Chapter 8 Commercial

insurance
What are the potential loss exposures of
a business?
Suppose you own and operate a tennis shop in a
resort area. The business is seasonal. A large
part of the annual revenues are due to sales in
June, July, and August. You keep the shop open
during the remaining months of the year, but
the inventory carried during those months is
reduced. During the summer months, the
amount of inventory on hand is substantially
increased. Identify the major loss exposures
that the tennis shop faces.

Source: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13th Edition. Pearson
Property Insurance and Pecuniary Insurance
 Fire and Extra Perils Insurance
 Fire Business Interruption Insurance
 Property “All Risks” Insurance

Marine Insurance
 Marine Cargo Insurance
 Marine Hull Insurance

Liability Insurance
 Employers’ Liability Insurance
 Public Liability Insurance

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Fire and extra perils
insurance
Scope of cover
Fire and extra perils insurance is a kind of commercial property insurance policies, which
cover the following perils:

 Fire
 Fire, as a peril, means actual ignition of something that should not be on fire, not
deliberately caused or arranged by the insured
 Fire damage will include damage caused by smoke, heating and extinguishing water
 The fire does not have to burn on the insured premises. A fire as defined above
burning in a neighbouring property could create a valid claim from heat, smoke or
water damage, etc. to the insured property

 Lightning
 Whether followed by fire or not

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Scope of cover
Fire and extra perils insurance is a kind of commercial property insurance policies, which
cover the following perils (continued):

 Extra Perils
 Known as special perils or extended perils
 Extra perils insured by the policy are specified in the policy schedule, and may
include riots and strikes, subsidence and landslide, storm and typhoon, impact by
vehicle and damage by aircraft

 Note: Explosion
 There is an excluded peril of explosion under the standard fire policy
 However, the exclusion clause does not apply to damage arising from the insured
peril of explosion of gas (or boiler) used for domestic purposes

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Limitations and exclusions
 Pro rata average condition
 When the premium is based on a sum insured selected by the insured, the policy
terms will include a pro rata average condition, so that if under-insurance exists at
the time of loss, the insured will not be covered for the full amount of loss
 For example, if at the time of loss the sum insured represented only 80% of the
value at risk, the claim payment would be limited to 80% of the loss
 Exclusions
 Standard exclusions such as war, nuclear incidents, and terrorism
 Theft during or after the occurrence of a fire

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Premium basis
 Premium will be based on a rate applied to the sum insured
 Loading or discounting of premium according to individual features such as the height of
the insured buildings, their remoteness, fire fighting facilities
 It is common for separate sums insured to be shown on a fire policy for different types
of insured property, such as:
 Buildings
 Stock in trade
 Machinery

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Fire Business
Interruption
Insurance
Fire Business Interruption Insurance

 Fire business interruption insurance is a kind of pecuniary insurance

 Fire insurance indemnifies the insured for loss of or damage to physical property, fire
business interruption insurance compensates him for other types of after-effects of a fire

 Scope of cover
 Loss of gross profit (as defined in the policy) caused by an insured peril
 Additional expenses necessarily and reasonably incurred as a result of an insured peril
 Wages paid during an interruption period

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Limitations and exclusions
 Material Damage proviso
 No loss will be recoverable under the Business Interruption policy, if
 there is not a material damage (physical damage) insurance in place in respect of
the same policyholder’s interests, or
 thefire material damage insurer does not admit liability / pay for the material
damage from which business interruption results
 Purpose of the Material Damage proviso: With an uninsured property loss, the
policyholder might be short of funds for the necessary repairs or reinstatement, so
that the resulting interruption period would be extended (increasing the liability of
the Business Interruption policy)
 https://www.falconinsurance.com.hk/company/zh/business-interruption-2/

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Business Interruption Insurance – Covid-19?
Property “All Risks”
Insurance
Property “All Risks” Insurance
Scope of cover
 All loss or damage is covered unless specifically excluded
 Typical exclusions are
 Inevitable loss
 Lack of routine care
 “Standard exclusions” such as war, nuclear risks and terrorism
 Unreasonable causes: losses deliberately caused by the insured or suffered while
participating in illegal activities

Premium basis
 Premium will be based upon a rate applicable to the sum insured

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Marine
insurance
Marine insurance at a glance

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Marine insurance – Marine cargo insurance
 Insurance on marine cargo is substantially property insurance, there are basically two
types of cover:
 (i) The own damage cover is on an “all risks” basis and is in most cases the only
cover acceptable to banks who are advancing money or giving guarantees in respect
of cargo shipments
 (ii) The own damage cover is on a “specified risks” basis: specified major casualties
(fire, stranding, sinking, collision, etc.); earthquake, volcanic eruption and
lightning; jettison and washing overboard; entry of sea, lake or river water

 Marine cargo cover is mostly on a “warehouse to warehouse” basis

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Marine insurance – Marine cargo insurance
 Exclusions

 Loss due to wilful misconduct of the assured

 Inevitable losses, e.g. wear and tear, ordinary loss in weight
 Loss due to inadequate packing
 Loss due to inherent vice
 Loss due to unseaworthiness of the carrying vessel, of which the assured is aware at the time
of loading
 Loss due to war, strikes

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Marine insurance – Marine hull insurance
 Marine hull insurance covers, e.g.
 The hull of the insured vessel
 The vessel’s equipment and stores
 Fuel for propelling the vessel.
 Safety boats
 Collision liability: liability arising from the insured vessel’s collision with another vessel
(Note: Collision liability cover excludes loss of life, personal injury and illness. The owner of the
vessel need to buy another liability insurance as required by law as shown on next page)
 “Standard” exclusions of war, nuclear and similar risks apply

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Marine Insurance - Third Party Insurance
 Merchant Shipping (Local Vessels) Ordinance (Cap. 548):
 No owner, chartered or coxswains of a local vessel, with a couple of exceptions, may
use, or cause or permit any other person to use, the vessel in the waters of Hong
Kong unless there is in force a liability insurance policy in respect of the death of or
bodily injury to any person caused by or arising out of such use by such owner,
chartered or coxswain or by that other person, as the case may be.
 The minimum cover that the law requires
 $10 million any one occurrence in the case of a vessel of more than 12 permitted
passengers;
 $5 million any one occurrence in any other cases

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Exercise

 The Mary Queen, an ocean-going oil

tanker, negligently collided with a large
freighter. The Mary Queen is insured by a
marine hull insurance policy. For each of
the following losses, explain whether the
marine hull coverage would apply to the
loss.
a. Damage to the Mary Queen
b. Damage to the freighter
c. Death or injury to the crew members on
the freighter

Source: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13th Edition. Pearson
Employers’
Liability
Insurance
Employers’ Liability Insurance

 Cover the insured employer’s liability at law towards his employees

 A major branch of compulsory insurance in HK, which covers

 Liability under the Employees’ Compensation Ordinance: Statutory liability which is placed
upon an employer to pay compensation to his employees or dependents in respect of injury or
death caused by an accident arising out of and in the course of their employment

 Liability independent of the Employees’ Compensation Ordinance: relates to employers’

liability in tort (mainly negligence) in respect of the death of or injury to employees arising
out of and in the course of their employment

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Employers’ Liability Insurance
 According to s. 40 of the Employees’ Compensation Ordinance (Cap. 282), no employer
shall employ any employee in any employment unless there is in force a policy of
insurance to cover their liabilities both under the Ordinance and at common law for
injuries at work in respect of all their employees, irrespective of the length of
employment contract or working hours, full-time or part-time employment.

 The minimum insurance cover

 For employer with the number of employees not more than 200: the amount of insurance
cover per event should not be less than $100 million
 For employer with the number of employees more than 200: the amount of insurance cover
per event should not be less than $200 million

 An employer who fails to comply commits an offence and is liable on conviction to a

maximum fine of $100,000 and imprisonment for two years

Source: https://www.labour.gov.hk/eng/faq/cap282a_whole.htm
 Employers’ Liability Insurance typically exclude:

Employers’ Contractual liability

Liability Liability to the employees of the insured’s contractors

Insurance -
Exclusions Injured or deceased persons who are not employees within
the meaning of the Employees’ Compensation Ordinance

Standard exclusions, such as war, nuclear risks and

terrorism

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
How to determine premium of employers’
liability insurance?

CLAIM HISTORY OF ACCIDENT RATE OF SAFETY AND HEALTH MARKET CONDITION

THE EMPLOYER THE INDUSTRY OR MEASURES TAKEN BY
OCCUPATION THE EMPLOYER
Public liability
insurance
What is public liability insurance?
Public liability insurance
 The public liability covers
 The insured’s liability to third parties in respect of death, injury or property damage
that is not insurable by specialized liability insurances such as motor insurance,
employers’ liability insurance
 Legal expenses

 Limitations and exclusions

 Geographical area: Accidents occurring outside the specified geographical area are
not covered
 Other policies: Other types of policies may cover liability risks. To avoid overlap and
confusion, such risks are excluded.

Source: https://www.ia.org.hk/en/supervision/reg_ins_intermediaries/files/GI_SN_eng_2018.pdf
Example of public liability insurance
 Building owners’ corporation third party liability policy
 Hotel or guesthouse operator’s public liability policy
 https://www.shacombank.com.hk/tch/commercial/insurance/public.jsp