in the future. Therefore, unlike most non-
insurance products, the costs associated with an insurance product are not known at the
point of sale and as a result need to be estimated. The ratemaking process involves
estimating the various components of the fundamental insurance equation to determine
whether or not the estimated premium is likely to achieve the target profit during the period
the rates will be in effect.
It is a common ratemaking practice to use relevant historical experience to estimate the
future expected costs that will be used in the fundamental insurance equation; this does
not mean actuaries are setting premium to recoup past losses.
The principle in the “CAS Statement of Principles Regarding Property and Casualty
Insurance Ratemaking” states that “A rate is an estimate of the expected value of future
costs”. Historic costs are only used to the extent that they provide valuable information for
estimating future expected costs. When using historic loss experience, it is important to
recognize that adjustments will be necessary to convert this experience into that which will
be expected in the future when the rates will be in effect. For example, if there are
inflationary pressures that impact losses, the future losses will be higher than the losses
incurred during the historical period. Failure to recognize the increase in losses can lead
to an understatement of the premium needed to achieve the target profit.
There are many factors that can impact the different components of the fundamental
insurance equation and that should be considered when using historical experience to
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assess the adequacy of the current rates.

The following are some items that may necessitate a restatement of the historical
experience:
• Rate changes
• Operational changes
• Inflationary pressures
• Changes in the mix of business written
• Law changes
The key to using historical information as a starting point for estimating future costs is to
make adjustments as necessary to project the various components to the level expected
during the period the rates will be in effect. There should be a reasonable expectation that
the premium will cover the expected losses and expenses and provide the targeted profit
for the entity assuming the risk.
(ii) Overall and Individual Balance

When considering the adequacy or redundancy of rates, it is important to ensure that the
fundamental insurance equation is in balance at both an overall level as well as at an
individual or segment level. Equilibrium at the aggregate level ensures that the total
premium for all policies written is sufficient to cover the total expected losses and
expenses and to provide for the targeted profit. If the proposed rates are either too high or
too low to achieve the targeted profit, the company can consider decreasing or increasing
rates uniformly. In addition to achieving the desired equilibrium at the aggregate level, it is
important to consider the equation at the individual risk or segment level. Principle 3 of the
CAS “Statement of Principles Regarding Property and Casualty Insurance Ratemaking”
states: “A rate provides for the costs associated with an individual risk transfer” (CAS
Committee on Ratemaking Principles, p. 6). A policy that presents significantly higher risk
of loss should have a higher premium than a policy that represents a significantly lower
risk of loss. For example, in workers compensation insurance an employee working in a
high-risk environment (e.g., a steel worker on high-rise buildings) is expected to have a
higher propensity for insurance losses than one in a low-risk environment (e.g., a clerical
office employee). Typically, insurance companies recognize this difference in risk and vary
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premium accordingly. Failure to recognize differences in risk will lead to rates that are not
equitable.
6. Rate Making Process

Rate making is the determination of what rates, or premiums, to charge for insurance.
A rate is the price per unit of insurance for each exposure unit, which is a unit of liability or
property with similar characteristics. For instance, in property and casualty insurance, the
exposure unit is typically equal to $100 of property value, and liability is measured in
$1,000 units. Life insurance also has $1000 exposure units. The insurance premium is the
rate multiplied by the number of units of protection purchased.
Insurance Premium = Rate × Number of Exposure Units Purchased

The difference between the selling price for insurance and the selling price for other
products is that the actual cost of providing the insurance is unknown until the policy
period has lapsed. Therefore, insurance rates must be based on predictions rather than
actual costs. Most rates are determined by statistical analysis of past losses based on
specific variables of the insured. Variables that yield the best forecasts are the criteria by
which premiums are set. However, in some cases, historical analysis does not provide
sufficient statistical justification for selling a rate, such as for earthquake insurance. In
these cases, catastrophe modeling is sometimes used, but with less success. Actuaries
set the insurance rate based on specific variables, while underwriters decide which
variables apply to a specific insurance applicant.
Because an insurance company is a business, it is obvious that the rate charged must
cover losses and expenses, and earn some profit. But to be competitive, insurance
companies must also offer the lowest premium for a given coverage. Moreover, all States
have laws that regulate what insurance companies can charge, and thus, both business
and regulatory objectives must be met.
The primary purpose of rate making is to determine the lowest premium that meets all of
the required objectives. A major part of rate making is identifying every characteristic that
can reliably predict future losses, so that lower premiums can be charged to the low risk
groups and higher premiums charged to the higher risk groups. By offering lower
premiums to lower risk groups, an insurance company can attract those individuals to its
own insurance, lowering its own losses and expenses, while increasing the losses and
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expenses for the remaining insurance companies as they retain more of the higher risk
pools. This is the reason why insurance companies spend money on actuarial studies with
the objective of identifying every characteristic that reliably predicts future losses.
Note that both the rate making and the underwriting must be accurate. If the rate is
accurate for a particular class, but the underwriter assigns applicants who do not belong to
that class, then that rate may be inadequate to compensate for losses. On the other hand,
if the underwriting is competent, but the rate is based on an inadequate sample size or is
based on variables that do not reliably predict future losses, then the insurance company
may suffer significant losses.
The pure premium, which is determined by actuarial studies, consists of that part of the
premium necessary to pay for losses and loss related expenses.
Loading is that part of the premium which is necessary to cover other expenses,
particularly sales expenses, and to allow for a profit.
The gross rate is the pure premium and the loading per exposure unit and the gross
premium is the premium charged to the insurance applicant, and is equal to the gross rate
multiplied by the number of exposure units to be insured.
The ratio of the loading charge over the gross rate is the expense ratio.
Pure Premium = Total Amount of Losses Incurred per year/Number of Exposure
Units
Example: an average loss of Rs. 1 million per year per 1000 automobiles yields the
following pure premium:
Pure Premium = Rs. 1,000,000 / 1000 = Rs. 1000 per Automobile per Year
Gross Rate = Pure Premium + Load
The loading charge consists of the following:
• commission and other acquisition expenses
• premium taxes
• general administrative expenses
• contingency allowances
• profit
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Loading charges are often expressed as a proportion of premiums, since they increase
proportionately with the premium, especially commission and premium taxes. Hence, the
loading charge is often referred to as an expense ratio. Therefore, the gross rate is
expressed as a percentage increase over the pure premium:
Pure Premium
Gross Rate =
1 – Expense Ratio
Example: If the premium is Rs.600 and the expense ratio is 40%, then:
Gross Rate = Rs. 600 / (1 – 0.4) = Rs.600/0.6 = Rs. 1000
Gross Premium = Gross Rate x Number of Exposure Units
Expense Ratio = Load / Gross Rate
Other business objectives in setting premiums are:
(a) simplicity in the rate structure, so that it can be more easily understood by the
customer, and sold by the agent;
(b) responsiveness to changing conditions and to actual losses and expenses; and
(c) encouraging practices among the insured that will minimize losses.
The main regulatory objective is to protect the customer. A corollary of this is that the
insurer must maintain solvency in order to pay claims. Thus, the 3 main regulatory
requirements regarding rates are :
1. they must be fair compared to the risk;
2. premiums must be adequate to maintain insurer solvency; and
3. premium rates are not discriminatory—the same rates should be charged for all
members of an underwriting class with a similar risk profile.
Although competition would compel businesses to meet these objectives the States want
to regulate the industry enough so that fewer insurers would go bankrupt, since many
customers depend on insurance companies to avoid financial calamity.
The main problem that many insurers face in setting fair and adequate premiums is that
actual losses and expenses are not known when the premium is collected, since the
premium pays for insurance coverage in the immediate future. Only after the premium
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period has elapsed, will the insurer know what its true costs are. Larger insurance
companies have actuarial departments that maintain their own databases to estimate
frequency and the dollar amount of losses for each underwriting class, but smaller
companies rely on advisory organizations or actuarial consulting firms for loss information.
7. Rate Making for Property and Liability Insurance

Rates for most insurance is determined by a class rating or an individual rating. Individual
rating includes judgment rating and merit rating. Merit rating can be further classified as
schedule rating, experience rating, and retrospective rating. Individual rates depend on the
individuals whereas class rates depends on the underwriting class of the insured.
Individual rates are often calculated as a modification of a base class rate.
All insurance rates could be class rates, where the insurance company simply adjusts the
premium to reflect the losses of the entire class. However, some insurance companies will
identify lower risk groups within the class, then offer them lower premiums to grab market
share. This, in turn, raises losses for the insurance company offering a class rating,
forcing it to subdivide its own class, and offering different premiums that reflect the losses
within those subgroups, eventually leading, with enough refinement of the subgroups, to
individual rates. However, class rates remain for those risk groups that are more
homogeneous, without identifiable subgroups of lower or higher risk.
(a) Class Ratings

Class rating is used when the factors causing losses can either be easily quantified or
there are reliable statistics that can predict future losses. These rates are published in a
manual, and so the class rating method is sometimes called a manual rating. The class is
defined through statistical studies as a group with specific characteristics that reliably
predict the insured losses of that group. A class rating must be applied to a rate class that
is large enough to reliably forecast losses through statistical analysis but small enough to
maintain homogeneity so that the premium covers the loss exposure and is competitive for
each member of the class.
Class ratings are often used in pricing insurance products — mostly life insurance and
product and liability insurance — sold to the consumer because there are copious
statistics and a large enough population of similar situations that make class ratings
effective. It also allows agents to give an insurance quote quickly.
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There are two methods to determine a class rated premium or to adjust it.
In the pure premium method, the pure premium is first calculated by summing the losses
and loss-adjusted expenses over a given period, and dividing that by the number of
exposure units. Then the loading charge is added to the pure premium to determine the
gross premium that is charged to the customer.
Actual Losses + Loss-Adjusted Expenses
Pure Premium =
Number of Exposure Units
Gross Premium = Pure Premium + Load

The loss ratio method is used more to adjust the premium based on the actual loss
experience rather than setting the premium. The loss ratio is the sum of losses and loss-
adjusted expenses over the premiums charged.
If the actual loss ratio differs from the expected loss ratio, then the premium is adjusted
according to the following formula:
Loss Ratio Method for Adjusting Premiums for a Class Rating

Actual Loss Ratio – Expected Loss Ratio
Rate Change =
Expected Loss Ratio
(b) Individual Ratings

Individual ratings are used when many factors are used to predict the losses and those
factors vary considerably among individuals. Additionally, individuals can exercise loss
control measures that will reduce losses, so those individuals will pay a lower premium.
Judgment ratings are used when the factors that determine potential losses are varied and
cannot easily be quantified. Because of the complexity of these factors, there are no
statistics that can reliably assess the probability and quantity of future losses. Hence, an
underwriter must evaluate each exposure individually, and use intuition based on past
experience. This rating method is predominant in determining rates for ocean marine
insurance, for instance.
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(c) Merit Ratings

A merit rating is based on a class rating, but the premium is adjusted according to the
individual customer, depending on the actual losses of that customer. Merit ratings often
determine the premiums for commercial insurance and for car insurance, and, in most of
these cases, the customer has some control over losses—hence, the name. Merit ratings
are used when a class rating can give a good approximation, but the factors are diverse
enough to yield a greater spread of losses than if the composition of the class were more
uniform. Thus, merit ratings are used to vary the premium from what the class rating would
yield based on individual factors or actual losses experienced by the customer. Merit
ratings are determined by 3 benefits: schedule rating, experience rating, and retrospective
rating.
(d) Schedule Ratings

Schedule rating uses a class rating as an average base, then the premium is adjusted
according to specific details of the loss exposure. Some factors may increase the premium
and some may decrease it—the final premium is determined by adding these credits and
debits to the average premium for the class. For example, schedule rating is used to
determine premiums for commercial property insurance, where such factors as the size
and location of the building, the number of people in the building and how it is used, and
how well is it maintained are considered.
(e) Experience Ratings

Experience rating uses the actual loss amounts in previous policy periods, typically the
prior 3 years, as compared to the class average to determine the premium for the next
policy period. If losses were less than the class average, then the premium is lowered, and
if losses were higher, then the premium is raised.
The adjustment to the premium is determined by the loss ratio method, but is multiplied by
a credibility factor to determine the actual adjustment. The credibility factor is the reliability
that the actual loss experience is predictive of future losses. In statistics, the larger the
sample, the more reliable the statistics based on that sample. Hence, the credibility factor
is largely determined by the size of the business—the larger the business, the greater the
credibility factor, and the larger the adjustment of the premium up or down. Because the
credibility factor for small businesses is small, they are not generally eligible for
experience rated adjustments to their premiums.
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Loss Ratio Method for Adjusting Premiums for an Experience Rating

Actual Loss Ratio – Expected Loss Ratio
Rate Change = × Credibility Factor
Expected Loss Ratio
Example: Adjusting Premiums for an Experience Rating
Actual Loss Ratio 16%

Expected Loss Ratio 20%
Credibility Factor 0.25
Rate charge 5.0 Actual Loss Ratio – Expected Loss Ratio
= * Credibility Factor
% Expected Loss
To increase credibility, insurers will sometimes observe losses over several years, but
taking observations over a longer period of time may be less accurate because some
variables affecting losses may have changed. To improve forecasts based on longer time
periods, the insurer may give greater weight to later years than earlier years, or a trend
factor may be used, based on average claim payments, inflation, or some other factor that
may affect the insurance company’s exposure.
Experience rating is typically used for general liability insurance, workers compensation
and group insurance. It is also extensively used for auto insurance, including personal
auto insurance, because losses obviously depend on how well and how safely the insured
drives.
(f) Retrospective Ratings

Retrospective rating (retro plan) uses the actual loss experience for the period to
determine the premium for that period, limited by a minimum and a maximum amount that
can be charged. Part of the premium is paid at the beginning, and the other part — the
retrospective premium — is paid at the end of the period, the amount of which is
determined by the actual losses for that period. Retrospective rating is often used when
schedule rating cannot accurately determine the premium and where past losses are not
necessarily indicative of future losses, such as for burglary insurance. The retrospective
premium is based on a base insurance rate, modified by the actual losses in the period, a
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charge for the loss adjustment, and state premium taxes. Businesses often choose retro
rating plans for general liability, workers compensation, and group health insurance. This
is a typical formula for calculating the retrospective premium for workers compensation:
Retrospective Rating Formula
Retrospective Premium = [Basic Premium + (Ratable Losses × Loss Conversion Factor)] ×
Premium Tax Multiplier
The loss conversion factor is expressed as a percentage of the ratable losses. This
percentage is added to 1, then multiplied by the amount of losses during the retrospective
period. Likewise, the premium tax multiplier is a percentage of the premiums charged, so
the premium tax percentage is added to 1 before multiplying it by the total premium.
Therefore if the loss adjustment expenses equals 10% of the losses, then the loss
conversion factor = 1 + 10% = 1.1. If the premium tax is 4% of the premiums charged,
then the premium tax multiplier = 1 + 4% = 1.04.
(g) Book Rate Theory (Technical Pricing)

In theory a book rate is built up as follows:
Profit
Expenses
Reinsurance cost Book Rate
Commission
Pure risk
A pure risk premium is a quantitative assessment of the liability of the risk. The technical
pricing relies on the insurer having quality statistical information, based on historical loss
details and exposure information, collated at market level or intra – company e.g. national
fire statistics, weather records, crime statistics etc. from a comparison of loss experience
over a period of time, compared to exposure at risk over the same period, a technical rate
can be identified, which can then be adjusted for expenses, commission, a small level of
profit etc. This will be converted to produce a rate per cent or per mille on sums insured,
wage roll or turnover etc. depending upon the type of risk and type of policy as also based
on the level or rate required for the average risk. Such a rate is called “Book Rate”.
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(h) Burning Cost Ratings

This method is easier, as this is a retrospective rating and considerable care is needed if it
is to be used as a guide for future performance. However, it is an acceptable pricing
mechanism for some types of reinsurance, where the previous year is being priced in
arrears. Less reliable is its use for rating in individual cases, particularly in liability.
Basically, in the calculation of burning cost rating method the underwriter:
• identifies the last five years’ claims experience
• divides that by 5 to get the average
• adjusts that for any special circumstances, e.g. inflation
• identifies the total exposure for the equivalent
• divide by 5 to get the average
• divide the average claims by the average exposure.
Adjustments should be made -
1. in turnover and / or wage figures and the loss experience for acquisitions or
disposals, that are or are no longer a feature of the risk going forward
2. changes in the Limit of Liability if it impacts claims
3. claims that may have been excluded in certain years but paid in others.
The burning cost rating method may be of use where the technical guide rate may not be
appropriate as the sole method of premium calculation, such as when
• The risk is a diversified industrial or conglomerate one
• Where the claims experience produces an inconsistent result over a minimum of 5
years (excluding current year)
Following Additional information are required to complete a burning cost calculation :
• Claims experience split between claims paid and claims outstanding
• Turnover or wages
• Previous insurer (s) for each of the past five years
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(i) Rate on Line Ratings

This rating method should be used to reflect the price per million, in local currency, applied
to a limit of indemnity, or to reflect premium needed for a period of years to cover the cost
of the limit(s) provided. It is primarily used for accounts, which reveal characteristics of
high severity/low frequency potential and risks with high limits of indemnity. It is
inappropriate for smaller risks as it takes no account of exposure.
Example
A percentage, derived by dividing the premium by limit. For example, a Rs.100 crores
catastrophe cover with a premium of Rs. 2. crores would have a rate on line of 2 %.
8. Operational Premium Issues

Rating the Policy
Having built a technical rate, we can apply it in an operational environment. This can be
done by incorporating and preparing underwriting manuals with sections on the primary
rating base.
Examples of these are likely to be as follows:
Insurance Exposure Classification code Additional rating /
underwriting features
Fire Insurance Rate % or per mille on The individual risks will Construction, Fire
Buildings/ Contents be divided by trade Extinguishers,
Sum Insured (often on and ideally by sub- Undivided floor
reinstatement basis process spaces. Deductible,
ex-stock) etc.
Business Rate % or per mille on The individual risks will In addition to those
Interruption Gross Profit Sum be divided by trade following the fire rate,
insured (often in we will have
reinstatement basis) adjustments for
indemnity period
Burglary Rate % or per mille on The individual risks will Security i.e Burglary
Contents Sum Insured be divided by trade alarms, other security
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devices, etc. discounts

for larger risks,
Deductibles etc.
Third Party Rate per mille on The individual risks will Adjusted for Limit of
turnover or rate % on be divided by trade Indemnity,
wage roll where and ideally by sub- Deductibles. Etc.
manual work at third process
party permises
Products Rate per mille on The separate product Adjusted for Limit of
Liability turnover risks will be divided by Indemnity: US&
trade Canada exposures
attract loadings.
9. Considerations for Ratemaking and Pricing

Some factors that influence the process of ratemaking include:
1. Management Expenses: As mentioned earlier, these expenses are those which an
insurer will have to incur as he runs the business and include salaries, travel and
accommodation, office expenses etc.
2. Commissions: This is particularly relevant in the corporate insurance market which
globally tends to use professional brokers as distributional channels. Insurance
products are not customized and hence it requires tailoring and customization.
Commissions can range upto 17.5 % as of now in India.
3. Claims expenses: In addition to paying out claims, the claims department has to
incur some expenses in handling claims that include use of expert witness,
qualified surveyors etc.
4. No Claims Bonus / Malus: In motor insurance covers, there is a recognized scale
of discounts for risks with no claims or limited claims – a No claims Bonus. This is
used in many countries to encourage the insured to drive carefully and if there is a
small claim, to consider treating that as “self insured” rather than jeopardizing his no
claim bonus, which can be substantial after 4 years of claims free driving. A per the
Indian practice, when the insurer settles a claim, the insured losses all previously
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accumulated No Claim Bonus. However, he can again continue to earn no claim

bonus for claims free years at subsequent renewals.
5. Loading / Malus: There is also a reverse scenario where insurers load the
premiums as per a published schedule when the claims experience is bad. Such
loading of premium when the claims experience is poor is known as Loading /
Malus. Conditions when such loadings are done and the amount of loading are
disclosed in advance In other words, it means that the policy document makes a
mention of the conditions, when the premium would be loaded, and this is intimated
to the policyholder in advance. In many countries, certain caps are imposed on the
loading. Indian Motor Insurance, for instance, caps some loadings at 100% and
some types of loadings at 200%.
6. Trends: As cited earlier, the insurer needs to collate the historical information
relating to losses / claims and exposures. However, it is critical that notice is taken
of trends – past, present, and future that will affect the assumptions coming from
these statistics. This should be done in a structural format and there are a number of
areas that need to be considered by the portfolio underwriters.
Some of these indicators or trends can be :
(i) Inflation: In certain classes, the claims costs and exposures will not be consistent
as regards inflationary impact. For example, hotels may be rated on the number of
bedrooms as regards the Public Liability Risk – rejected claims experience should
take into account inflationary changes.
(ii) Political environment: Changes in the political landscape can change a country or
a part of the country from a high hazard (crime risks) to a low hazard over a
relatively short period of time and vice versa. Moreover, issues such as terrorism
have significantly increased over the past 20 years.
(iii) Technology: Over the last 2 decades, technology has vastly improved the safety
standards in many industries, by reducing manual interventions. For example,
Printing industry has introduced computerized presses, and just-in-time strategy ,
improving fire risks safety.
(iv) Legal changes: Changes in the legal environment and litigation costs can change
significantly the claims costs and payouts.
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(v) Attractiveness: Items such as mobile phones, Laptops are attractive in the first
year but with the falling prices and greater availability move them into commodity
areas and relatively unattractive mode in comparison.
(vi) Miscellaneous: These include climatic changes, global warming and their likely
impact on flood risks etc.
SUMMARY
• Pricing is critical to the success of any insurance venture.
• Underwriting profits should be a consistent target.
• The basic pricing element comprises of amount of premiums in & claims paid out,
which leads to pure premium.
• Pure premium needs adjustment for all the working expenses and normal outgoings
of any insurer.
• Technical rate and book rate are critical for long term underwriting profits.
• Operational premium issues include rating, catastrophe loading and commercial
discounting.
• Insurance pricing is different from most products as it is a promise to do something
in the future if certain events take place during a specified time period.
• The price the insurance consumer pays is referred to as premium, and the premium
is generally calculated based on a given rate per unit of risk exposed.
• The goal of rate making is to assure that the fundamental insurance equation is
appropriately balanced.
• “A rate is an estimate of the expected value of future costs”.
• Historic costs are only used to the extent that they provide valuable information for
estimating future expected costs.
• Rate making is the determination of what rates, or premiums, to charge for
insurance. A rate is the price per unit of insurance for each exposure unit, which is a
unit of liability or property with similar characteristics.
• Rates for most insurance is determined by a class rating or an individual rating.
Individual rating includes judgment rating and merit rating.
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• Merit rating can be further classified as schedule rating, experience rating, and
retrospective rating.
• Some factors that influence the process of rate making include Management
Expenses, Commissions, Claims expenses, Bonus and Malus.
REVISION QUESTIONS
1. 2000 factories require a Sum Insured of Rs.10 crores each. Statistically, we know
that 2 factories get destroyed by fire each year, but we do not know which two if
the losses are to be paid for by all of the 2000 factory owners, what should be the
contribution by each factory owner by way of pure premiums?
(a) Rs. 75,000 (b) Rs. 1, 00,000
(c) Rs. 2, 00,000 (d) Rs. 3,00,000
2. Which of the following does not form a part of “Book” price calculation?
(a) Claims Costs (b) Management Expenses
(c) Commission (d) Investment income
3. When we look at claims trends, we look at a number of factors. Which of the
following factor is not to be considered:
(a) Inflation (b) Technology
(c) Legal changes (d) Exposures
4. If the total premium is Rs.50,000 and the Limit of Liability is Rs. 20,000,000, what
is the rate of line?
(a) 2.5 % (b) 0.25%
(c) 4 % (d) 0.4%
5. When insurance companies undercut each other to grab the market share by
reducing premium, it is known as
(a) Soft market (b) Hard market
(c) Competitive market (d) None of the above
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6. “The Loss lighteth rather easily upon the many than heavily upon the few” –[ The
English Act of Parliament in 1601 It is the Act of the English Parliament, 1601.
What does it best sum up?
(a) Concept of insurance pooling
(b) Concept of responsible underwriting
(c) The need for more insurance companies
(d) The need for more claims handling
7. Which of the following is the correct definition of ‘pure premium’?
(a) Total amount of claims incurred per year divided by the number of exposure units
(b) Total amount of claims divided by premium
(c) Total premium divided by the total claims
(d) Total premium divided by the number of exposure units
8. Within the calculation of technical pricing there are a number of future trends the
underwriter needs to consider. Which one of the following is incorrect?
(a) Inflation (b) Claims made during the year
(c) Technology (d) Legal changes
9. Which of the following is unlikely to be a rating underwriting factor in Fire
Insurance?
(a) Construction (b) Fire Extinguishers
(c) Building Security (d) Deductible
10. The claims loading applied to a policy is known as:_
(a) Claims Bonus (b) Claims Malus
(c) Claims Fides (d) Claims Minus
Answers
1. (b) 2. (d) 3. (d) 4. (b) 5. (a) 6. (a) 7. (a) 8. (b) 9. (c) 10. (b)
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CHAPTER – 11
GENERAL INSURANCE CLAIMS
1. Introduction
2. What is a Claim?
3. Common Practice for Claims Processing
4. Post Settlement Action
5. Recoveries
6. Salvage
7. Loss Minimization and Salvage
8. Modes of Settlement (Liability Insurance)
9. Claims Recoveries
10. In House Settlements
11. Illustrations
12. Protection of Policyholders’ Interests Regulations, 2017
13. Summary
14. Questions
After completion of the Chapter, the Student shall be able to
• Describe the intricacies involves in a general insurance claim
• Explain the common practices followed in general insurance claims processing
• Evaluate the different stages involved in settlement of claims
• Examine the post settlement activities and actions
• Explain the processes for recoveries and salvage instituted by the insurer
• Describe the provisions for in-house settlements of claims
1. Introduction
The settlement of claims constitutes one of the important functions in an insurance
organization. Indeed, the payment of claims may be regarded as the primary service of
insurance to the public. It is the purpose for which an insurance contract is entered into.
The proper settlement of claims requires a sound knowledge of the law, principles and
practices governing insurance contracts in particular, a thorough knowledge of the terms
and conditions of the standard policies and various extensions and modifications
thereunder.
In addition, the prompt and fair settlement of claims is the hallmark of good service to the
insuring public. A company’s claims service is therefore the principal point of service as
regards the insured. Failure in this area can cause irreparable damage to the insurance
company’s reputation and lead to loss of valued customers and even lead to law suits
being filed against the company. It is equally important that claims negotiations should be
on the basis of patience, tact and courtesy.
Before understanding the process and methods of settlement, it is important to understand
the following:
2. What is a claim?
Definition: A claim is a notification to an insurance company requesting the payment of an
amount, on the happening of a specified event, under the terms of the policy.
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The payment of a claim is the primary reason why the insurer is in the business. Insurance
is an unusual industry compared to most of the industries. In insurance business, nothing
other than a policy document and a promise to pay an insured claim is given to the
customer when he hands over his or her premium.
A claim is a right to receive the amount secured under the policy of insurance contract.
The benefits:
(i) For the individual, peace of mind that the property and liabilities are insured.
(ii) For the corporate, the satisfaction in knowing that the risks to the balance sheet are
taken care of.
Therefore, it is the duty of the insurer to satisfy both the above bye fair and equitable
handling of a claim should an insured contingency arise.
As a general rule, claims incurred constitute the largest cost for an insurer. Out of every
Rs.100 that an insurer receives as premium, he is likely to pay out Rs. 65 or more to settle
claims, the balance of Rs.35 being required for covering other expenses such as
commissions, management expenses etc.
Obviously, on the happening of the event, the insured suffers financial loss, which he or
she puts forth for compensation before the insurer.
3. Common Practice for Claims Processing

The procedure in respect of claims under various classes of insurance is a common
pattern and may be considered under three broad headings –
1. Preliminary stage
2. Investigation stage
3. Settlement stage
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3.1 Preliminary Procedure Stage

(i) Notice of Loss
It is most essential that insurers receive early notification of the loss. The time limits within
which notice of loss shall be given by the insured are provided for in policy conditions.
Some policies provide for immediate or forthwith notification whereas others require
notice to be given as early as practicable after the loss. The purpose of an immediate
notice condition is to allow the insurer to investigate a loss at its early stages. It would also
enable the insurer to suggest measures to minimize the loss and to take steps to protect
salvage.
Undue delay in notification would adversely affect the insurers position. Therefore, non-
compliance with these provisions will relieve the insurer of liability if the non- compliance
materially affects the insurers position. Whether there is delay in notification or not or
whether the delay is material will be ultimately decided by the Courts based on the facts of
individual cases.
The notice of loss condition in liability policies provides for two aspects:
1. notification of the happening of the accident immediately, followed by
2. notification of the receipt of claim or suit filed against the insured.
Under certain types of policies (e.g. Burglary) notice is also to be given to police
authorities.
(ii) Loss Minimization
At Common law, there is a duty on the part of the insured to observe good faith during the
currency of the policy, especially when a loss occurs.
This duty of good faith means that, at all times, the insured has to act as if he is uninsured.
When a loss occurs it is the legal duty of the insured to do his utmost to minimize the loss.
(iii) Procedural issues
On receipt of intimation of loss or damage insurers check that:
1. the policy is in force on the date of occurrence of the loss or damage;
2. the loss or damage is by a peril insured by the policy;
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3. the subject matter affected by the loss is the same as is insured under the policy;
4. notice of loss has been received without undue delay.
After this check up the loss is allotted a number and entered in the Claims Register. A
separate file is opened for the claim with a copy of the policy, or relevant extracts thereof
filed with the claim papers. Thereafter, a claim form is issued to the insured.
(iv) Claim Forms
The contents of the claim form vary with each class of insurance. In general the claim form
is designed to elicit full information regarding the circumstances of the loss, such as date
of loss, time, cause of loss, extent of loss, etc.
The other questions vary from one class of insurance to another. For example, motor
claim form provides for a rough sketch of the accident, burglary claim form contains a
question regarding notification to the police; where the insurance is subject to pro-rata
average a question is asked on the values of the property at the time of loss. In those
classes of policies which are contracts of indemnity, a question is asked to ascertain the
other policies held by the insured covering the same subject matter and whether any third
party was responsible for the loss. This information is necessary to enforce contribution
and subrogation.
The issue of a claim form does not constitute an admission of liability on the part of the
insurers. The insurers make this position very clear by making a remark on the form to that
effect. All letters that the insurers send to the insured in connection with the claim are also
sent without prejudice to their rights and hence they carry the remark without prejudice.
These words are intended to make it clear that although the insurers are engaged in
correspondence and processing of the loss, the question of liability under the policy is left
open. Thus claim forms are issued without prejudice, which means that by the issue of the
claim form liability is not admitted under the policy. Claim forms are invariably used in fire
and accident insurance. They are not used in marine insurance except in respect of inland
transit claims. (The practice varies)
3.2 Investigation and Assessment Stage

On receipt of the claim form duly completed from the insured, the insurers decide about
investigation and assessment of the loss. If the loss is small, the investigation to
determine the cause and extent of loss is done by an Officer of the insurers (upto
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Rs.20,000). Sometimes even this may be waived and the loss settled on the basis of the
claim form only.
(a) Appointment of Surveyor
The investigation of larger or complicated claims is entrusted to independent
professional surveyors who are specialists in their line. The practice of assessment of loss
by independent surveyors is based on the principle that since both the insurers and
insured are interested parties, the opinion of an independent professional person should
be acceptable to both the parties as well as to a court of law in the event of any dispute.
The appointment of a surveyor is intimated to the claimant. The surveyor is furnished with
all relevant claim papers such as claim form, copy of policy, etc. However, many a times,
surveyor is appointed and survey is carried out immediately on receipt of notice of loss,
that is, even before claim form could be issued.
Section 64UM of the Insurance Act provides that no claim in respect of a loss which has
occurred in India and requiring to be paid or settled in India equal to or exceeding
Rs.20,000 on any policy of insurance shall be admitted for payment or settled by the
insurer unless he has obtained a report on the loss from a person who holds a license to
act as a Surveyor or Loss Assessor.
Under the provisions of the Insurance Act as amended by the Amendment Act of 1968 a
Surveyor and Loss Assessor is required to hold a valid license issued by the Controller of
Insurance. The license is valid for a period of five years and is granted subject to
submission of application form and payment of fee as prescribed under the Act.
(b) Claims Documents
In addition to the claim form, independent survey report etc., certain documents are
required to be submitted by the claimant or secured by the insurers to substantiate the
claim. For example, for fire claims, a report from the Fire Brigade is obtained; in burglary
claims, a report from the Police; for Workman’s Compensation Fatal Claims a report from
the Coroner, Police report and post mortem report; for motor claims; driving license,
registration book, police report etc.
In marine cargo claims, the nature of documents varies according to the type of loss i.e.,
total loss, particular average, inland transit claims etc. For example, the documents
required for total loss claims are the following
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(a) Original Policy

(b) Invoice
(c) Bill of Lading
(d) Bill of Entry
(e) Copy of Protest, i.e., statement made by the Captain of the Vessel on the loss
before a
(i) Notary Public (if relevant)
(ii) Non-delivery or short landing certificate (if relevant)
(iii) Landed but missing certificate (if relevant)
(iv) Letter of subrogation and Power of Attorney, Notice of loss to the carrier under
section 10 (Carriers Act) correspondence exchanged with Carriers, Port Trust
etc. regarding claims filed against them.
Under the Evidence Act 1872 and Civil Procedure Code, 1908 all the above documents
should be in original and not copies; otherwise, no recovery is possible.
(c) Arbitration
Arbitration is distinct from litigation and is a method of settling disputes under contract in
accordance with the Arbitration and Conciliation Act, 1996.
The normal method of enforcing a contract or settling of dispute thereunder is an action in
a court of law. Litigation, however, involves considerable delay and expense. The
Arbitration Act allows the parties to submit disputes under a contract to the more
informal, less costly and private process of arbitration. Fire and most accident policies
contain an arbitration condition which provides for settlement of differences by arbitration.
There is no arbitration condition in marine insurance policies.
According to the Arbitration condition in the fire policies, if the liability under the policy is
admitted by the company, and there is a difference concerning quantum to be paid, such a
difference must be referred to the arbitration, in terms of the Arbitration and Conciliation
Act, 1996.
The procedure in arbitration is along the following lines. The dispute is submitted to the
decision of a single arbitrator to be appointed by the parties, or in the event of any
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disagreement between them to the decision of two arbitrators one each appointed by the
parties. These two arbitrators appoint an umpire, who presides at the meetings. The
procedure during these meetings resembles that of a court of law. Each party states his
case, if necessary with the help of a counsel and witnesses are examined. If the two
arbitrators do not agree on a decision, the matter is submitted before the umpire, who
makes his award. Costs are awarded at the discretion of the arbitrator/arbitrators or
umpire making the award.
Policy conditions provide for limitation to apply to claims. For example, the fire policy
provides that in no case whatsoever shall the Company be liable for any loss or damage
after the expiration of 12 months from the happening of the loss or damage unless the
claim is subject to pending action or arbitration; it being expressly agreed and declared
that if the Company shall disclaim liability for any claim hereunder and such claim shall not
within 12 calendar months from the date of the disclaimer have been made the subject
matter of a suit in a court of law then the claim shall for all purposes be deemed to have
been abandoned and shall not thereafter be recoverable hereunder.
3.3 Settlement Stage

The claim is processed on the basis of:
(i) the claim form;
(ii) Independent report from surveyors, legal opinion, medical opinion, etc., as the
case may be;
(iii) Various documents furnished by the insured; and
(iv) any other evidence secured by the insurers
(v) Final & full satisfaction discharge is a must. Otherwise claimant can go to court for
payment of additional amounts after realizing the claim cheque. There are many
decisions saying that the discharge voucher was obtained by the insurer due to
misrepresentation, undue influence, etc.
If the claim is in order, settlement is effected by cheque. The payment is entered in the
claims register as well as in the relevant policy record. Appropriate recoveries are made
from the co-insurers, if any.
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Before effecting payment, it is essential to decide whether the claimant is entitled to

receive the claim monies. For example for payment of fatal claim under personal accident
insurance, probate or letters of administration or succession certificates have to be
produced by legal heirs. If the property insured under a fire policy is mortgaged to the
bank, then according to the agreed bank cause, claim monies are to be paid to the bank,
whose receipt will be a complete discharge to the insurers. Similarly claims for Total Loss
on vehicles subject to hire purchase agreements are paid to financiers. Marine cargo
claims are paid to the claimant who produces the marine policy duly endorsed in his
favour.
Once agreement is reached on quantum etc., the claim will be settled accordingly. This
could be done by cheque or it could be through a number of other formats such as:
(i) Claim payments: Payment of claims forms a part of processing of claims which is
an important managerial function of the claims department of the insurance company or
the insurer. Depending on the managerial decision to pay the claim under the insurance
obligation of the insurer, the payments of claim may be of the following nature:
(a) Standard claims: These are the claims made as per the standardized terms and
conditions of policies or the contract of insurance. The amount is paid as per the
meaning and interpretation of the policy terms and conditions. The claims
settlements and payment of claims is simple and direct funding and does not lead to
any disputes or issues.
(b) Non-standard claims: In these claims, the insurance contracts are discharged by
paying the amount of insurance as per the agreed terms and conditions or rules and
regulations framed by the insurance company irrespective of the policies as the
insured or the claimant has not fulfilled or performed the conditions or warranties.
The decision to pay the amount may be unilateral or bilateral. It the insurance
company arranges to pay the amount as per the bilateral agreement arrived or
negotiated, the insured will have no grievance of settlement or payment. When the
payment is made unilaterally, without the consensus of the insured, the disputes
concerning the payment and settlement of claims will arise leading to litigation and
continuance.
(c) Ex-gratia claims: In these claim payments, the insured is not legally eligible to
receive the claim. But, the insurance company, in view of the mandatory provisions
and the concept of social security or insurance business marketing, may pay some
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amount to relieve the insured from the hardships or boost their morale. This payment
of insurance amount is beyond the scope of the terms of the claim and payment is
made on sympathetic grounds.
(ii) Payments of claims into courts: Payment of claim in the court is one of the
devices for the life insurance company to get discharged from the obligation of payment of
the insurance claim. However, this device is not applicable to the transactions of the
general insurance contracts. When the insurance company is not able to resolve the
dispute relating to the identity of genuine or eligible claimant, when a number of claimants
have applied to receive the claim, the insurance company may shift the burden of
identifying the correct eligible claimant to the court by following the procedure mentioned
in section 47 of the Insurance Act, 1938. By paying the claim amount in the court, the
intention to settle the issue can be established by the insurance company. The duty to
identify the claimant and conduct the proceedings will be with the court and filing the
petition and payment of the amount in the court will discharge the insurer from the liability.
The discharge is valid and effective as the insurer has performed its part of the promise.
(iii) Leakage: Leakage is the term for any additional costs incurred by the insurer
beyond those necessary to fulfill its claim obligations under the insurance contract,
excluding fraud. Thus, it covers any inefficiencies or errors in handling or settling of the
claim, failures of service or replacement goods suppliers to act efficiently or according to
their service contract, or any other unnecessary cost.
Examples of leakage include:
• Failure to recover excesses / deductibles from policyholders
• Failure to recover amounts reclaimable from third parties, other insurers, re-insurers,
etc.
• Unintentional overpayment of the claim (e.g. payment in excess of limits of cover or
amount claimed)
• Excessive claims administrative costs, inefficiency etc.
• Failure to decline claims that are not covered by the policy.
Leakage to a large extent can be managed through effective management, by establishing
some form of audit or benchmarking process, to regularly assess the effectiveness of
claims handling service and the level of leakage experienced.
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The common practice followed by insured for processing of claims could be tabulated as
under:
Heading Comment
Notice to the The insured must:
Insurer – • Minimize the damage and recover any missing property
immediately • inform the insurance company in writing
• get in touch with relevant authorities (police etc.)
• send an intimation not admitting ANY responsibility / Liability)
Notice to the The insured must
Insurer – within a • put a claim in writing detailing the amount lost or damages
period of 30 days suffered
• advise of any other insurance , possibly covering the loss
Provide detailed Insured must provide all relevant information – books of account,
information to the etc to the insurer.
Insurer
Possession to the Insured must allow the insurer to take possession of any building
Insurer – Property or property that is the subject of the claim. However, this does not
Claims allow the insurer to abandon the property.
No admission of Where a claim involves a Third Party suing the insured, it is a
liability – Third condition that the insured must make NO admission of liability but
Party Liability pass on the summons, notice, claims for damages, etc. directly
to the insurer.
The claims process can be summarized thus :
As soon as a Contingency occurs, which the insured believes falls within the scope of the
policy, the insurance company should comply with the following steps:
(a) Initial intimation of a claim – with regard to the policy number
(b) Forwarding of further details
(c) Setting up of reserves by Insurer
(d) Investigation
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(e) Offer / negotiation or declinature

(f) Final settlement
(g) Closure
4. Post Settlement Action

The action taken after settlement of the claim in relation to underwriting varies from one
class of business to another. For example, sum insured under a fire policy stands reduced
to the extent of the amount of claim paid. However, it can be reinstated on payment of pro-
rata premium. On payment of the capital sum insured under a personal accident policy,
the policy, stands cancelled. Similarly, payment of a claim under fidelity guarantee policy
automatically terminates the policy. With a total loss claim on a motor vehicle, the policy is
returned to the insurers.
5. Recoveries
Recoveries may be in the form of salvage or from third parties under subrogation rights.
Recoveries of salvage are to be entered in the claims register. After settlement of claim,
the insurers under the law of subrogation, are entitled to succeed to the rights and
remedies of the insured and to recover the loss paid from a third party who may be
responsible for the loss under respective laws applicable. Thus, insurers can recover the
loss from shipping companies, railways, road carriers, airlines, Port Trust Authorities etc.
In the case of non-delivery of consignment, the carriers are responsible for the loss.
Similarly, the Port Trust is liable for goods which safely landed but subsequently found to
be missing.
For this purpose, a letter of subrogation duly stamped is obtained from the insured. The
letter is worded along the following lines :
XXX Insurance Co. Ltd.
In consideration of your paying to me/us a sum of Rs. __________ in respect of the under
mentioned goods insured with you under Policy No. __________ I/We hereby assign and
transfer to you all my/our right(s), title and interest in respect of the said goods, and all
rights or claims against any person or persons in respect thereof.
AND I/We also authorize you to use my/our name in any action or proceedings you may
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bring in relation to any of the matters hereby assigned and transferred to you, and I/We
undertake for myself/ourselves to concur in any matters or proceedings and __________
to execute all documents which may be necessary, and generally to assist therein by all
means in my/our power.
I/We further undertake if called upon by you to do so, myself/ourselves to undertake any
such action or proceedings that you may direct on your behalf; it being understood that
you are to indemnify me/us and any other persons whose names may necessarily be used
against any costs, charges or expenses which may be incurred in respect of any action or
proceedings that may be taken by virtue of this Agreement.
Date: Signature
6. Salvage
Salvage refers to partially damaged property. On payment of loss, salvage belongs to
insurers. For example, when motor claims are settled on total loss basis, the damaged
vehicle is taken over by insurers. Salvage can also arise in fire claims, marine cargo
claims etc.
Salvage is disposed off according to the procedure laid down by the companies for the
purpose. Surveyors, who have assessed the loss, will also recommend methods of
disposal.
Finally, recoveries have to be made from reinsurers, under relevant reinsurance
arrangements, if applicable, and this is done at Head Office level.
7. Loss Minimization and Salvage

The primary duties of a surveyor are to determine the cause and extent of loss, to examine
compliance with terms and conditions and warranties and to give a report on the basis of
which insurers may take decision regarding settlement.
Surveyors also pay a role in loss minimization and protection of salvage. In fire losses, for
example, surveyors may recommend measures such as temporary repairs to roofs .,
removal of clogged material from machinery so that production process is not interrupted,
prevention of rust damage to machinery, removal of undamaged property to places of
safety, separation of wet stocks for drying and reconditioning etc.
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8. Modes of settlement (Liability Insurance)

In case of a liability cover, the payments are not made to the insured, but to the Third
party claiming damages arising from the insured’s negligence. There will also be payments
made in respect of legal fees that the insured has incurred – although these will be
normally controlled by the insurer and paid directly to the legal team.
9. Claims Recoveries (amounts due to the insurer in respect

of claims paid)
In many claims, there will be an option for the insurer to recover some amount from the
insured or a third party.
Typically, the main areas for recovery are:
Type of Recoverable Comments

Recovery from
Excess and Insured Many insurance policies have stated excesses or
Deductible deductibles – the amount the policyholder must
contribute towards a claim. This may be relatively low
for a household policy e.g. a few hundreds of rupees, or
could be hundreds of thousands of dollars for a large
professional indemnity policy.
Subrogation Third parties Where a third party can be shown to be at fault in
or their causing the loss/ claim, then under the insurance
insurers principle of subrogation, the insurer can take over the
insured’s legal rights to recover the cost of the claim
from the offending third party and / or their insurers.
The key issue here is establishing fault and getting the
other party to accept liability. Fault can be often be
difficult to prove categorically, and many court cases
result from attempts to ascertain liability for incidents
leading to a claim.
Contribution Other Insurer There will be times when the same property is insured
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by two different insurers under different policies. As

long as there is more than one policy covering
• Same property
• Same interest
• Same peril
the loss will be shared proportionately between the
insurers concerned (one insurer will control the claim
and then recover appropriate amount from the other
insurer/s)
Reinsurance Reinsurer Where a policy is individually (facultative) reinsured, a
recovery can be made from the reinsurer in accordance
with the terms of the policy.
10. In house settlements

Independent surveys are dispensed with in respect of claims where documentary evidence
of the cause of loss is available in the form of police reports. (minor theft claims), landed
but missing certificates issued by Port Trust, non delivery certificates issued by Railway,
lost overboard certificate issued by Port authorities where cargo loss has taken place
during loading etc.
11. Illustrations
(i) Fire Legal Liability Coverage and Claim
Fire Legal Liability Coverage is mentioned at the end of exclusions for Damage to Property
under Coverage A, which states that. “…Paragraphs of this exclusion do not apply to
damage by fire to premises while rented to you or temporarily occupied by you with
permission of the owner…” It is subject to separate limit of insurance as specified in limits
of insurance. This limit is generally lower than per occurrence limit.
The salient aspects of this cover are:
• Part of Premises and Operation Coverage, but a distinct coverage
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• Rented to or temporarily occupied by the named insured with the owner’s permission
• Subject to Separate limits to be specified in limits of insurance
• Subject to exclusions for expected or intended injury or contractual
Following example will explain the calculation of insurers’ liability.
X Ltd. leased one room in a big building in Delhi for his shop of motor spare parts. Due to
negligence of an employee the rented premises caught fire resulting in damage to the
extent of Rs. 20,0000 for the rented one and Rs.40,0000 for other parts. Workers in other
shops got injured and Claimed Rs. 100000. If Fire Damage Limit is Rs. 500000, each
occurrence limit is Rs. 500000 & aggregate Rs. 20 lakhs.
Nature of Loss Claimed Loss payable
1. Damage to rented premises 200000 50000
2. Damage to rest of building 400000 400000
3. Bodily Injury 100000 50000
Total Rs. 500000
(ii) CGL Policy Conditions for claims settlement

These conditions address various matters, such as the insured’s duties in the event of
occurrence, claim, or suit, the insured’s right to sue the insurer, principle of contribution,
subrogation etc.
(a) Duties of the Insured after occurrence, Offense, Claim or Suit
• Immediate Notice
• Contents in notice—time, place and cause of occurrence, names and address
of insured persons and witnesses, nature and location of injury or damage etc.
• Others
(b) Legal Actions against the insurers providing for procedure and on agreed
settlement
(c) Other Insurance mentioning Primary Insurance, Excess Insurance and method of
sharing
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(d) Premium Audit: Provision for computation of final premium after audit for
adjustment against advance premium and for due return of excess premium if paid
in advance and for recovery of the shortage, if any.
(e) Representations: Statements in the policy issued are based on the insured’s
representations.
(f) Separation of Insured: Application of insurance to each insured separately against
whom claim is made
(g) Renewal of Policy: Providing rule and procedure for non-renewal of policy (by
notice before 30days)
(h) Transfer of Recovery Rights: The insured will bring suit or transfer those rights to
insurer
(i) Bankruptcy: Insolvency of insured will relieve the insurer of their obligation under
coverage part.
(iii) Extended Reporting Periods (Section V)

A claim-made CGL policy provides for two extended reporting period:
(i) Basic Extended Reporting Period and (ii) Supplemental Reporting Period.
(i) Basic Extended Reporting Period is provided automatically without any additional
premium if the policy is cancelled or not renewed or the insurer renews the policy with
later retrospective date or with occurrence base. With such extension the policy will cover
claims made against the insured within 5 years for the occurrence within policy period and
reported within 60 days from expiry. It does not increase the Limits of Insurance or apply
to claims to be covered by subsequent policy.
Example:
X was insured by a Claim-made CGL policy issued by P Ins. Co. During renewal X Ltd
purchased an Occurrence CGL Policy from R Ins. Co. 40 days after the claim-made policy
expired, the insured (X) came to know about an injury that occurred one week before the
expiry of claim-made policy. X immediately reported the occurrence to P Ins. Co. and R
Ins. Co. 1 year later the insured person finally made claim against X. Now the question is
which insurance co. will respond to the claim. As the basic extended reporting period was
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in effect, because claim-made period was not renewed and claim was for bodily injury
caused by an occurrence reported to P Ins. Co within 60 days of the expiry of the policy,
P’s policy will respond to the claim.
(ii) Supplemental Reporting Period is granted under the same circumstances as above
provided the named insured requests in writing within 60 days from the expiry of policy
and pays an additional premium specified by the insurer. The supplemental tail begins
when basic tail ends and it continues indefinitely for the occurrence reported to the insured
within 60 days, but did not result into claims even after 5 years.
(iv) Limits of Insurance

Limits of insurance in CGL Policy require discussion on the following limits and aspects:
(a) General aggregate limit for damages payable (i) for bodily injury or property
damage in premises and operation liability, but not damages for ‘Products and
Completed Operations’ under Coverage A (ii) for personal and advertising injury
liability under Coverage B and (iii) Medical expenses under Coverage C
(b) Product and completed operation aggregate limit for damages payable for
‘Products and completed Operations’ under Coverage A
(c) Each occurrence limits pecifies the maximum amount of damages payable under
Coverage A and Coverage C for any one occurrence.
(d) Personal and advertising injury limit specifies the maximum amount of damages
payable for personal and advertising injury sustained by any one person or
organization under Coverage B for any one occurrence.
(e) Fire damage limit specifies the maximum amount payable by the insurer for
damages resulting from any one fire covered by Fire Legal Liability Coverage.
(f) Medical expenses limit specifies the maximum amount payable by the insurer
under Coverage to any one person.
Example:
Let us consider the following example to explain this. CGL Policy of X Ltd provides the
following insurance limits.
(a) General Aggregate… Rs. 1000000
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(b) Product Comp. Aggregate Rs. 1000000

(c) Each Occurrence Rs. 500000
(d) Personal & Adv. Injury Rs. 500000
During the policy period from 1.1.06 to 31.12.06, X Ltd experienced and paid following
liability claims for damages for seven different occurrences for determining the liability of
insurers, we need to tabulate the damages against occurrence type.
Damages Occurrence Type:
1. Rs. 350000 Operations in Premises
2. Rs. 500000 Products
3. Rs. 600000 Personal and Advertising injury
4. Rs. 300000 Personal and Advertising injury
5. Rs. 200000 Products and Completed Operations’
6. Rs. 400000 Products and Completed Operations’
7. Rs. 3000 Medical Payments
The liability of Insurer will be determined as below:
1. Rs. 350000 payable from General Aggregate Limit
2. Rs. 500000 payable from Product and Completed Operation Aggregate Limit
3. Rs. 500000 out of Rs. 600000 payable from General Aggregate Limit (Bal. Rs.
150000)
4. Rs. 150000 out of Rs. 300000 payable from General Aggregate Limit (Bal. Rs.
150000)
5. Rs. 200000 payable from Product and Completed Operation Aggregate Limit.
6. Rs. 300000 out of Rs. 400000 payable from Product &Completed Operation
Aggregate Limit
7. Rs. 3000 not payable as there is no balance in General Aggregate Limit
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The above example has made the application of insurance limits very clear and will help
the underwriters to decide the limits for determination of exposures and determine rates
and terms therefor accordingly.
12. Protection of Policyholders’ Interests) Regulations, 2017

The guidelines and regulations issued by the IRDAI for protection of policyholder’s
interests in 2017 is briefly summarized below focusing on the salient features of a general
insurance policy components and general insurance claim procedure and practice.
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA
NOTIFICATION Hyderabad, the 22nd June, 2017
Insurance Regulatory and Development Authority of India
(Protection of Policyholders’ Interests) Regulations, 2017
F. No. IRDAI/Reg/8/145/2017.— In exercise of the powers conferred by clause (zc) of sub-
section (2) of section 114A of the Insurance Act, 1938 (4 of1938) read with clause (b) of
sub section (2) of section 14 and section 26of the Insurance Regulatory and Development
Authority Act, 1999 (41 of 1999), the Authority, in consultation with the Insurance Advisory
Committee, hereby makes the following regulations, namely:
1. Applicability
(a) These Regulations are complementary to any other regulations made by the
Authority, which, inter alia, provide for protection of the interests of
policyholders.
(b) These Regulations apply to all insurers, distribution channels, intermediaries,
insurance intermediaries, other regulated entities and policyholders.
2. Objectives
(i) To ensure that interests of insurance policyholders’ are protected.
(ii) To ensure that insurers, distribution channels and other regulated entities fulfil
their obligations towards policyholders and have in place standard procedures
and best practices in sale and service of insurance policies.
(iii) To ensure policyholder-centric governance by insurers with emphasis on
grievance redressal.
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3. Matters to be stated in General Insurance Policy:

A general insurance policy shall clearly state:
(i) the name(s) and address(s) of the insured and of any bank(s) or any other
person having financial interest in the subject matter of insurance, UIN of the
product, name, code number, contact details of the person involved in sales
process;
(ii) full description of the property or interest insured;
(iii) the location or locations of the property or interest insured under the policy
and, where appropriate, with respective insured values;
(iv) period of Insurance;
(v) sums insured;
(vi) perils covered and not covered;
(vii) any franchise or deductible applicable;
(viii) premium payable and where the premium is provisional subject to adjustment,
the basis of adjustment of premium be stated;
(ix) policy terms, conditions and warranties, Exclusions, if any.
(x) action to be taken by the insured upon occurrence of a contingency likely to
give rise to a claim under the policy;
(xi) the obligations of the insured in relation to the subject matter of insurance
upon occurrence of an event giving rise to a claim and the rights of the insurer
in the circumstances;
(xii) any special conditions attaching to the policy;
(xiii) the grounds for cancellation of the policy which in the case of a retail policy,
for the insurer, can be only on the grounds of mis – representation, non-
disclosure of material facts, fraud or non co-operation of the insured
Explanation:
Products approved as retail policies under File and Use guidelines notified by
the Authority from time to time fall within the purview of retail policy referred
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above. Provided that in the case of Commercial policies alone, other

circumstances under which the policy may be cancelled be given, along with
the manner of calculation of refund and notice period for cancellation.
(xiv) the address of the insurer to which all communications in respect of the
insurance contract should be sent;
(xv) the details of the endorsements, add-on covers attaching to the main policy;
(xvi) that, on renewal, the benefits provided under the policy and/or terms and
conditions of the policy including premium rate may be subject to change; and
(xvii) details of insurer’s internal grievance redressal mechanism along with address
and contact details of Insurance Ombudsman within whose territorial
jurisdiction the branch or office of the insurer or the residential address or
place of residence of the policyholder is located.
4. Claim Procedure In Respect of a General Insurance Policy
The claim process in case of a General Insurance is as follows:
(i) An insured or the claimant shall give notice to the insurer of any loss arising
under contract of insurance at the earliest or within such extended time as
may be allowed by the insurer.
(ii) On receipt of such a communication, a general insurer shall respond
immediately and give clear information to the insured on the procedures that
he should follow. In cases where a surveyor has to be appointed for assessing
a loss/claim, it shall do so immediately, in any case within 72 hours of the
receipt of intimation from the insured.
(iii) Insurer shall communicate the details of the appointment of surveyor, including
the role, duties and responsibilities of the surveyor to the insured by letter,
email or any other electronic form immediately after the appointment of the
surveyor.
(iv) The insurer / surveyor shall within 7 days of the claim intimation, inform the
insured / claimant of the essential documents and other requirements that the
claimant should submit in support of the claim. Where documents are
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available in public domain or with a public authority, the surveyor/insurer shall

obtain them.
(v) The surveyor shall start the survey immediately unless there is a contingency
that delays immediate survey, in any case within 48 hours of his appointment.
(vi) Interim report of the physical details of the loss shall be recorded and
uploaded/forwarded to the insurer within the shortest time but not later than 15
days from the date of first visit of the surveyor. A copy of the interim report
shall be furnished by the insurer to the insured/claimant, if he so desires.
(vii) Where the insured is unable to furnish all the particulars required by the
surveyor or where the surveyor does not receive the full cooperation of the
insured, the insurer or the surveyor, as the case may be, shall inform in writing
to the insured under information to the insurer about the consequent delay that
may result in the assessment of the claim.
(viii) It shall be the duty equally of the insurer and the surveyor to follow up with the
insured for pending information/documents guiding the insured with regard to
submissions to be made. The insurer and/or surveyor shall not call for any
information/document that is not relevant for the claim.
(ix) The surveyor shall, subject to sub-regulation 4 above, submit his final report to
the insurer within 30 days of his appointment. A copy of the surveyor’s report
shall be furnished by the insurer to the insured/claimant, if he so desires.
Notwithstanding anything mentioned herein, in case of claims made in respect
of commercial and large risks the surveyor shall submit the final report to the
insurer within 90 days of his appointment.
(x) However, such claims shall be settled by the insurer within 30 days of receipt
of final survey report and/or the last relevant and necessary document as the
case may be.
(xi) Where special circumstances exist in respect of a claim either due to its
special / complicated nature, or due to difficulties associated with
replacement/reinstatement, the surveyor shall, seek an extension from insurer
for submission of his report. In such an event, the insurer shall give the status
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to the insured/claimant fortnightly wherever warranted. The insurer may make

provisional/ on account payment based on the admitted claim liability.
(xii) If an insurer, on the receipt of a survey report, finds that it is incomplete in any
respect, he shall require the surveyor, under intimation to the insured/claimant;
to furnish an additional report on certain specific issues as may be required by
the insurer. Such a request may be made by the insurer within 15 days of the
receipt of the final survey report.
(xiii) Provided that the facility of calling for an additional report by the insurer shall
not be resorted to more than once in the case of a claim.
(xiv) The surveyor, on receipt of this communication, shall furnish an additional
report within three weeks from the date of receipt of communication from the
insurer.
(xv) On receipt of the final survey report or the additional survey report, as the
case may be, and on receipt of all required information/documents that are
relevant and necessary for the claim, an insurer shall, with in a period of 30
days offer a settlement of the claim to the insured/claimant. If the insurer, for
any reasons to be recorded in writing and communicated to the
insured/claimant, decides to reject a claim under the policy, it shall do so
within a period of 30 days from the receipt of the final survey report and/or
additional information/documents or the additional survey report, as the case
may be.
(xvi) In case, the amount admitted is less than the amount claimed, then the insurer
shall inform the insured/claimant in writing about the basis of settlement in
particular, where the claim is rejected, the insurer shall give the reasons for
the same in writing drawing reference to the specific terms and conditions of
the policy document.
(xvii) In the event the claim is not settled within 30 days as stipulated above, the
insurer shall be liable to pay interest at a rate, which is 2% above the bank
rate from the date of receipt of last relevant and necessary document from the
insured/claimant by insurer till the date of actual payment.
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SUMMARY
• The settlement of claims constitutes one of the important functions in an insurance
organization. Indeed, the payment of claims may be regarded as the primary service
of insurance to the public.
• The payment of a claim is the primary reason why the insurer is in the business.
Insurance is an unusual industry compared to most of the industries.
• The procedure in respect of claims under various classes of insurance is a
common pattern and may be considered under three broad headings Preliminary
stage, Investigation stage, and Settlement stage.
• It is most essential that insurers receive early notification of the loss. The time limits
within which notice of loss shall be given by the insured are provided for in policy
conditions.
• On receipt of the claim form duly completed from the insured, the insurers decide
about investigation and assessment of the loss
• The claim is processed on the basis ofthe claim form, independent report from
surveyors, legal opinion, medical opinion, and various documents furnished by the
insured and any other evidence secured by the insurers.
• Post settlement action taken after settlement of the claim in relation to underwriting
varies from one class of business to another.
• Recoveries may be in the form of salvage or from third parties under subrogation
rights. Recoveries of salvage are to be entered in the claims register
• Salvage refers to partially damaged property. On payment of loss, salvage belongs
to insurers.
• The primary duties of a surveyor are to determine the cause and extent of loss, to
examine compliance with terms and conditions and warranties and to give a report
on the basis of which insurers may take decision regarding settlement.
• In case of a liability cover, the payments are not made to the insured, butto the Third
party claiming damages arising from the insured’s negligence.
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REVISION QUESTIONS
1. Describe the basic parts of an Insurance Contract.
Ans. Insurance contracts generally can be divided into
• Declarations
• Definitions
• Insuring agreement /Operative clause
• Exclusions
• Conditions
• Miscellaneous provisions
Generally, most of the insurance contracts contain these parts:
Declarations: In the declaration part information regarding property or activity to be
insured by the insurer is presented. It is useful for underwriting and rating purposes.
It is generally found on the first page of the policy. In property insurance, the
declaration page contains information regarding the identification of the insurer,
name of the insured, location of the property, period of protection, amount of
insurance, amount of the premium, etc. In life insurance, the declaration
page contains the insured ís name, age, premium amount, issue date and policy
number.
Definitions: Insurance contracts generally contain a page of definitions. They are
highlighted in bold or different type face. For example the insurer is always referred
to as ‘we’, ‘our’ or ‘us’ and the insured is referred to as ‘you’ and ‘your’ These
definitions make easy to determine the coverage under the policy.
Insuring Agreement: It is the most important part in the contact. It summarizes the
major promises and conditions to fulfil the promises by the insurer. In property and
liability insurance there are two forms of an agreement-(1). Named peril policy and
(2)All risk coverage. In the named peril policy the policy covers only the
specified perils, whereas under an all risk coverage policy the policy covers all
losses except those losses specifically excluded. All risks coverage is preferable to
named perils coverage because of its broad coverage and also as the burden of
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proof to deny the payment is placed on the insurer unlike the insured in the named
peril policy. Life insurance is an example of all risks policy and it covers all causes of
death with some exceptions like suicide, aviation, war, etc.
Exclusions: There are three types of exclusions in an insurance contract:
(a) Excluded perils [ex. The peril of war is excluded in disability income policy]
(b) Excluded losses [ex. Professional liability losses are excluded from personal
liability section of home owners policy]
(c) Excluded property [ex. Cars and planes in a home owners policy]
Main reasons for these exclusions are:
• Some perils are uninsurable like wars.
• Some perils are predictable declines [wear and tear and inherent vice]
• Some perils are extraordinary hazards [in cars and cabs - cabs are more
prone to accidents than car]
• To avoid duplication of coverage [ ex. A car is excluded under home owners
policy because car is covered under the personal auto policy]
• To avoid moral hazard - If unlimited amount of money were covered fradulent
claims could increase.
• Finally exclusions are used because the coverage is not needed by the typical
insured.
Conditions: To meet promises by the insurer, the conditions section imposes certain
duties on the insured. If the policy conditions are not met, the insurer can refuse to
pay the claim.
Miscellaneous Provisions: In property and liability insurance, miscellaneous
provisions refer to cancellation, subrogation, and assignment of the policy; and in life
insurance, grace period, reinstatement of a lapsed policy and misstatement of age,
etc.
Most of the policy owners make a common mistake of not reading policies
fully and understanding the contractual provisions that appear in the policies
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which lead to controversies in the settlement. To avoid this, a careful study of

basic parts of insurance contract would be useful.
2. Why do deductibles appear in insurance contracts? Identify some deductibles
that are found in insurance contracts?
Ans. This provision is generally found in property, health and auto insurance contracts
and not in life insurance contracts because the insured’s death is a total loss
and deductibles reduce the face amount of insurance. According to Rejda,??? What
is Rejda?? a deductible is a provision by which a specified amount is subtracted
from the total loss payment that otherwise would be payable. Main purposes of
these deductibles are
• To eliminate small claims [expensive to handle and process].
• To reduce premiums [larger deductibles are preferable to smaller deductibles].
• To reduce moral and morale hazard [because of it insured may not profit out of
loss and it encourages insured to be careful of his property]
3. A majority of insurance claims pertain to losses caused by fire. Underwriting of
natural disasters also constitutes a major portion of insurance activities. What are
the possible losses that can arise due to disasters? Suggest a broad
framework for disaster management in order to minimize such losses?
Ans. A natural disaster is defined as any natural phenomenon, which causes such
widespread losses to lives, property or the environment, from which the affected
population cannot recover without external assistance. Cyclones, floods, storms,
earthquakes, drought, forest fire, avalanches, etc. are some examples of natural
disasters.
Disasters are mostly natural but they can also be caused by man. The world is prone
to natural disasters which are caused by the interplay of natural forces and human
activities.
A broad categorization of losses that arise due to natural disasters are:
Direct losses: These losses are in the form of damage to buildings, its
contents, infrastructure, loss of human lives, costs of clearing the debris,
restoration, loss mitigation and disposal.
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Indirect losses: These are losses that result due to business interruption and power
failure, costs of transportation, detours, assistance, storage, accommodation,
provision of essentials, and communications.
Intangible losses: These include psychological trauma and impairments, losses of
intangible values, and losses due to evacuation from areas under risk.
A risk management plan consists of the following steps:
Risk Identification: It involves identifying the extent and intensity of past
events, areas that are hit by one event at the same time, potential risk areas, and
climatic trends.
Risk Evaluation: It involves assessing the probability of the occurrence of a disaster
and the severity of the disaster.
Risk Control: This step covers measures aimed at avoiding, eliminating or reducing
the chances of occurrence of loss-producing events and eliminating the severity of
the disasters that could happen.
Risk Retention: This step pertains to the ability of the country or the society
in particular to withstand disasters. There are two aspects of risk
retention - psychological and financial. The psychological aspects have a lot to
do with the involvement of government machinery and voluntary agencies and also
to a great extent on the tenacity of the people.
Risk Transfer: This is a risk financing method and provides a means for handling risk
which have a high severity of losses and one cannot afford to retain such risks.
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CHAPTER – 12
LAWS GOVERNING GENERAL INSURANCE
BUSINESS IN INDIA, INVESTMENT AND
ACCOUNTING
1. Introduction
2. The Insurance Act, 1938
3. General Insurance Business Nationalization Act, 1972
4. Insurance Regulatory Authority (IRA)
5. Insurance Regulatory and Development Authority of India (IRDAI)
6. Establishment of Insurance Advisory Committee
7. Insurance (Amendment) Act, 2015
8. IRDAI Regulations and Guidelines
9. Other Important legislations governing general Insurance business
After the completion of the Chapter, the Student will be able to
• Explain the need and importance for regulations for insurance business
• Describe the evolution of the insurance laws for monitoring insurance
operations
• Evaluate and explain the amendments brought in Insurance legislations as per

the need of the hour
• Explain the regulations and guidelines of IRDAI in critical areas of investments,
solvency margins and financial reporting of general insurance operations
• Describe the other governing laws affecting general insurance business in
India.
1. Introduction
Insurance business is one of the most highly regulated businesses globally for reasons of
equity and efficiency. It has a well-defined regulatory and legislative framework to operate.
Insurance law by itself is both unique and comprehensive because it operates within the
limitations of all the other governing legislations and ensures the legal provisions by
incorporating the same in its various policies.
The transactions of general insurance business in India are governed by two main statues,
namely:
• The Insurance Act, 1938
• General Insurance Business (Nationalization) Act, 1972
• The Insurance Regulatory Authority (IRA)
• The Insurance Regulatory and Development Authority, 1999
2. The Insurance Act, 1938

This Act was passed in 1938 and was brought into force from 1st July, 1939. This Act
applies to the GIC and the four subsidiaries. The Act was amended in the years 1950,
1968, 1988, 1999. This Act specifies the restrictions and limitations applicable as may be
specified by the Central Government by virtue of the powers conferred by section 35 of the
General Insurance Business (Nationalization) Act.
The important provisions of the Act relate to:
Registration: Every insurer is required to obtain a Certificate of Registration from the
Controller of Insurance, by making payment of requisite fees. Registration should be
renewed annually.
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LAWS GOVERNING GENERAL INSURANCE BUSINESS IN INDIA, INVESTMENT AND …
Accounts and audit: An insurer is required to maintain separate accounts of the receipts
and payments in each class of insurance viz. Fire. Marine and Miscellaneous Insurance.
Apart from the regular financial statements, the companies are required to maintain the
following documents in respect of each class of insurance:
• Record of Cover notes specifying the details of the risk covered
• Record of policies
• Record of premiums
• Record of endorsements Record of Bank guarantees
• Record of claims
• Register of agency force and business procured by each with details of commission
• Register of employees
• Cash Books
• Reinsurance details
• Claims register
Investments: Investments of insurance companies are usually made in approved modes
under the provisions of the Act. Guidelines and limitations are issued by the Central
Government from time to time.
Limitation on management expenses: The Act prescribes the maximum limits of
expenses of management including commission that may be incurred by an insurer. The
percentages are prescribed in relation to the total gross direct business written by the
insurer in India.
Prohibition of Rebates: The Act prohibits any person from offering any rebate of
commission or a rebate of premium to any person to take insurance. Any person found
guilty would be punished with a fine up to five hundred rupees.
Powers of Investigation: The Central Government may at any time direct the Controller
or any other person by order, to investigate the affairs of any insurer and report to the
Central Government.
Other Provisions: Other provisions of the Act deal with the licensing of agents,
surveyors, advance payment of premium and Tariff Advisory Committee (TAC).
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• Prohibition of rebates
• Powers of investigation
• Licensing of agents
• Advance payments of premiums
• Tariff Advisory Committee
3. General Insurance Business Nationalization Act, 1972

This Act came into force on 1st January, 1973. This Act is in pursuance of clause (c) of
Article 39 of the Constitution of India which reads thus:
“The State shall direct its policy towards securing that the operation of the economic
system does not result in concentration of wealth and means of production so as to prove
harmful to the common interest of the community”. Under this Act, there were no private
insurers in the country. As a result general insurance business became the domain of the
State. The General Insurance Corporation of India (GIC) became the holding company
with four subsidiaries, namely United India Insurance Company with Head Office in
Madras, Oriental Insurance Company with Head Office in New Delhi, National Insurance
Company with Head Office in Calcutta and New India Assurance Company with Head
Office in Bombay.
The ownership of all shares of both the Indian insurance companies and the foreign
insurers vested in the Central Government with effect from 1.1.1973. The services of all
the personnel in the private sector were also transferred to the holding company and
subsidiaries based on factors such as qualification, seniority, position and location.
3.1 Objectives of the Act

The object of the Act was primarily,
• to provide for the acquisition of the shares of the existing general insurance
companies
• to serve the needs of the economy by development of general insurance business
• to establish the GIC by the Central Government under the provisions of the
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Companies Act of 1956, with an initial authorized share capital of rupees seventy –
five crores
• to aid, assist, and advise the companies in the matter of setting up of standards in
the conduct of general insurance business
• to encourage healthy competition amongst the companies as far as possible
• to ensure that the operation of the economic system does not result in the
concentration of wealth to the common detriment.
• to ensure that no person shall take insurance in respect of any property in India with
an insurer whose principal registered office is outside India
• to carry on of any part of the general insurance business if it thinks it desirable to do
so
• to advice the companies in the matter of controlling their experience and investment
of funds.
3.2 The Mission of GIC

• To provide need-based and low cost general insurance covers to rural population
• To administer a crop insurance scheme for the benefit of the farmers
• To develop and introduce covers with social security benefits
• To develop a marketing network throughout the country including areas with low
premium potential
• Promote balanced regional development irrespective of cost considerations
• To make benefits of insurance available to the masses.
4. Insurance Regulatory Authority (IRA)

The Insurance Act, 1938, recommended the appointment of the Controller of Insurance, to
ensure compliance of the various provisions under the Act by insurance companies. The
Controller approves the terms and conditions of various plans and adequacy of premiums.
The Authority also periodically scrutinizes the return on investments, annual accounts, and
periodical actuarial valuation submitted by insurance companies.
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The IRA consists of not more than seven (see below) members out of whom a Chairman
and two members representing the Life and general insurance business are appointed on
full time basis. The whole time members shall hold office for 5 years or until the age of 62
(65 years for the Chairman) whichever is earlier. The part time members hold the office for
not more than 5 years.
4.1 Composition of Authority

The Authority shall consist of the following members, namely:-
(a) a Chairperson;
(b) not more than five whole-time members;
(c) not more than four part-time members,
to be appointed by the Central Government from amongst persons of ability, integrity and
standing who have knowledge or experience in life insurance, general insurance, actuarial
science, finance, economics, law, accountancy, administration or any other discipline
which would, in the opinion of the Central Government, be useful to the Authority.
4.2 Duties of IRA

The important duties of the IRA include the following:
• To regulate, promote and ensure orderly growth of the insurance business
• To exercise all powers and functions of the Authority
• To protect the interests of the policyholder with regard to settlement of claims and
other terms and conditions
• To promote and regulate professional bodies connected with insurance organization
• To undertake inspection, investigation, and audit of companies, intermediaries, and
other organizations connected with the insurance business.
• To regulate and control the rates of non-tariffed general insurance policies under
section 64(u) of the Insurance Act.
• To prescribe the format for the maintenance and submission of accounts by insurers
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• To regulate the investment of funds

• To regulate the margins of solvency
• To adjudicate disputes between the insurer and intermediaries.
5. Insurance Regulatory and Development Authority of India

(IRDAI), 1999
The Committee on reforms of the insurance sector under the chairmanship of Shri R N
Malhotra, ex-governor of Reserve Bank of India, recommended the creation of a more
efficient and competitive financial system in tune with global trends. It recommended
amendments to regulate the insurance sector to adjust with the economic policies of
privatization. The Government in pursuance of the recommendation of the Committee,
decided to establish a Provisional Insurance Regulatory and Development Authority in
1996, to replace the erstwhile authority called the Controller of Insurance constituted
under the Insurance Act, 1938, which initially worked under the Ministry of Commerce and
later transferred to the Ministry of Finance.
Finally, the decision to establish the Insurance Regulatory and Development Authority was
implemented by the passing of the Insurance Regulatory and Development Authority Act,
1999. In India, presently after the opening up of the insurance sector, the regulator for the
monitoring of the operations of the insurance companies is the IRDAI, having its head
office in Hyderabad.
5.1 Aim of IRDAI

The regulatory framework mainly aims to focus on three areas, viz.,
• The protection of the interest of the consumers
• To ensure the financial soundness of the insurance industry
• To pave the way to help a healthy growth of the insurance market where both the
government and the private players play simultaneously.
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5.2 Duties of IRDAI

Some of the important duties, powers and functions of Authority include to
• Issue certificate of registration, to applicants interested in insurance business, and
also to renew, modify, withdraw, suspend or cancel such registration
• Specify requisite qualifications and practical training for insurance intermediaries
and agents
• Specify the code of conduct for surveyors and loss assessors
• Levy fees and other charges for carrying out the purposes of this Act
• Control and regulate the rates, terms and conditions that may be offered by insurers
in respect of general insurance business
• Regulate investment of funds by insurance companies
• Regulate maintenance of margin of solvency
• Adjudication of disputes between insurers and insurance intermediaries
• Supervise the functioning of the Tariff Advisory Committee
• Specify percentage of life and general insurance business to be undertaken by the
insurer in the rural or social sector.
The Authority shall consist of a chairperson, five whole-time members and four part-time
members, to be appointed by the Central Government from amongst persons of ability,
integrity and standing who have knowledge or experience in life insurance, general
insurance, actuarial science, finance, economics, law, accountancy, administration or any
other disciplines.
The Chairperson and every other whole-time member shall hold office for a term of five
years provided that no person shall hold office as a whole-time member after he has
attained the age of sixty-two (65 years for Chairman) years. A part-time member also shall
hold office for a term not exceeding five years from the date on which he enters upon his
office. The IRDAI shall constitute a fund to be called “the Insurance Regulatory and
Development Authority Fund” and there shall be credited thereto –
(a) All Government grants, fees and charges received by the Authority;
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(b) All sums received by the Authority from such other source as may be decided upon
by the Central Government;
(c) The percentage of prescribed income received from the insurers. The fund shall be
applied for meeting –
• salaries, allowances and other remuneration of the members, officers and
other employees of the Authority;
• other expenses of the Authority in connection with the discharge of its
functions and for the purposes of this Act.
6. Establishment of Insurance Advisory Committee

The Insurance Advisory Committee shall consist of not more than twenty-five members
from various fields like commerce, industry, transport, agriculture, consumer forum,
surveyors, agents, intermediaries, organizations engaged in safety and loss prevention,
research bodies and employees association in the insurance sector. The Chairperson and
the members of the Authority shall be the ex-officio Chairperson and the ex-officio
members of the Insurance Advisory Committee.
According to Section 64A of the Insurance Act, 1938, the Insurance Association of India
was established, consisting of all the insurers carrying on business in India as members
and as per provisions of Section 64C, the Act recommended the establishment of
independent Life Insurance Council and General Insurance Councils.
Now, the Insurance Regulatory and Development Authority has brought into existence the
following:
(a) The Life Insurance Council
(b) The General Insurance Council
6.1 Life insurance Council

Structure
• The Life Insurance Council will have an Executive Committee of 21 members of
which 2 will be from the IRDAI and the rest from licensed life insurers
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• The Committee will establish standards of conduct and practices for efficient
customer service, advise IRDAI on controlling insurers’ expenses and serve as a
forum that helps maintain healthy market conduct
• It will create and manage a process for agent examination and certification
• The Life Insurance Council is funded by the Life Insurers in India.
Purpose
The Life Insurance Council seeks to play a significant and complementary role in
transforming India’s life insurance industry into a vibrant, trustworthy and profitable
service, helping the people of India on their journey to prosperity.
Its mission:
• To function as an active forum to aid, advise and assist insurers in maintaining high
standards of conduct and service to policyholders
• Advise the supervisory authority in the matter of controlling expenses
• Interact with the Government and other bodies on policy matters
• Actively participate in spreading insurance awareness in India
• Take steps to develop education and research in insurance
• To bring the benefit of the best practices in the world to India.
The Council will
• Strive for a positive image of the industry through media, forums and opinion-
makers and enhance consumer confidence in the industry
• Assist the industry in maintaining high standards of ethics and governance
• Promote awareness regarding the role and benefits of life insurance
• Organize structured, regular and proactive discussions with Government, lawmakers
and Regulators on matters relevant to the contribution by the life insurance industry
and act as an effective liaison between them
• Conduct research on operational, economic, legislative, regulatory and customer-
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oriented issues in life insurance, publish monographs on current developments in life

insurance and contribute to the development of the sector
• Set up the Mortality and Morbidity Information Bureau (MMIB) and take an active
role in its functioning
• Set up similar organizations for the benefit of the life insurance industry
• Act as a forum of interaction with organizations in other segments of the financial
services sector
• Play a leading role in insurance education, research, training, discussion forums and
conferences
• Provide help and guidance to members when necessary
• Be an active link between the Indian life insurance industry and the global markets.
Legislations & Control
• Address common issues in legislation and practice. Interface with the various other
regulatory bodies on behalf of the insurance industry.
• Identify regularly the important issues to be taken up with Government and/or IRDAI
& PFRDA and make presentations on behalf of the industry
• Prepare benchmarks for the industry in all areas of operation and help maintain high
standards of conduct, ethics and governance
• Take measures to prevent practices that are detrimental to the interests of the
policyholders.
Training & Certification
• Take up the work relating to the training, examination and certification of Agents as
provided in the Insurance Act
• Play a positive role in establishing standards, training of officials and intermediaries
not only in products and sales but also other aspects relevant to the life insurance
industry and lift the level of professionalism
• Conduct professional development programmes in collaboration with international
councils and life insurance institutes.
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Education & Awareness

• Launch regular insurance awareness programs
• Facilitate the conducting of Continuous Development Programmes for intermediaries
• Provide structured regular information to the public about the industry
• Launch an interactive website/Life Insurance Journals/newsletters
• Organise/participate in major conferences, seminars, workshops and lectures by
Indian/visiting experts on insurance and related areas
• Facilitate knowledge-exchange programs (both in India and with Councils abroad)
• To develop and upgrade the skills of local insurance professionals
• Co-ordinate with educational institutions in India and overseas to encourage
research, professional development courses etc.
• Elevate the profession of insurance selling and that of the Advisor, to that of
financial analysts and planners through certification programs developed in
conjunction with Indian and International institutions
• Establish a consumer relations cell.
6.2 General Insurance (GI) Council

Vision for the industry and the GI Council
• A sustainable, profitable and growing non-life insurance industry in India
• An industry trusted and recognized as contributing to society and the economy
• An economic and public policy climate conducive to a flourishing industry
• A body (GI Council) recognized as providing active leadership and an authoritative
collective voice for the non-life insurance industry in India.
The GI Council’s mission
To provide leadership on issues having a bearing on the industry’s collective strength and
image and to shape and influence decisions made by the Government, regulator and other
public authorities, within the country, in order to benefit the industry collectively.
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This will be achieved on an active, collective and non-competitive basis by:

• pro-active analysis and lobbying to secure improvement in the legal and regulatory
framework
• analysis and representations in response to initiatives from others which affect the
industry
• being recognised as a leading contributor to public policy thinking on issues relevant
to non-life insurance industry
• presenting a positive image of the industry to the public, the media and other
opinion-formers
• providing leadership and guidance to the industry on issues which may affect its
public image and reputation
• maintaining a core secretariat with staff of high calibre and relevant skills drawn from
the industry on project to project basis, working under the guidance of the Board and
its committees, focussed on delivering the mission.
GI Council will provide other services to member companies (such as an active role in
management of commercial vehicle third party liability motor pool) which benefit the
industry collectively; which support the mission; which can be provided without diversion of
resources from the core functions; and which cannot be done more effectively by any
other body.
Investment management of insurance companies has become a challenge in the present
day scenario, with the convergence of financial institutions. The challenge is more seen in
the areas of financial management which in fact determines the success of the insurance
companies. Globally insurance companies are the most regulated for the only reason that
they deal with public funds. Basically, insurance operations rely on the trust of
policyholders. Hence, insurance companies’ investments are subject to severe regulatory
supervision mainly to safeguard the interests of the policyholders. In India, the investment
guidelines are issued by the IRDAI, in the present paradigm following the opening up of
the insurance sector.
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7. Insurance (Amendment) Act, 2015

The Insurance Laws (Amendment) Bill, 2015 was passed by the Lok Sabha on 4th March,
2015 and by the Rajya Sabha i.e. on 12th March, 2015.The passage of the Bill thus paved
the way for major reform related amendments in the Insurance Act, 1938, the General
Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and
Development Authority (IRDAI) Act, 1999. The Insurance Laws (Amendment) Act 2015 to
be so enacted, will seamlessly replace the Insurance Laws (Amendment) Ordinance,
2014, which came into force on 26th December 2014.
The amendment Act will remove archaic and redundant provisions in the legislations and
incorporates certain provisions to provide Insurance Regulatory and Development
Authority of India (IRDAI) with the flexibility to discharge its functions more effectively and
efficiently. It also provides for enhancement of the foreign investment cap in an Indian
Insurance Company from 26% to an explicitly composite limit of 49% with the safeguard of
Indian ownership and control.
Major Highlights of the Act
The major highlights of the Insurance Laws (Amendment) Bill, 2015 passed by Parliament
provides for
— Enhancement of the Foreign Investment Cap in an Indian Insurance Company from
26% to an Explicitly Composite Limit of 49% with the Safeguard of Indian Ownership
and Control
— Provides Insurance Regulatory and Development Authority of India (IRDAI) with
Flexibility to Discharge its Functions More Effectively and Efficiently Among Others
7.1 Capital Availability

In addition to the provisions for enhanced foreign equity, the amended law will enable
capital raising through new and innovative instruments under the regulatory supervision of
IRDAI. Greater availability of capital for the capital intensive insurance sector would lead
to greater distribution reach to under / un-served areas, more innovative product
formulations to meet diverse insurance needs of citizens, efficient service delivery through
improved distribution technology and enhanced customer service standards. The Rules to
operationalize the new provisions in the Law related to foreign equity investors have
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already been notified on 19th Feb 2015 under powers accorded by the ordinance. The four
public sector general insurance companies, presently required as per the General
Insurance Business (Nationalisation) Act, 1972 (GIBNA, 1972) to be 100% government
owned, are now allowed to raise capital, keeping in view the need for expansion of the
business in the rural and social sectors, meeting the solvency margin for this purpose and
achieving enhanced competitiveness subject to the Government equity not being less than
51% at any point of time.
7.2 Consumer Welfare

Further, the amendments to the laws will enable the interests of consumers to be better
served through provisions like those enabling penalties on intermediaries / insurance
companies for misconduct and disallowing multilevel marketing of insurance products in
order to curtail the practice of mis-selling. The amended Law has several provisions for
levying higher penalties ranging from up to Rs.1 Crore to Rs. 25 Crore for various
violations including misselling and misrepresentation by agents / insurance companies.
With a view to serve the interest of the policy holders better, the period during which a
policy can be repudiated on any ground, including mis-statement of facts etc., will be
confined to three years from the commencement of the policy and no policy would be
called in question on any ground after three years. The amendments provide for an easier
process for payment to the nominee of the policy holder, as the insurer would be
discharged of its legal liabilities once the payment is made to the nominee. It is now
obligatory in the law for insurance companies to underwrite third party motor vehicle
insurance as per IRDAI regulations. Rural and Social sector obligations for insurers are
retained in the amended laws.
7.3 Empowerment of IRDAI

The Act will entrust responsibility of appointing insurance agents to insurers and provides
for IRDAI to regulate their eligibility, qualifications and other aspects. It enables agents to
work more broadly across companies in various business categories; with the safeguard
that conflict of interest would not be allowed by IRDAI through suitable regulations. IRDAI
is empowered to regulate key aspects of Insurance Company operations in areas like
solvency, investments, expenses and commissions and to formulate regulations for
payment of commission and control of management expenses. It empowers the Authority
to regulate the functions, code of conduct, etc., of surveyors and loss assessors. It also
expands the scope of insurance intermediaries to include insurance brokers, reinsurance
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brokers, insurance consultants, corporate agents, third party administrators, surveyors and
loss assessors and such other entities, as may be notified by the Authority from time to
time. Further, properties in India can now be insured with a foreign insurer with prior
permission of IRDAI; which was earlier to be done with the approval of the Central
Government.
7.4 Health Insurance

The amendment Act defines 'health insurance business' inclusive of travel and personal
accident cover and discourages non-serious players by retaining capital requirements for
health insurers at the level of Rs. 100 Crore, thereby paving the way for promotion of
health insurance as a separate vertical.
7.5 Promoting Reinsurance Business in India

The amended law enables foreign reinsurers to set up branches in India and defines‘
re-insurance’ to mean “the insurance of part of one insurer’s risk by another insurer who
accepts the risk for a mutually acceptable premium”, and thereby excludes the possibility
of 100% ceding of risk to a re-insurer, which could lead to companies acting as front
companies for other insurers. Further, it enables Lloyds and its members to operate in
India through setting up of branches for the purpose of reinsurance business or as
investors in an Indian Insurance Company within the 49% cap.
7.6 Strengthening of Industry Councils

The Life Insurance Council and General Insurance Council have now been made self-
regulating bodies by empowering them to frame bye-laws for elections, meetings and levy
and collect fees etc. from its members. Inclusion of representatives of self-help groups and
insurance cooperative societies in insurance councils has also been enabled to broad
base the representation on these Councils.
7.7 Robust Appellate Process

Appeals against the orders of IRDAI are to be preferred to SAT as the amended Law
provides for any insurer or insurance intermediary aggrieved by any order made by IRDAI
to prefer an appeal to the Securities Appellate Tribunal (SAT). Thus, the amendments
incorporate enhancements in the Insurance Laws in keeping with the evolving insurance
sector scenario and regulatory practices across the globe. The amendments will enable
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the Regulator to create an operational framework for greater innovation, competition and
transparency, to meet the insurance needs of citizens in a more complete and subscriber
friendly manner. The amendments are expected to enable the sector to achieve its full
growth potential and contribute towards the overall growth of the economy and job
creation.
7.8 Shareholding pattern

The bill brings in a huge change by vesting power with IRDAI to allow the insurance
companies to raise capital through other forms (in addition to equity share capital) as per
the approval of the authority. Prior to the amendment, only equity share capital were
allowed to be issued by the insurance companies. Keeping in consonance with the basic
fundamentals of companies law, the voting right (even after the amendment) will be only
given to the equity shareholders. The amendment act has omitted section 6AA of the
Insurance Act, 1938. Section 6AA(1) stated that,
“No promoter shall at any time hold more than twenty-six percent or such other
percentage as may be prescribed, of the paid-up equity capital in an Indian
insurance company.”
Beyond ten years from the date of commencement of business, no promoter was allowed
to keep a shareholding of more than 26%. The amendment act has omitted this section
which means that even after ten years of commencement of business; a promoter can
hold more than 26% (even upto 100%) of shares in the business. When this amendment
was proposed in 2008 Bill, the standing committee had recommended against the
omission of this section as according to the standing committee, this section allows (rather
mandates) diversification of ownership of business.
7.9 Restrictions on sanction of loans and advances by insurers

Prior to the amendment, Section 29 of the Insurance Act, 1938 prohibited loans or any
kinds of advances to the insurance agents (other than a highly restricted list) which did not
exceed previous year’s renewal commission, “with the overall ceiling of loans or advances
restricted to a very nominal sum of One hundred rupees”. In addition to this, any other kind
of loans was also generally prohibited. This section came as an obstruction in general
process of doing business as it prohibited even general loans to vendors or agents who
were required as part of the functioning of business.
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The 2015 amendment act has substituted Section 29 with a new section which provides
for approval of loans and advances but as per the norms which can be or are to be
specified by the Insurance Regulatory and Development Authority and on the basis of the
scheme which needs to be duly approved by the board of directors of the insurer. This
amendment provides for liberalization of the highly restricted section and provision.
7.10 Enables partial assignment of policy

The Insurance Laws (Amendment) Act, 1938 has amended the Section 38 of the
Insurance Act, 1938. Prior to amendment this section only allowed the transfer of policy in
toto. The amended section allows partial assignment which means “assigning a part of
interest in a life insurance policy”. This partial assignment comes with the restriction that
the holder of this partial assignment “won’t be entitled to further assign or transfer the
residual amount payable under the same policy”.
7.11 Foreign re-insurer

Section 2(9) of the Insurance Act, 1938 has been amended and the definition of insurer
includes “(d) a foreign company engaged in re-insurance business through a branch
established in India. Explanation.—For the purposes of this sub-clause, the expression
“foreign company” shall mean a company or body established or incorporated under a law
of any country outside India and includes Lloyd’s established under the Lloyd’s Act, 1871
(United Kingdom) or any of its Members”. The amendment act allows the foreign re-
insurance companies to directly operate their re-insurance business in India through
branch offices registered with Insurance Regulatory and Development Authority.
Qualification, as provided in the explanation, will be applicable.
7.12 Insurance agents and commission

The amended Section 40 of the Insurance Act, 1938 provides that,
“Insurers are prohibited from paying any remuneration to any person other than an
insurance agent or an intermediary for soliciting or procuring insurance business in
India and outside of the prescribed manner”.
In addition, the intermediaries or the insurance agents and intermediaries are mandated to
ensure that the commission they receive and the contracts pursuant to the policies should
be as per the regulations promulgated.
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The amendment act has omitted Section 44 which provided that “an insurance company
cannot deny payment of renewal commission after termination, if an insurance agent has
served for five years with an insurer. If the agent has completed 10 years, such
entitlement to renewal commission after termination vests only if the agent, after
termination, does not work directly or indirectly with any insurer. Such renewal commission
is payable to the legal heirs of deceased insurance agent after his death”. When this
omission was suggested by the 2008 amendment bill, the standing committee proposed
for retention of this section as according to it, it works for the interest of a large number of
agents. But the section was finally omitted, because “while compensation is paid after
termination, the policyholders are not serviced resulting in lapsation”.
Section 45, policy not to be called in question on ground of misstatement after three years
Globally, insurance contracts are considered to be the contracts made in utmost good faith
i.e. “uberimma fides”. What we mean by utmost good faith is that you won’t conceal
anything and as a customer are obligated to disclose all the required details to the best of
your knowledge, e.g., health condition, income sources, etc. The disclosure helps the
insurance company in effectively assessing the risk involved under the policy cover and in
consequently fixing the premium. Prior to the amendment, Section 45 of the Insurance Act,
1938 do not allow the insurance company to deny the claim made after two years from the
date when the policy came into effect.
There are three exceptions to this policy which are
• such mis-statement or concealment was made on a material fact,
• that it was fraudulently made by the policyholder and that
• the policyholder knew at the time of making it that the statement was false or was
material to disclose”.
The 2008 Bill recommended that the insurer should not be allowed to deny the claim if the
claim was made after five years from the date of policy coming into effect, irrespective of
the conditions involved. This means even if the fraudulent statement (or the other two
conditions as mentioned above) was made by the policy holder, it won’t affect the claim, if
the claim was made after five years from the date when the policy came into effect. The
Standing Committee had recommended three years term instead of five years term. The
2015 amendment act has reduced it to three years. Therefore, now if a claim is made
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under an insurance policy after three years from the taking of policy, the insurance
company won’t have the right to repudiate it under any condition whatsoever.
7.13 Penalties for violations

The amendment act has considerably increased the penalties for violation of the provision
of the Act. A few examples are, as per Section 102, if a company doesn’t comply with
directions of IRDAI, the penalty has been substantially increased from Rupees Five Lakhs
to Rupees One Lakh for each day or Rupees One Crore, whichever is less.
A new section, section 2CB has been introduced which states that
(i) No person shall take out or renew any policy of insurance in respect of any property
in India or any ship or other vessel or aircraft registered in India with an insurer
whose principal place of business is outside India save with the prior permission of
the Authority.
(ii) If any person contravenes the provision of sub-section (1), he shall be liable to a
penalty which may extend to five crore rupees.” The amount of penalty is
substantially high.
(iii) For a lot of other provisions, the penalty for violation or non-compliance has been
substantially increased. The Standing Committee had recommended to reduce the
penalty but this suggestion has not been incorporated as higher penalties are
considered to have more deterrent effect.
7.14 Appellate Authority: Securities Appellate Tribunal (SAT)

The amendment act has made Securities Appellate Tribunal (SAT) as the appellate
authority to the Insurance Regulatory and Development Authority. The issue which is
required to be kept in mind is that the experts sitting at SAT should have sufficient
knowledge about insurance sector so that they can deal with the issues in an effective
fashion.
7.15 Insurance Regulatory and Development Authority

Earlier, Section 3A of the Insurance Act, 1938 required for annual renewal of registration
of insurance company. The amended section mandates just for annual fee and no annual
renewal is required. Therefore, it provides for permanent registration of the companies.
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IRDAI has the power to suspend or cancel such registration under certain stipulated
conditions.
Section 3(2) of the Insurance Registration Act, 1938 has been amended and the
requirement of depositing a certain amount with Reserve Bank of India for the purpose of
the registration of the company has been removed. Now, they will just have to fulfill
whatever will be prescribed by the regulations. Though this requirement has been
removed, the company will have to maintain a solvency margin as provided by the IRDAI.
The amendment act has added Section 32D which states that “Every insurer carrying on
general insurance business shall, after the commencement of the Insurance Laws
(Amendment) Act, 2015, underwrite such minimum percentage of insurance business in
third party risks of motor vehicles as may be specified by the regulations”. The act has
given the power to IRDAI to exempt any insurer who is primarily engaged in the “business
of health, re-insurance, agriculture, export credit guarantee”.
The amendment act has substituted Section 40B and 40C of the Insurance Act, 1938 and
the new sections provide that management expenses of any insurance company should
not exceed the limits which would be prescribed by IRDAI and the details of the
management expenses will be provided to IRDAI as per the regulations promulgated.
8. IRDAI Regulations and Guidelines for General Insurance

8.1 IRDAI (Investment) Regulations 2016
Readers are advised to visit www.irdai.gov.in for latest version of the Regulation.
8.2 Solvency Margins of General Insurance Companies

(i) Solvency Surveillance
Insurance industry is highly regulated in all the countries, though the regulatory framework
differs from country to country. In some countries, regulation is in the form of State
monopoly and in some other countries, the Government controls important aspects of
business like licensing, minimum tariff, product approval etc. Even in developed countries
where liberalization and free market economy are the buzzwords, stringent ‘front end’ and
‘back-end’ regulations are in vogue. The framework depends on a host of factors like size
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of insurance market, type of customers and players in the market, degree of

professionalization, magnitude of transparency, etc.
Insurance companies collect premium in advance with a promise to settle claims at a
future date in the event of named contingency. Thus, the entire business is based wholly
on the financial strength and integrity of the management to meet its obligations.
Insurance business is unique in many other aspects as well. Insurer assumes a dual role
of risk management and money management. This exposes insurers to risk on both assets
as well as liabilities side. Risk on the asset side arises mainly because of price fluctuations
as a major portion of insurance funds are invested in financial assets. On the liability side,
the difficulty in assessing the liability (Technical Reserves) accurately creates risk.
Another unique aspect is that the stake of the shareholders and promoters is very small
compared to the policyholders’ interest. Due to these unique features insurance
companies operations are closely monitored.
Risk profile of non-life insurers is very different from life companies. Main difference is in
the nature of the business. Life insurers collect level premium for offering risk coverage for
a fairly long period of 15-30 years whereas non-life insurance contract is for a short term,
generally for a year. In case of life insurance, the size of claims can somewhat be
estimated as the companies ‘assure’ a specific sum in the event of a contingency and the
number of claims can also be predicted based on mortality tables. But, quantum of loss in
case of non-life business is not easily predictable as also the number of accidents.
Moreover, in the case of non-life business, it is essential to make a distinction between
property and liability lines because of the different time factor involved in claim settlement.
Liability is a long tail business as the loss may be reported over a number of years in
future, long after the expiry of insurance policy. Huge (open-ended) liability to premium
ratio and mandatory character of some lines are also factors to be reckoned with. In
addition, involvement of third parties and direct settlement to them compounds the
problem of loss assessment. Legal costs involved in settlement are sometimes
astronomical and run-off claims are very common in this type of business.
Insurance companies make provisions for loss and invest the money in financial
instruments as the settlement of claim takes time.
(ii) Solvency Margin
It is imperative to quantify each of the risk factors discussed above as they could lead to
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insolvency. In order to absorb sudden setbacks, it is necessary to have some safety

margin. Financial strength needed for this purpose is generally provided by shareholders
and promoters. That is why owners’ funds in insurance entities are term as ‘policy holders
’surplus’. There are many ways by which the financial prowess of insurers are ascertained.
Assessment of the proportion of owners’ funds to outsiders ’liability gives an idea of how
much a company is geared. High gearing, though increases the profitability, raises the
level of risk undertaken by any entity.
IRDAI had tightened its monitoring by increasing the frequency of solvency reporting to
quarterly. The filing of quarterly statements is required to be made as per the following
schedule:
Solvency report as on To be submitted on or before
30th June 15th August
30th September 15th November
31st December 15th February
(iii) Methods of determining solvency margins
Regulators are interested in short term solvency of insurance entities mainly because
failure of an insurance company can produce severe and far reaching consequences like
shrinkage in market capacity, high premium rates, foreign exchange loss, disruption of
working of commercial enterprises etc. Supervisory authorities follow any one of the
following methods for determining solvency of insurance companies.
1. Absolute Margin: Minimum margin which is calculated as assets over liabilities.
2. Percentage Method: Margin calculations are based on a fixed percentage of
premium and /or claims, net of reinsurance.
3. Risk-weighted Method: Margin calculations are based on the quantification of risks
relating to assets and liabilities. Weights are assigned to various risk categories for
quantification.
In order to determine the level of solvency / capital adequacy it is necessary to understand
the type of regulatory framework in existence. In India selective prescriptions in key areas
like minimum price tariff, investments, reinsurance and administration expenses are
already in vogue. Freedom is given to insurers in other areas like reserving, volume and
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portfolio mix; rear-end supervision is in the form of submission of return in prescribed

format. Assuming that the present structure of regulation will be continued in the
liberalized set up, the moot question is how to determine the level of solvency.
(iv) Requirement of Solvency Margin
Pricing or rating risk which is measured by exposure ratio will be higher than the solvency
ratio used to quantify reserving risks in case of new business/companies. For well-
established companies it has been observed that solvency ratio is higher than exposure
ratio. Therefore, it is suggested that these two ratios be quantified as given above and the
greater of the amounts should be taken as the minimum required amount for solvency.
(v) Margin of Safety
Keeping the required margin of solvency as the bench mark, the actual adjusted *solvency
margin may be expressed as the multiplier which becomes the indicator of margin of
safety. Available margin of safety ratio is determined thus:
Actual Adjusted Solvency Margin*
Required Solvency Margin
* Appropriate deductions are to be made from available solvency from non-compliance of
front-end regulatory prescriptions (e.g. non-admitted assets).
Higher the margin, greater is the index of security against subsequent adverse variations.
(vi) Trigger Points of Regulator Interventions
Depending upon the margin of the safety levels, the following interventions are suggested:
(A) Absolute Method
Margin of Safety more than 2 times – No intervention
Less than 2, more than 1.5 – Calling for additional Necessary
Less than 1.5 more than 1 – On site supervision
Less than 1 – Stop writing business
(B) Relative Method : Absolute method suggests intervention levels based only on a
particular company’s margin of safety ratio. An alternative method based on the
performance of the insurance industry as a whole may be used as supplement to the
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above trigger levels. Margin of safety ratio for the industry can be calculated by
taking the average of this ratio of all the companies in the industry. For categorizing
companies for Supervisory Rating, standard deviation of margin of safety in relation
to industry average can be considered in the following ways:
1. Companies having Margin of safety ratio above and equal to industry average
– SECURE
2. Companies with margin of safety below industry average
(a) Between industry average – BARELY SECURE
(b) Between ½ standard deviation and 1 standard deviation below
average –VULNERABLE
(c) More than 1 standard deviation below average – UNSECURE
(vii) Insurance Regulatory and Development Authority of India (Assets, Liabilities,
and Solvency Margin of General Insurance Business) Regulations, 2016
8.3 IRDAI Guidelines on Financial Reporting of Insurance Operations

& Accounting
The purpose of financial reporting is to allow an assessment of the financial condition and
current operating results of a company. Life insurance contracts are, on an average, long-
term. The profitability of a block of contracts over a time period depends upon:
• Persistency
• Mortality
• Morbidity
• Interest
• Expense Experience
To report the financial condition and current operating results, a life insurance company
requires construction of a valuation. A valuation is a measure and comparison of an
insurer’s assets and liabilities.
Financial Reports : Financial information and reporting depends upon needs of the user.
Users are classified into:
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External users such as

• Regulators
• Current policy owners and potential customers
• Rating agencies
• Creditors
• Potential Buyers
• The Internal Revenue Service
• Employees and Suppliers
• General business communities
Internal Users comprising the corporate managers. Besides they also use the following
two measurement tools, to evaluate the financial performance –
• Managerial accounting including budgeting, cost accounting and audit and control
functions.
• Economic value analysis used to evaluate the long term financial results of current
management actions.
Financial Statements: The primary elements of the annual statement required by
Insurance regulations are-
• Balance Sheet
• Summary of Operations
• A cash flow statement
The specimen schedules as per IRDAI reporting norms are shown at the end of this
Chapter.
Balance Sheet: The purpose of Balance Sheet is to reflect the insurer’s solvency by
comparing the assets and liabilities. The final accounting equation for a company’s
balance sheet is
Assets = Liabilities + (capital stock + surplus)
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Assets
Insurer’s assets can be divided into three major categories.
• Invested assets
• Other admitted assets
• Non-admitted assets
Invested assets produce interest, dividend, rent and capital gain income, and include
• Cash
• Bonds
• Common and Preferred Stocks
• Preferred Stock
• Mortgage Loan on Real Estate
• Real Estate
• Policy Loans and Premium Notes
• Collateral Loans
Certain other assets not included in investments shown in the balance sheet are
• Risk management assets
• Investment income due and accrued
• Premium due and uncollected
• Accrued interest
• Non investment assets
Liabilities
The greatest part of life insurer company’s liabilities, including policy reserves supported
by assets held to fund future benefits under the company contracts.
Other liabilities include-
• Amounts held on deposit
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• Policy owner dividend allocated but not yet payable

• Claims incurred but not yet paid
• Other amounts unpaid
• The asset valuation reserve (AVR)
• Special Reserves
• Policy owner account balances
• Post retirement benefits
• IBNR provisions are also made (incurred but not reported)
Summary of operations
The summary of operations represents an income statement for the reported year,
providing a summary of company’s income, disposition of income, a reconciliation of
beginning and ending surplus.
Income
The income of a life insurer includes
• Premium
• Investment income
• Deposits
• Miscellaneous income
Disposition of Income
The income of a life insurance company is devoted to the cost of doing an insurance
business and includes-
• benefits
• operating expense and taxes
• Increases in required policy reserves
Cash Flow Statement
The cash flow statement reports an insurer’s cash activities and may reveal potential
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liquidity problems. The cash flow statement reports the sources and uses of all insurer
cash for a given reporting period for both insurance operations and investment activity.
Managerial Accounting
The insurer management requires accounting both for managerial purposes, which include
• Budget accounting
• Cost accounting
• Audit and control Procedures
Economic Value Analysis
To measure adequately the long-term financial impact of current-year management
decisions, it is necessary to avoid the limitations inherent in SAP and GAAP accounting
statements.
The goals of management oriented measurement are as follows:
• No distortion of long-term results of surrenders.
• Recognize anticipated profits on future business
• Recognize the long-term value resulting from current investment
• Recognize the unrealized capital gains and losses associated with investment
management programs.
The primary management objective of every (non life insurer is to ensure solvency at all
times and meet the contractual liabilities arising out of each contract of insurance)life
insurer is to create value for shareholders and in mutual companies for policyowners.
Performance measurement systems based on the creation of value are increasingly being
adopted by Life insurers as a standard for judging the effectiveness of management
activity.
Two of the important techniques are
• Value added analysis
• Return on equity analysis
Value Added Analysis
Net worth is defined as statutory surplus, plus the present value of future statutory
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earnings on existing business, plus the present value of future statutory earnings on future
business. Present values are calculated by taking appropriate discount rate on cash flows.
Whenever the present value of future cash flows exceeds the investment under analysis,
management is creating value for shareholders or policy owners.
Value added analysis for a given planning or analysis period is measured as follows:
Ending Net Worth
Less: Beginning Net worth
Plus: Stock and Policy owner Dividends paid
Less: Capital Infusions
Equals: Value added for the period.
Return on Equity Analysis
Return on equity method is used to calculate profitability as a return on an insurer’s
investment in a product line or other venture. Return on equity is the implicit internal rate
of return associated with the cash flow or statutory profits of a profit line or other venture.
When the return on equity exceeds the insurer’s cost of capital, value is created for
shareholders or policy owners.
Some Important Prophylatic Ratios Used By Insurers
The system of solvency margin can be supplemented by a set of early warning system.
1. Margin of safety Ratio:
*Adjusted Actual Solvency Margin > 15 times
Required Solvency Margin
*Adjustments to be made for non-compliance of various
front-end regulatory prescriptions.
2. Leverage/Exposure ratios:
Property Liability
Business Business
(Times)
a) Growth in Net Premium Written 3 5
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Growth in Net Worth

b) Operating leverage ratios:
i) Gross Premium Written 6 8
Net worth
ii) Net Premium Written 3.5 5.5
Net Worth
c) Financial Leverage Ratios:
i) Technical Liabilities 1 2
Net Worth
ii) Networth growth to liability growth ratio
Growth Rate of Networth
Growth Rate of Liabilities
3. Adequacy sufficiency Ratios:
a) Reserve / Funds Adequacy
Technical Liabilities + Net Worth 1.5 2.5
Net Premium Written
b. Loss Reserve Development Coverage
Adequacy
Loss Reserve Development <10% 25%
Net Worth
c. Pricing Sufficiency Ratio:
Actual Claim incurred Ratio + 20%
Expected Claim Incurred Ratio
4. Profitability ratios
a. Overall Technical Performance Ratios*
i) Loss Ratios
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Incurred Losses > 80% 150%

Net Premium earned
ii) Expense Ratio
Net Commission +
Management Expenses <20%
Net Premium Earned
iii) Combined Ratio
i) + ii) <100% 100%
b. Overall Operating Ratio*
Underwriting Profit / Loss
Plus Net Investment <95%
Income & Other income / charges
Net Premium Earned
c. Underwriting/Investment performance Relativity
Ratio
Underwriting Profit / Loss + 25%
Net Investment Income
d. Yield on investments
Net Investment Income 10% 12%
Average Invested Assets
e. Return on Equity
Net gain from Operation 10% 15%
Net worth in the beginning of the year
*Separately for one year and two years
5. Reinsurance
a) i) Premium Retention
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Ratio Net Premium <50% 50%

Gross Premium
ii) R.I. Recovery Vulnerability Ratio
Reinsurance Recoverable <5% 5%
Networth
b) R.I. Exposure Ratio
Reinsurance Ceded + total
Reinsurance Recoverables
Networth <25% 40%
6. Liquidity
a) Quick Liquidity
Quickly convertible Assets 30% 15%
Technical Liabilities
b) Current Liquidity
i) Liquidity Investments 100% 75%
Technical Liabilities
ii) Investment in Affiliate <5%
Networth
iii) Investment in Non-admitted Assets Networth <10%
iv) Net Cash Flow >0
7. Efficiency / Effectiveness ratio:
a) R.I. Recovery Ratio
Net Claim incurred Ratio
Gross Claim incurred Ratio <100%
b) Expense Ratio
Management Expenses <18.5%
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Gross Direct Premiums

c) Direct Commission <5%
Gross Direct Premium Written
d) Net Reinsurance Commission
Net Reinsurance Ceded >25%
e) Gross Premium Lapse <20%
Gross Premium Written in Previous Year
Illustration
Insurers and other interested parties (such as insurance regulators, rating agencies, and
investors) rely on asset of basic ratios to monitor and evaluate the appropriateness of an
insurance company’s rates.
Some of the basic ratios are discussed here:
(a) Frequency
Frequency is a measure of the rate at which claims occur and is normally calculated as:
Frequency = Number of Exposures / Number of Claims
Number of claims
Frequency =
Number of Exposures
For example, if the number of claims is 100,000 and the number of earned exposures is
2,000,000, then the frequency is 5% (= 100,000 / 2,000,000). Normally, the numerator is
the number of reported claims and the denominator is the number of earned exposures.
As other variations may be used depending on the specific needs of the company, it is
important to clearly document the types of claims and exposures used. Analysis of
changes in claims frequency can identify general industry trends associated with the
incidence of claims or the utilization of the insurance coverage. It can also help measure
the effectiveness of specific underwriting actions.
(b) Severity
Severity is a measure of the average cost of claims and is calculated as:
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Severity = Losses / Number of Claims

Losses
Severity =
Number of Claims
Thus, if the total loss dollars are $300,000,000 and the number of claims is 100,000, then
the severity is $3,000 (= $300,000,000 / 100,000). Severity calculations can vary
significantly. For example, paid severity is calculated using paid losses on closed claims
divided by closed claims. Reported severity, on the other hand, is calculated using
reported losses and reported claims. Additionally, ALAE may be included or excluded from
the numerator. Consequently, it is important to clearly document the types of losses and
claims used in calculating the ratio. Analyzing changes in severity provides information
about loss trends and highlights the impact of any changes in claims handling procedures.
(c) Pure Premium (or Loss Cost)
Pure premium (also known as loss cost or burning cost) is a measure of the average loss
per exposure and is calculated as:
Pure Premium = Losses / Number of Exposures = Frequency x Severity.
Loss
Pure Premium = = Frequency x Severity .
Number of Exposures
The term pure premium is unique to insurance and most likely was derived to describe the
portion of the risk’s expected costs that is “purely” attributable to loss. Continuing with the
example above, if total loss dollars are $300,000,000 and the number of exposures
is2,000,000, then the pure premium is $150 (= $300,000,000 / 2,000,000 = 5.0% x
$3,000). Typically, pure premium is calculated using reported losses (or ultimate losses)
and earned exposures. The reported losses may or may not include ALAE and/or ULAE.
As companies may choose to use other inputs depending on the specific needs, it is
important to document the inputs chosen.
Changes in pure premium highlight industry trends in overall loss costs due to changes in
both frequency and severity.
(d) Average Premium
The previous ratios focused on the loss portion of the fundamental insurance equation.
However, it is also very important to analyze the premium side. A typical ratio is average
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premium, which is calculated as follows:

Average Premium = Premium / Number of Exposures
Premium
Average Premium =
Number of Exposures
For example, if the total premium is $400,000,000 and the total exposures are 2,000,000,
then the average premium is $200 (=$400,000,000 / 2,000,000). It is important that the
premium and the exposures be on the same basis (e.g., written, earned, or in-
force).Changes in average premium, if adjusted for rate change activity, highlight changes
in the mix of business written (e.g., shifts toward higher or lower risk characteristics
reflected in rates).
(e) Loss Ratio
Loss ratio is a measure of the portion of each premium dollar used to pay losses and is
calculated as:
Loss Ratio = Losses / Premium = Pure Premium / Average Premium
Losses Pure Premium
Loss Ratio = =
Premium Average Premium
For example, if the total loss dollars are $300,000,000 and the total premium is
$400,000,000, then the loss ratio is 75% (= $300,000,000 / $400,000,000). Typically, the
ratio uses total reported losses and total earned premium; however, other variations are
common. For example, companies may include LAE in the calculation of loss ratios
(commonly referred to as loss and LAE ratios). Once again, it is important to clarify the
inputs being used. Historically, most companies monitor and analyze the loss and LAE
ratio as a primary measure of the adequacy of the rates overall and for various key
segments of the portfolio.
(f) Loss Adjustment Expense Ratio
The loss adjustment expense (LAE) ratio compares the amount of claim-related expense
to total losses and is calculated as follows:
LAE Ratio = Loss Adjustment Expenses / Losses
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Loss Adjustment Expenses

LAE Ratio =
Losses
The loss adjustment expenses include both allocated and unallocated loss adjustment
expenses. Companies may differ as to whether paid or reported (incurred) figures are
used. It is important to recognize that the LAE are being divided by total losses and not by
premium, so the loss and LAE ratio is not the sum of the loss ratio and the LAE ratio, but
rather is the loss ratio multiplied by the sum of one plus the LAE ratio. Companies monitor
this ratio over time to determine if costs associated with claim settlement procedures are
stable or not. A company may compare its ratio to those of other companies as a
benchmark for its claims settlement procedures.
(g) Underwriting Expense Ratio
The underwriting (UW) expense ratio is a measure of the portion of each premium dollar
used to pay for under writing expenses, and it is calculated as follows:
UW Expense Ratio = Underwriting Expenses / Premium
Underwriting Expenses
UW Expense Ratio =
Premium
Often the company will sub-divide the major underwriting expense categories into
expenses that are generally incurred at the onset of the policy (e.g., commissions, other
acquisition, taxes, licenses, and fees) and expenses that are incurred throughout the
policy (e.g., general expenses). For the purpose of calculating the underwriting expense
ratio, the former expenses are measured as a ratio to written premium and the latter
expenses are measured as a ratio to earned premium. This is done to better match the
expense payments to the premium associated with the expense and to better estimate
what percentage of future policy premium should be charged to pay for these costs. The
individual expense category ratios are then added to calculate the overall underwriting
expense ratio.
A company will monitor this ratio over time and compare actual changes in the ratio to
expected changes based on general inflation. A company may even compare its ratio to
other companies’ ratios as a benchmark for policy acquisition and service expenditures.
(h) Operating Expense Ratio
The operating expense ratio (OER) is a measure of the portion of each premium rupee
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used to pay for loss adjustment and underwriting expenses and is calculated as:
OER = UW Expense Ratio + LAE / Earned Premium
The OER is used to monitor operational expenditures and is key to determining overall
profitability.
LAE
OER = UW Expense Ratio +
Earned Premium
(i) Combined Ratio
The combined ratio is the combination of the loss and expense ratios, and historically has
been calculated as:
Combined Ratio = Loss Ratio + LAE /Earned Premium+ Underwriting Expenses /
Written Premium
LAE Underwriting Expenses
Combined Ratio = Loss Ratio + +
Earned Premium Written Premium
In calculating the combined ratio, the loss ratio should not include LAE or it will be double
counted.
As mentioned in the section on underwriting expense ratio, some companies may compare
underwriting expenses incurred throughout the policy to earned premium rather than to
written premium. In this case, the companies may choose to define combined ratio as:
Combined Ratio = Loss Ratio + OER.
The combined ratio is a primary measure of the profitability of the book of business.
(j) Retention Ratio
Retention is a measure of the rate at which existing insured’s renew their policies upon
expiration. There tention ratio is defined as follows:
Retention Ratio = Number of Policies Renewed / Number of Potential Renewal Policies
Number of Policies Renewed
Retention Ratio =
Number of Potential Renewal Policies
If 100,000 policies are invited to renew in a particular month and 85,000 of the insured’s
choose to renew, then the retention ratio is 85% (= 85,000 / 100,000). There are a
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significant number of variations as to how retention ratios are defined. For example, some
companies exclude policies that get cancelled due to death and policies that an
underwriter non-renews, while others do not. Retention ratios and changes in the retention
ratios are monitored closely by product management and marketing departments.
Retention ratios are used to gauge the competitiveness of rates and are very closely
examined following rate changes or major changes in service. They are also a key
parameter in projecting future premium volume.
(k) Close Ratio
The close ratio (also known as hit ratio, quote-to-close ratio, or conversion rate) is a
measure of the rate at which prospective insured’s accept a new business quote. The
close ratio is defined as follows:
Close Ratio = Number of Accepted Quotes / Number of Quotes
Number of Accepted Quotes
Close Ratio =
Number of Quotes
For example, if the company provides 300,000 quotes in a particular month and generates
60,000 new policies from those quotes, then the close ratio is 20% (= 60,000 / 300,000).
Like the retention ratio, there can be significant variation in the way this ratio is defined.
For example, a prospective insured may receive multiple quotes and companies may
count that as one quote or may consider each quote separately. Close ratios and changes
in the close ratios are monitored closely by product management and marketing
departments. Closed ratios are used to determine the competitiveness of rates for new
business.
Conclusion
Thus, investment management of an insurance company is very crucial for the
sustainability and continual operations of the company. Ratio analysis is one of the
scientific tools to help check the deviations from the operations of the company.
8.4 IRDAI (Preparation of Financial Statements and Auditor’s Report of

Insurance Companies) Regulations, 2002
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9. Other Important Legislations Governing General Insurance

Business in India
9.1 The Motor Vehicles Acts, 1939 and 1988
The Motor Vehicles Act was first passed in 1939 and Chapter VIII was brought into force
from 1st July, 1946. The Act was subsequently amended in 1956 and 1988. Chapter VIII
provides for compulsory insurance of motor vehicles. According to the provisions of the
Act, no vehicle can be used in a public place unless there is in force in relation to that
vehicle a policy of insurance issued by an authorised insurer. This policy covers the
insured’s liability in respect of death or bodily injury of third parties, fare-paying
passengers, paid drivers, etc., and damage to property of third parties. The Act also
prescribes the limits of liability.
The MV Act, 1939 was amended in 1956 to provide for the constitution of Motor Accidents
Claims Tribunals (MACT) by the state governments to ensure speedy settlement of claims
of persons involved in accidents. These tribunals follow simple and fast procedure and
charge nominal fees.
Important Legal Provisions
(i) No Fault Liability
Section 140(1) of the MV Act, 1988 contains provisions regarding no-fault liability of the
insured as follows:
“Where the death or permanent disablement of any person has resulted from an accident
arising out of the use of a motor vehicle, the owner of the vehicle shall, or, as the case
may be, the owners of the vehicle shall, jointly and severally, be liable to pay
compensation in respect of such death or disablement in accordance with the provisions of
this section”.
The essence of this provision is that, the negligence of the owner, or user of the motor
vehicle is no longer relevant to decide the question of liability. On the other hand the
claimants shall also not be required to plead and establish that the death or permanent
disablement in respect of which the claim has been made was due to any wrongful act,
neglect or default of the owner, or owners, of the vehicle or vehicles concerned or any
other person. This concept is known as No-Fault Liability.
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The compensation payable following is as follows:

Motor Vehicles MV Act, 1988
Act, 1939 (amended in 1994)
Death Rs. 25,000 Rs. 50,000
Permanent Disablement Rs. 12,000 Rs. 25,000
Note: Permanent disablement refers to injury or injuries involving permanent privation of
sight of either eye, hearing of either ear, or privation of any member of joint, or
disfiguration of the head or face.
(ii) Hit and Run Accidents
Hit and run accident is “an accident arising out of the use of a motor vehicle or motor
vehicles, the identity whereof cannot be ascertained in spite of reasonable efforts for the
purpose.” Section 163 of the MV Act provides that the Central Government may establish
a fund known as Solatium Fund to be utilised for paying compensation in respect of death
or grievous hurt to persons resulting from Hit and run motor accidents.
The compensation payable following is as follows:
Motor Vehicles Amended Act, 1988
Act, 1939 (1994 amendment)
Death Rs. 8,500 Rs. 25,000
Grievous Hurt Rs. 2,000 Rs. 12,500
Note: According to section 320 of IPC ‘Grievous Hurt’ includes emasculation, permanent
privation of sight of either eye, hearing of either ear, or privation of any member of joint, or
disfiguration of the head or face, fracture or dislocation of a bone or tooth, any hurt which
endangers life or which causes severe bodily pain for twenty days, or unable to follow his
ordinary pursuits.
(iii) Solatium Scheme
The Solatium Scheme was initiated by the Central Government in 1989 for the payment of
compensation to the victims of ‘Hit and Run’ accidents. This scheme came into force from
1st July, 1989.
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The salient features of the scheme are as follows:

(a) The GIC nominates officers in each district for settlement of claims
(b) Application for compensation to be filed with the Claims Enquiry Officer (CEO)
designated in each district within six months from the date of accident
(c) The CEO will hold enquiry and submit a report to the Claims Settlement
Commissioner nominated for the district for sanction
(d) The sanction order with all supporting documents to be communicated to the
concerned insurance company for making payment
(e) Payment to be made by Cheque/ Demand Draft to the claimant within 15 days from
the date of receipt of the sanction order Monthly returns of claims paid and pending
to be submitted to the Claims Settlement Commissioner
(f) Annual report of the scheme to be submitted by GIC to the Standing Committee and
to the Central Government
The Standing Committee members are nominees of the GIC and four subsidiaries. It
reviews the working of the scheme. The District Level Committee is concerned with the
implementation of the scheme at the district level.
Structured Formula for compensation
Section 163A, of the Motor Vehicles Act (amended on 14.11.1994) provides for fixed
compensation to be paid to victims of fatal injuries to be made on the basis of “structured
formula basis” based on their age and income.
9.2 The Inland Steam Vessels (Amendment) Act, 1977

The Inland Steam Vessels (Amendment) Act, 1917 as amended in 1977 provides for the
application of the provisions of Chapter VIII of the Motor Vehicles Act, 1939 in relation to
the insurance of mechanically propelled vessels against third party risks. The Act makes it
mandatory for owners or operators of inland vessels to insure against legal liability for
death or bodily injury of third parties or of passengers carried for hire or reward and for
damage to property of third parties. The limits of liability are also prescribed.
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This Marine Insurance Act, 1963 contains the law relating to marine insurance. This Act
governs the practice of the marine insurance contracts. The provisions for subrogation
proceedings for underwriters to pursue rights of recovery from carriers and bailees are
also contained in this act.
9.4 The Carriage of Goods by Sea Act, 1925

This Act defines the rights, liabilities and immunities of a ship-owner in respect loss or
damage to cargo carried. It also deals with three aspects of the ship owner’s liabilities
towards cargo owners, viz.:
a) where the ship-owner is deemed to be liable for loss or damage to cargo unless he
proves otherwise
b) where the ship owner is exempted from liability: loss resulting from perils of the seas
c) limits of liability of a ship owner for loss of or damage to cargo calculated in
monetary terms per package or unit of cargo.
9.5 The Merchant Shipping Act, 1958

This Act provides protection to ship owners. For example, the liability of the ship owner
can be limited to certain maximum limits for some losses, which have occurred without the
privity or fault of the ship owner. Generally these claims may relate to loss of life, personal
injury or damage to property on land or water. At the same time, the Act imposes an
obligation on the ship owner to send the ship to sea in a seaworthy and safe condition.
9.6 The Bill of Lading Act, 1856

The Bill of Lading is one of the important documents needed to substantiate a Marine
claim. This Act defines the character of a Bill of Lading as a documentary evidence of the
contract of carriage of goods between the shipper and ship owner. This Bill also is an
acknowledgement of the receipt of goods on board the vessel and serves as a document
of title.
9.7 The Indian Ports (Major Ports) Act, 1963

This Act defines the liability of the Port Trust Authorities for the loss of or damage to goods
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whilst in their custody and also prescribes the time limits for filing monetary claims, or suit
against the Port Trust Authorities.
9.8 Indian Railways Act, 1989

This Act deals with the various administrative aspects, and important provisions relating to
marine insurance. These provisions define the rights and the liabilities of the railways as
carriers of goods. The Railways Claims Tribunal Act, 1987, defines the procedures for the
settlement of claims relating to claims for cargo loss, personal injuries, refund of excess
freight and other issues.
9.9 The Carriers Act, 1865

This Act contains provisions defining the rights and liabilities of the truck owners or
operators who carry goods for the public on hire basis, for any loss of or damage to the
goods carried by them. The provisions also prescribe the time frame for the notification of
the loss of or damage of the goods to be filed with the road carriers.
9.10 The Indian Post Office Act, 1898

This Act defines the liability of the Government for the loss, mis-delivery, delay, of or
damage to any postal article in the course of postal transit.
9.11 The Carriage by Air Act, 1972

This Act, gives effect to the provisions of the Warsaw Convention, 1929 and the Hague
Protocol, 1955 relating to international carriage of goods and passengers by air. The Act
also defines the liability of the air carrier for death of or injury to passengers and for the
loss of or damage to registered cargo and luggage. The time limitation for filing of claims,
and maximum limits of liability for injury, death, damage etc are also clearly specified in
the various sections of the Act. Almost all the provisions, with little modifications, are
equally applicable to domestic carriage.
9.12 Multi-modal Transportation Act, 1993 (MMTS)

This Act provides for the registration of the multi-modal transport operators who are
engaged in transportation of goods under more than one mode of transport i.e. rail/ road
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and sea. The provisions define the limits of liability of the operator, for any loss, contents
of the various documents, notification etc.
9.13 Public Liability Insurance Act, 1991

This Act was enacted for the purpose of providing relief to the persons affected by
accident occurring while handling any hazardous substance and for matters connected
therewith or incidental thereto. The underlying basis for relief under the act is the No- Fault
basis.
The compensation payable by the owner of the establishment in the case of death or injury
to any person other than a workman or damage to any property resulting from an accident
is as follows:
Medical expenses Maximum of Rs.12,500 per person
(Reimbursement)
Death Rs. 25,000
Fatal Accidents Rs. 25,000 per person + Medical expenses upto
maximum of Rs.12,500
Permanent Partial Reimbursement of medical expenses up to
Disability/ injury/ maximum of Rs.12,500 + cash
benefit on the sickness basis of medical
certification
Temporary Partial Fixed monthly relief not exceeding
Disability Rs. 1,000/- per month up to a
(Loss of wages) maximum of 3 months
• unless hospitalized for 3 days
• victim is above 16 years of age
Permanent Total
Disablement Rs. 25,000
Actual damage to private property Rs. 6,000
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9.14 The Indian Stamp Act, 1899

The Indian Stamp Act, 1899 requires that the policy of insurance be stamped in
accordance with the Schedule of rates prescribed therein.
9.15 The Consumer Protection Act, 1986

This Act was enacted to provide for the protection of the interest of the consumers and to
make provision for the establishment of the consumer councils and other authorities for
the settlement of consumer disputes.
A consumer dispute means a dispute where the person against whom a complaint has
been made denies and disputes the allegations contained in the complaint.
For the purpose of the Act, Consumer Disputes Redressal Agencies are established in
each district and state and at the national level.
Authority Jurisdiction Reward
District Forum Order Civil Court for Value of goods and services and
execution of decree. compensation payable is lessthan Rs. 5
lakhs
State Original, appellate and as Value of goods, services and
Commission well as supervisory compensation payable is not less than
%s. 5 Lakhs and < Rs.20 Lakhs.
National Original, appellate and as Value of goods, services and
Commission well as supervisory - Final compensation payable exceeds Rs.20
Authority Lakhs.
Note: All the three agencies have powers of Civil Court.
Consumer Forum Orders
The Redressal Forums after detailed evaluation of the cases filed, can issue direction to
the opposite party to do one of the following things namely:
• To remove the defect from the goods in question
• To replace the goods which shall be free from any defect
• To return to the complainant the price or charges paid by him/her
• To pay compensation for any loss or injury suffered by the consumer due to the
negligence of the opposite party
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• To remove the defects/ deficiencies in the services in question

• To disallow the continuation of any unfair trade practice or the restrictive trade
practice
• Not to offer any hazardous goods for sale
• To withdraw hazardous goods from being offered for sale
• To provide for adequate costs to parties.
Insurance as a ‘service’
The business of insurance is defined as ‘service’ under the provisions of this Act. Most of
the consumer disputes relating to insurance fall in the following categories:
• Delay in settlement of claims
• Non- settlement of claims
• Repudiation of claims
• Quantum of loss
• Policy terms and conditions.
Note: The Consumer Protection Act also takes into consideration cases pertaining to
Products Liability insurances and Professional Indemnities. The cases may pertain to
injuries, etc. caused by defective products or negligence of professionals like doctors,
lawyers and accountants. In a study conducted on 114 consumer cases adjudicated by the
National Commission during the period 1991 to 1994, 65 cases were decided against
insurers and 49 cases in their favour. Can also mention about Insurance Ombudsman,
though it is not through a legislation but only through a govt. Notification. It is like an
arbitrator facilitating redressal of customer grievances.
9.16 Highlights of Arbitration and Conciliation Act, 2015

The Government of India decided to amend the Arbitration and Conciliation Act, 1996 by
introducing the Arbitration and Conciliation (Amendment) Bill, 2015 in the Parliament. The
Union Cabinet chaired by the Prime Minister, had given its approval for amendments to
the Arbitration and Conciliation Bill, 2015 taking into consideration the Law Commission's
recommendations, and suggestions received from stake holders.
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In an attempt to make arbitration a preferred mode of settlement of commercial disputes

and making India a hub of international commercial arbitration, the President of India on
23rd October 2015 promulgated an Ordinance ("Arbitration and Conciliation (Amendment)
Ordinance, 2015) amending the Arbitration and Conciliation Act, 1996.
Amendments
The following are the salient features of the new ordinance:
1. The first and foremost welcome amendment introduced by the ordinance is with
respect to definition of expression 'Court'. The amended law makes a clear
distinction between an international commercial arbitration and domestic arbitration
with regard to the definition of 'Court'. In so far as domestic arbitration is concerned,
the definition of "Court" is the same as was in the 1996 Act, however, for the
purpose of international commercial arbitration, 'Court' has been defined to mean
only High Court of competent jurisdiction. Accordingly, in an international
commercial arbitration, as per the new law, district court will have no jurisdiction and
the parties can expect speedier and efficacious determination of any issue directly
by the High court which is better equipped in terms of handling commercial disputes.
2. Amendment of Section 2(2): A proviso to Section 2(2) has been added which
envisages that subject to the agreement to the contrary, Section 9 (interim
measures), Section 27(taking of evidence), and Section 37(1)(a), 37(3) shall also
apply to international commercial arbitrations, even if the seat of arbitration is
outside India, meaning thereby that the new law has tried to strike a kind of balance
between the situations created by the judgments of Bhatia International and Balco v.
Kaiser. Now Section 2(2) envisages that Part-I shall apply where the place of
arbitration is in India and that provisions of Sections 9, 27, 37(1) (a) and 37 (3) shall
also apply to international commercial arbitration even if the seat of arbitration is
outside India unless parties to the arbitration agreement have agreed to the
contrary.
3. Amendment to Section 8: (Reference of parties to the dispute to arbitration): In
Section 8, which mandates any judicial authority to refer the parties to arbitration in
respect of an action brought before it, which is subject matter of arbitration
agreement. The sub-section(1) has been amended envisaging that notwithstanding
any judgment, decree or order of the Supreme Court or any court, the judicial
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authority shall refer the parties to the arbitration unless it finds that prima facie no
valid arbitration agreement exists. A provision has also been made enabling the
party, who applies for reference of the matter to arbitration, to apply to the Court for
a direction of production of the arbitration agreement or certified copy thereof in the
event the parties applying for reference of the disputes to arbitration is not in the
possession of the arbitration agreement and the opposite party has the same.
4. Amendment to Section 9 (Interim Measures): The amended section envisages
that if the Court passes an interim measure of protection under the section before
commencement of arbitral proceedings, then the arbitral proceedings shall have to
commence within a period of 90 days from the date of such order or within such time
as the Court may determine. Also, that the Court shall not entertain any application
under section 9 unless it finds that circumstances exist which may not render the
remedy under Section 17 efficacious.
The above amendments to Section 9 are certainly aimed at ensuring that parties
ultimately resort to arbitration process and get their disputes settled on merit through
arbitration. The exercise of power under Section 9 after constitution of the tribunal
has been made more onerous and the same can be exercised only in circumstances
where remedy under Section 17, appears to be non-efficacious to the Court
concerned.
5. Amendment to Section 11 (Appointment of Arbitrators): In so far as section 11,
"appointment of arbitrators" is concerned, the new law makes it incumbent upon the
Supreme Court or the High Court or person designated by them to dispute of the
application for appointment of arbitrators within 60 days from the date of service of
notice on the opposite party.As per the new Act, the expression 'Chief Justice of
India' and 'Chief Justice of High Court' used in earlier provision have been replaced
with Supreme Court or as the case may be, High Court, respectively. The decision
made by the Supreme Court or the High Court or person designated by them have
been made final and only an appeal to Supreme Court by way of Special Leave
Petition can lie from such an order for appointment of arbitrator. The new law also
attempts to fix limits on the fee payable to the arbitrator and empowers the high
court to frame such rule as may be necessary considering the rates specified in
Fourth Schedule.
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6. Amendment to Section 12: Amendment to Section 12, as per the new law makes
the declaration on the part of the arbitration about his independence and impartiality
more onerous. A Schedule has been inserted (Fifth Schedule) which lists the
grounds that would give rise to justifiable doubt to independence and impartiality of
arbitrator and the circumstances given in Fifth Schedule are very exhaustive. Any
person not falling under any of the grounds mentioned in the Fifth Schedule is likely
to be independent and impartial in all respects. Also, another schedule (seventh
schedule) is added and a provision has been inserted that notwithstanding any prior
agreement of the parties, if the arbitrator's relationship with the parties or the
counsel or the subject matter of dispute falls in any of the categories mentioned in
the seventh schedule, it would act as an ineligibility to act as an arbitrator. However,
subsequent to disputes having arisen, parties may by expressly entering into a
written agreement waive the applicability of this provision. In view of this, it would
not be possible for Government bodies to appoint their employees or consultants as
arbitrators in arbitrations concerning the said Government bodies.
7. Amendment to Section 14: Amendment of Section 14 aimed at filling a gap in the
earlier provision, which only provided for termination of mandate of the arbitrator. If
any of the eventualities mentioned in sub-section (1) arises. The new law also
provides for termination of mandate of arbitration and substitution and his/her
substitution by another one.
8. Amendment to Section 17 (Interim Measures by Arbitral tribunal): The old Act
had lacunae where the interim orders of the tribunal were not enforceable. The
Amendment removes that lacunae and stipulates that an arbitral tribunal under
Section 17 of the Act shall have the same powers that are available to a court under
Section 9 and that the interim order passed by an arbitral tribunal would be
enforceable as if it is an order of a court. The new amendment also clarifies that if
an arbitral tribunal is constituted, the Courts should not entertain applications under
Section 9 barring exceptional circumstances.
9. Amendment to Section 23: The new law empowers the Respondent in the
proceedings to submit counter claim or plead a set-off and hence falling within the
scope of arbitration agreement.
10. Amendment to Section 24: It requires the arbitral tribunal to hold the hearing for
presentation of evidence or oral arguments on day to day basis, and mandates the
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tribunal not to grant any adjournments unless sufficient causes shown. It further
empowers the tribunal the tribunal to impose exemplary cost where adjournment
11. Insertions of new Section 29A and 29B( Time limit for arbitral award and Fast
Track Procedure) : To address the criticism that the arbitration regime in India is a
long drawn process defying the very existence of the arbitration act, the Amended
Act envisages to provide for time bound arbitrations. Under the amended act, an
award shall be made by the arbitral tribunal within 12 months from the date it enters
upon reference. This period can be extended to a further period of maximum 6
months by the consent of the parties, after which the mandate of the arbitrator shall
terminate, unless the Court extends it for sufficient cause or on such other terms it
may deem fit. Also, while extending the said period, the Court may order reduction
of fees of arbitrator by upto 5% for each month such delay for reasons attributable to
the arbitrator. Also, the application for extension of time shall be disposed of by
Court within 60 days from the date of notice to the opposite party.
The Ordinance also provides that the parties at any stage of arbitral proceeding may
opt for a fast track procedure for settlement of dispute, where the tribunal shall have
to make an award within a period of 6 months. The tribunal shall decide the dispute
on the basis of written pleadings, documents and submissions filed by the parties
without oral hearing, unless the parties request for or if the tribunal considers it
necessary for clarifying certain issues. Where the tribunal decides the dispute within
6 months, provided additional fees can be paid to the arbitrator with the consent of
the parties.
12. Amendment to Section 25: The new Act empowers the tribunal to treat
Respondent's failure to communicate his statement of defence as forfeiture of his
right to file such statement of defence. However, the tribunal will continue the
proceedings without treating such failure as admission of the allegations made by
the Claimant.
13. Amendment to section 28: The new law requires the tribunal to take into account
the terms of contract and trade usages applicable to the transaction. In the earlier
law, the arbitral tribunal was mandated to decide disputes in accordance with the
terms of the contract and to take into account the trade usages applicable to the
transaction. To that extent, the new law seeks to relieve the arbitrators from strictly
adhering to the terms of the contract while deciding the case. However, the arbitrator
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can still not ignore the terms of the contract. Therefore, the new amendment seems
to bring in an element of discretion in favour of the arbitrators while making of an
award.
14. Amendment to Section 31: This provides for levy of future interest in the absence
of any decision of the arbitrator, on the awarded amount @2% higher than current
rate of interest prevalent on the date of award. The current rate of interest has been
assigned the same meaning as assigned to the expression under Clause (b) of
Section 21 of the Interest Act, 1978.In addition, the new Act lays down detailed
parameters for deciding cost, besides providing that an agreement between the
parties, that the whole or part of the cost of arbitration is to be paid by the party shall
be effective only if such an agreement is made after the dispute in question had
arisen. Therefore, a generic clause in the agreement stating that cost shall be
shared by the parties equally, will not inhibit the tribunal from passing the decision
as to costs and making one of the parties to the proceedings to bear whole or as a
part of such cost, as may be decided by the tribunal.
15. Amendment of Section 34 (Limiting the gamut of Public Policy of India): As per
the new amendment, an award passed in an international arbitration, can only be set
aside on the ground that it is against the public policy of India if, and only if, – (i) the
award is vitiated by fraud or corruption; (ii) it is in contravention with the fundamental
policy of Indian law; (iii) it is in conflict with basic notions of morality and justice. The
present amendment has clarified that the additional ground of "patently illegality" to
challenge an award can only be taken for domestic arbitrations and not international
arbitrations. Further, the amendment provides that the domestic awards can be
challenged on the ground of patent illegality on the face of the award but the award
shall not be set aside merely on the ground of an erroneous application of law or by
re-appreciation of evidence. The new Act also provides that an application for
setting aside of an award can be filed only after issuing prior notice to the other
party. The party filing the application has to file an affidavit along with the application
endorsing compliance with the requirement of service of prior notice on the other
party. A time limit of one year from the date of service of the advance notice on the
other parties has been fixed for disposal of the application under Section 34.
Significantly, there is no provision in the new Act which empowers the court or the
parties to extend the aforesaid limit of one year for disposal of the application under
Section 34.
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16. Amendment to Section 36 (Stay on enforcement of award): The Ordinance

provides that an award would not be stayed automatically by merely filing an
application for setting aside the award under Section 34. There has to be a specific
order from the Court staying the execution of award on an application made for the
said purpose by one of the parties. The Ordinance aims to remove the lacunae that
existed in the previous Act where pending an application under Section 34 for
setting aside of arbitral award, there was an automatic stay on the operation of the
award. The new law also empowers the Court to grant stay on operation of arbitral
award for payment of money subject to condition of deposit of whole or a part of the
awarded amount.
17. Amendment to Section 37: Under Section 37(1), the new law makes provision for
filing of an appeal against an order of judicial authority refusing to refer the parties to
arbitration under Section 8.
18. As regards enforcement of certain foreign awards, the new law seeks to add
explanation of Sections 48 and 57 thereby clarifying as to when an award shall be
considered to be in conflict within public policy of India. The parameters are the
same as are provided under Section 34. Similarly, the expression "Court" used in
Sections 47 and 56 have been defined to mean only the High Court of competent
jurisdiction.
9.17 Highlights of Arbitration and Conciliation (Amendment) Bill, 2018

The Arbitration and Conciliation (Amendment) Bill, 2018 was introduced in Lok Sabha by
the Minister for Law and Justice, Mr. PP Chaudhary, on July 18, 2018. It seeks to amend
the Arbitration and Conciliation Act, 1996. The Act contains provisions to deal with
domestic and international arbitration, and defines the law for conducting conciliation
proceedings.
Arbitration Council of India: The Bill seeks to establish an independent body called the
Arbitration Council of India (ACI) for the promotion of arbitration, mediation, conciliation
and other alternative dispute redressal mechanisms. Its functions include: (i) framing
policies for grading arbitral institutions and accrediting arbitrators, (ii) making policies for
the establishment, operation and maintenance of uniform professional standards for all
alternate dispute redressal matters, and (iii) maintaining a depository of arbitral awards
(judgments) made in India and abroad.
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Composition of the ACI: The ACI will consist of a Chairperson who is either: (i) a Judge
of the Supreme Court; or (ii) a Judge of a High Court; or (iii) Chief Justice of a High Court;
or (iv) an eminent person with expert knowledge in conduct of arbitration. Other members
will include an eminent arbitration practitioner, an academician with experience in
arbitration, and government appointees.
Appointment of arbitrators: Under the 1996 Act, parties were free to appoint arbitrators.
In case of disagreement on an appointment, the parties could request the Supreme Court,
or the concerned High Court, or any person or institution designated by such Court, to
appoint an arbitrator.
Under the Bill, the Supreme Court and High Courts may now designate arbitral institutions,
which parties can approach for the appointment of arbitrators. For international
commercial arbitration, appointments will be made by the institution designated by the
Supreme Court. For domestic arbitration, appointments will be made by the institution
designated by the concerned High Court. In case there are no arbitral institutions
available, the Chief Justice of the concerned High Court may maintain a panel of
arbitrators to perform the functions of the arbitral institutions. An application for
appointment of an arbitrator is required to be disposed of within 30 days.
Relaxation of time limits: Under the 1996 Act, arbitral tribunals are required to make
their award within a period of 12 months for all arbitration proceedings. The Bill proposed
to remove this time restriction for international commercial arbitrations.
Completion of written submissions: Currently, there is no time limit to file written
submissions before an arbitral tribunal. The Bill requires that the written claim and the
defence to the claim in an arbitration proceeding, should be completed within six months
of the appointment of the arbitrators.
Confidentiality of proceedings: The Bill provides that all details of arbitration
proceedings will be kept confidential except for the details of the arbitral award in certain
circumstances. Disclosure of the arbitral award will only be made where it is necessary for
implementing or enforcing the award.
Applicability of Arbitration and Conciliation Act, 2015: The Bill clarifies that the 2015
Act shall only apply to arbitral proceedings which started on or after October 23, 2015.
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Conclusion
The amendment brought to the 1996 Act is certainly a positive step towards making
arbitration expeditious, efficacious and a cost effective remedy. The new amendments
seek to curb the practices leading to wastage of time and making the arbitration process
prohibitively a costly affair. The new law also makes the declaration by the arbitrator about
his independence and impartiality more realistic as compared to a bare formality under the
previous regime. Making the arbitrator responsible for delay in the arbitration proceedings,
for the reasons attributable to him, would ensure that the arbitrators do not take up
arbitrations, which are beyond their capacities. Such a deterrent would imbibe self-
discipline and control amongst the arbitrators. It can be said that the present amendments
certainly travel an extra mile towards reducing the interference of the Court in arbitration
proceedings that has been a consistent effort of the legislature since passing of the 1996
Act.
SUMMARY
• Insurance business is one of the most highly regulated businesses globally for
reasons of equity and efficiency. It has a well-defined regulatory and legislative
framework to operate.
• The first Insurance Act was passed in 1938 and was brought into force from 1st July,
1939. This Act applies to the GIC and the four subsidiaries. The Act was amended in
the years 1950, 1968, 1988, 1999.
• The GIBNA Act came into force on 1st January, 1973. This Act is in pursuance of
clause (c) of Article 39 of the Constitution of India which reads thus:.
• The Insurance Act, 1938, recommended the appointment of the Controller of
Insurance, to ensure compliance of the various provisions under the Act by
insurance companies.
• The Committee on reforms of the insurance sector under the chairmanship of Shri R
N Malhotra, ex-governor of Reserve Bank of India, recommended the creation of a
more efficient and competitive financial system in tune with global trends.
• The Life Insurance Council seeks to play a significant and complementary role in
transforming India’s life insurance industry into a vibrant, trustworthy and profitable
service, helping the people of India on their journey to prosperity.
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• The general insurance council aims to provide leadership on issues having a bearing
on the industry’s collective strength and image and to shape and influence decisions
made by the Government, regulator and other public authorities, within the country,
in order to benefit the industry collectively.
• The Insurance Laws (Amendment) Bill, 2015 was passed by the Lok Sabha on 4th
March, 2015 and by the Rajya Sabha yesterday i.e. on 12th March, 2015.The
passage of the Bill thus paved the way for major reform related amendments in the
Insurance Act, 1938, the General Insurance Business (Nationalization) Act, 1972
and the Insurance Regulatory and Development Authority (IRDAI) Act, 1999.
• The investment performance of an insurance company affects profits, dividends,
interest credits on term etc.
• Insurance industry is highly regulated in all the countries, though the regulatory
framework differs from country to country. In some countries, regulation is in the
form of State monopoly and in some other countries, the Government controls
important aspects of business like licensing, minimum tariff, product approval etc.
• The purpose of financial reporting is to allow an assessment of the financial
condition and current operating results of a company. Life insurance contracts are,
on an average, long-term.
REVISION QUESTIONS
SECTION – A
1. The LIC was nationalized in the year
(a) 1955 (b) 1962
(c) 1956 (d) 1966
2. The GIC was nationalized in the year
(a) 1977 (b) 1947
(c) 1972 (d. 1975
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3. The Controller of Insurance has been replaced by the

(a) IRDAI (b) IIRM
(c) IBRD (d) SEBI
4. Which of the following is not the function of the IRDAI
(a) To regulate and promote orderly growth of the insurance market
(b) To register insurance companies
(c) To invest in the capital of the insurance company
(d) To supervise the functioning of the TAC
5. Which of the following sources of funds is not credited into the IRDAI fund ?
(a) Government grants, fees, charges
(b) Funds from Central Government
(c) Percentage of prescribed income from the insurer
(d) Donations from charitable and non-governmental institutions
(e) All of the above
6. The IRDAI fund cannot be utilized for the
(a) Salaries of members and employees
(b) Any other expenses related to the functions of the authority
(c) Allowances and perks of the employees and members
(d) Advertisement of private insurance company
(e) All of the above
7. Capital adequacy norms of an insurer specify the
(a) Maximum quantum of capital
(b) Minimum paid up equity capital
(c) Minimum reserve capital
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(d) Maximum reserve capital

8. Solvency margins refer to the adequate
(a) Excess of assets over liabilities
(b) Excess of over liabilities over assets
(c) Excess of liabilities over cash
(d) Total of assets and liabilities
9. The person engaged in the forecasting and pricing of insurance products is
known as
(a) Auditor (b) Actuary
(c) Advocate (d) Consultant
10. As per IRDAI Regulations the registration of an insurer may be suspended if
he
(a) Indulges in manipulative insurance business
(b) Fails to provide periodical returns
(c) Fails to make investments as per norms
(d) Fails to furnish information as required by the regulator
(e) All the above
11. The IRDAI has made it obligatory for the insurance companies to procure
business from
(a) Social sector (b) Urban sector
(c) Tertiary sector (d) Rural sector
12. Assignment provisions refers to
(a) The transfer of policies (b) Purchase of policies
(c) Buying and selling of policies (d) Distribution of policies
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13. Absolute assignment implies

(a) Complete transfer of all rights (b) Transfer of some rights
(c) No transfer of any rights (d) Transfer of only obligations
14. Collateral assignment implies
(a) Temporary / conditional transfer (b) Absolute transfer
(c) Transfer of only obligations (d) Transfer of all rights
Answers
1. (c) 2. (c) 3. (a) 4. (c) 5. (d) 6. (d) 7. (b) 8. (a) 9. (b) 10. (e)
11. (a) 12. (a) 13. (a) 14. (a)
SECTION – B
1. Enumerate the circumstances when a member can be removed from the office
of IRDAI?
Ans. A member can be removed from office by the Central Government under the
following circumstances:
1. When he is adjudged an insolvent
2. When he has become physically or mentally incapable
3. When he has been convicted of any offence which involves moral turpitude
4. When he has acquired financial interest which is likely to prejudicially affect
his function as a member
5. When he has abused his position so as to render his continuation in office
detrimental to the public interest
2. Outline the functions of IRDAI, which highlights its developmental role?
Ans. Out of the innumerable functions of the IRDAI, those that highlight its developmental
role for the growth of the insurance markets in India are as follows:
• To regulate, promote and ensure orderly growth of the insurance business and
reinsurance business.
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• To protect the interests of the policyholders in matters concerning assigning of

policy, nomination, insurable interest, settlement of insurance claim, surrender
value of policy, other terms and conditions of contracts of insurance.
• To promote efficiency in the conduct of insurance business.
• To call for information form, undertake inspection of, conducting enquires and
investigations, including audit of the insurers, intermediaries, insurance
intermediaries and other organizations connected with the insurance business.
• To regulate investment of funds by insurance companies
• To regulate maintenance of margin for solvency.
• To settle disputes between insurers and intermediaries or insurance
intermediaries.
• To specify the percentage of life insurance business and general insurance
business to be underwritten by the insurer in the rural or the social sector.
3. Define reinsurance and outline some of the functions of reinsurance.
Ans. Reinsurance is a contract of insurance between a primary insurer and a reinsurer
whereby the primary insurer transfers all or a part of its business to the reinsurer in
return for a commission called the ceding commission. Further, with a good
reinsurance arrangement, the primary insurer can:
1. Maximise the retention within the country
2. Develop adequate capacity
3. Secure the best possible protection for the reinsurance costs incurred
4. Simplify the administration of business
The reinsurance programme commences from the beginning of every financial year.
If an insurer wants to write inward reinsurance business, it must have a well-defined
underwriting policy.
4. The insurance regulator will work towards creating an environment that
generates confidence among potential policyholders. Why is there a need for
creating such an environment? What measures has the IRDAI taken in this
regard?
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Ans. Till recently, Government owned companies offered insurance services in India and
hence there was little doubt in the minds of the policyholders about the safety of
their savings. However, the same level of confidence cannot be expected in the
case of private companies. To gain this confidence, it is essential that there is a
fairly high level of transparency in their operations. Further, as the risk involved is
high, there should be adequate capital base for companies offering these services.
Larger capital base is also essential to spread the business and increase the volume
of business in order to gain the economies of scale. In this regard, IRDAI has issued
the following guidelines:
• Minimum paid-up capital of Rs.100 crore, for life/general insurance and
Rs.200 crore, in case of reinsurance business.
• Deposit with RBI, the least of (a) Rs. 10 crore, in cash or marketable approved
securities, or (b) a sum of 1% (for life insurance), 3% (for general insurance) of
the total gross premium written in India. In case of reinsurer the deposit
amount is Rs. 20 crore.
• Annual actuarial investigation.
• Solvency margins.
5 What strategies do you recommend to a new private sector insurer?
Ans. Insurance is comparatively a new business to the Indian corporate world as the LIC
and GIC and its subsidiaries were the only players in this market. In this new market,
the following strategic issues are to be identified:
• Tap potential market: There is vast untapped market for insurance in India.
• Investments in secured assets: For an insurance company the risk arises from
its liabilities side, i.e. due to the policies underwritten. Thus, investing in
secured assets should reduce risks on the assets side.
• Customized products: A large untapped market also gives scope to customize
the products. There was no proper product innovation that has been taking
place in the country.
• Market research: To identify the market to research identity the needs of
customer has to be undertaken. While LIC has more than 100 types of
713
policies, the level of awareness is very low. Historical data will enable the new
players identify the depth in the market and the scope for developing various
products.
6 Why are most of the Indian companies venturing into the insurance sector
going through the JV ís route?
Ans. There are three important reasons due to which most of the Indian companies are
going through the JV ís route to enter into the insurance business:
• Regulatory prescriptions: Regulations require the Indian players to open an
insurance firm in collaboration with a foreign player, which has an equity
holding of not more than 26 per.cent in the company
• New Business: Insurance is a new type of business and there is no proper

experience for the private players in this business. On the other hand,
worldwide the insurance market is well developed and there are many
companies operating on a global level. In order to gain their expertise, JVs
with such players becomes essential.
• Funds: Insurance is a business, which requires a large capital base, due to the
risks involved. Independent start-ups of insurance business by Indian
companies alone, will thus not be a feasible option. Instead, when the
regulations permit, it is better for the Indian players to have a foreign partner
who can bring in capital as well as expertise.
SECTION – C
Case Studies
XYZ Ltd. manufacturer of pharmaceuticals products , took a Consequential insurance
Policy (FLOP) for SI of Rs. 1,11,50,000 (Gross Profits). A fire occurred on 7. 3. 2015,
causing material damage of Rs. 20.50 lakh payable under Standard Fire Policy. The
Surveyors have collected the following information for determination of loss under fire loss
of profit policy:
Business trend: Increase 12%
714
Period of insurance: 01.01.2015 to 31.12.2015

Indemnity Limit: 6 months, time excess: 3 days
Occurrence of accident: 07.03.2015 at 17:30 hours
Completion of repairs: 15.04.2015 at 17:00 hours
Interruption period: 24.25 days in March and 14.75 days in April. Total = 39 days.
Other information collected in this regard:
(a) Net turnover (2014): Rs. 3,13,29,000
(b) Turnover (March and April 2014): Rs.26,74,500 and Rs.27,05,900
(c) Expenses for loss minimization: Rs. 20,500
(d) Reduction in insured costs: Rs. 20,500
(e) Actual turnover during interruption: Rs. 39,93,100
(f) Opening stock: Rs.25,80,000
(g) Raw materials: Rs.2,11,62,000
(h) Other expenses: Rs. 2,18,000
(i) Closing stock: Rs.26,83,000
SOLUTION
Calculation of Loss of Profit (M/s XYZ Ltd.)
Trading Account for the year ended on 31.12.2014
Opening stock 25,80,000 Turnover 3,13,29,000
Raw materials 2,11,62,000 Closing stock 26,83,000
Other expenses 2,18,000
Gross Profit (A) 1,00,52,000
3,40,12,000 3,40,12,000
715
Calculation of Gross Profit Ratio

(i) Gross profit ratio: 1,00,52,000 / 3,13,29,000 X 100 = 32.1%
(ii) Turnover for March and April 2014: 26,74,500 + 27,05,900 = Rs. 53,80,400
(iii) Adjusted turnover (with increase trend @12%) = Rs.60,26,048 (D)
(iv) Actual turnover (March and April) = Rs. 39,93,100 (E)
(v) Reduction in turnover (D – E ) = Rs. 20,32,948
(vi) Loss of gross profit : (reduction turnover x GP rate) = (20,32,948 x 32.1%) =
Rs. 6,52,576
(vii) Actual loss suffered: Rs. 6,52,576 + 20,500 – 6,060 = Rs. 6,67,016
Is it Admissible?
Loss as calculated above is to be adjusted with turnover trend, time excess,
underinsurance, etc. as given below:
Time excess: 3 days
Gross profit loss: 24.25 + 14.75 = 39 days
Loss for 3 days: 6,67,016 / 39 x 3 = Rs. 51.309
Indemnity for 36 days: 6,67,016 – 51,309 = Rs. 6,15,707
Now underinsurance to be verified
Annual turnover (as per last account) : Rs. 3,13,29,000
Adjusted turnover with increase trend 12%: Rs.3,50,88,480
Gross profit @ 32.1 % on Rs. 3,50,88,480 : Rs. 1,12,63,402
It is underinsurance as Rs. 1,12,63,402 is more than the SI of Rs. 1,11,50,000
Therefore, admissible claim is : Rs.6,15,707 x 1,11,50,000 / 1,12, 63,402 = Rs. 6,09,508
716

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Principles and

Banking, Financial Services and Insurance Committee

Month and Year of Publication

Price : Rs. 600

Published by : The Publication Department on behalf of the Institute of Chartered

CA. Prafulla P. Chhajed

CHAPTER-1 Introduction to Insurance, Basic Principles of

CHAPTER-2 Fire Insurance 62

CHAPTER-3 Marine Insurance 122

CHAPTER-4 Motor Insurance 185

CHAPTER-5 Engineering Insurance 306

CHAPTER-6 Health Insurance 365

CHAPTER-7 Miscellaneous Insurance 417

CHAPTER-8 Liability Insurance 510

CHAPTER-9 Underwriting Concepts, Insurance Contract

CHAPTER-10 General Insurance Rate Making 597

CHAPTER-11 General Insurance Claims 624

CHAPTER-12 Laws Governing General Insurance

4.2 Principle of Insurable Interest

1.1 Ancient Insurance Practices through the Ages

1.2 Modern Commercial Insurance

1.3 History of Insurance in India

1.4 Non-Life Insurance Industry – Current Scenario

Source: IRDAI Annual Report, 2018

Proposed Merger of Public Sector General Insurance Companies

2. Risk Management & Insurance

2.1 Concept of Risk, Perils and Hazards

2.2 Types of Risks

(i) The loss of the property

HOT SURFACES Fire

2. Complex chemical processes ( Refinery/ Fertiliser/ Solvent Extraction Units);

3. Introduction to General Insurance

3.1 Insurance as a Transfer System

3.2 Insurance as a Business

• Satisfaction of legal requirements

3.3 Insurance as a Contract

Parties who have no legal capacity to contract include:

4. Fundamental Principles Governing General Insurance

4.1 Principle of Utmost Good Faith

However, the following facts need not be disclosed:

Breach of duty of Utmost Good Faith

4.2 Principle of Insurable Interest

4.3 Principle of Indemnity

Hence ACV = Rs. (10 - 5) lakhs

Hence the liability of each individual insurer will be

• Replacement cost or reinstatement policies in Fire & Engineering insurance

4.4 Principle of Subrogation

4.5 Principle of Contribution

such loss or damage

2. The risk insured(event) against must be common to all the policies

4.6 Principle of Proximate Cause

5. Classification of General Insurance

(a) Fire Insurance

6. Marketing and Selling of Insurance

(d) It can be an oral agreement or a written contract

(b) The uncertainty concerning loss

Case Studies with Answers

2. Fire Insurance Contract

2.1 Characteristics of Fire Insurance Contract

2.2 Distinction between Life Insurance and Fire Insurance

3. Types of Fire Policies

11. Leakage from automatic sprinkler installations

7. Loss by natural calamity