Midlands State University

Faculty of Commerce

Department of Insurance & Risk Management

Module : Property Insurance (IRM 205)

Lecturer : S. Masiyiwa

“Good advice is precious”

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CHAPTER 1

INTRODUCTION TO PROPERTY AND PECUNIARY

1.0 Introduction Property insurance is the business of effecting and carrying out contracts of insurance against risks of, or damage to, material property, not being risks of a kind such that the business of effecting and carrying out contracts of insurance against them constitutes marine, aviation and transport insurance business or motor insurance business ( The UK Insurance Companies Act 1974/181)

The word property embraces every material thing or physical object to which fortuitous loss or damage may be occasioned. The distinction between immovable property and movable property has no relevance.

The perils normally insured include but are not limited to the following:- Fire Lightning Explosion Storm, wind, water, hail or snow Aircraft damage Impact by animals or vehicles Accidental leakage of sprinkler installations Burst pipes and overflowing of water tanks Riot strike and malicious damage Theft of goods Theft or loss of money Breakage of glass Accidental damage to or breakdown of machinery All risks

Many of the above perils may be insured by individual policies. However, insurers are increasingly using single policies ( i.e. package policies) covering losses from the above perils or some of them as may be applicable as regards both property and pecuniary insurance.

1.1 General principles and factors limiting insurability of risksFrom your introductory module (The Practice of Insurance IRM 101) it was mentioned that certain risks are uninsurable because to do so would be contrary to public policy. Below are some factors which can limit the scope of insurance protection available.

(a) Pecuniary valueLoss or damage covered by insurance must be capable of being expressed in pecuniary terms. This is due to the fact that in a majority of instances in contracts of indemnity the insurers settle claims by paying cash. However, the insurers may at their option settle the

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claim by reinstatement, replacement or repair, in which event they do not strictly settle by paying cash to the insured.

As a result of this factor some articles with very little commercial value, although highly prized by their owner may be uninsurable as the personal value attached to it by the owner is no capable of being expressed in financial terms and compensation by the payment of money is not feasible.

(b) Legality and public policy

The scope of all insurance policies is limited by law. An insured may not insure against the consequences to him of his own deliberate of fraudulent act i.e. the insured cannot benefit from his wilful misconduct.

A medical doctor or lawyer cannot insure against the effects of being disqualified from practising his profession on account of his own professional negligence. However, professionals may insure against liability to pay damages through some unintentional mistake or oversight in carrying out his professional duties. This is different from deliberate or intentional misconduct.

(c) Insurable interest

The insured must have a pecuniary interest recognised by law in the subject matter of the insurance contract. Where there is no insurable interest the insurance contract will be illegal and unenforceable in a court of law. To this end an insured cannot insure his neighbour’s property because he does not suffer any financial loss in the event that property is destroyed by, say fire or lightning.

(d) Lack of knowledge

There are certain risks of loss for which insurers will not provide any insurance cover. For example loss of profits through market fluctuations in prices of shares on the Zimbabwe Stock Exchange (ZSE) i.e. a speculative risk. The loss of profits is capable of being expressed in pecuniary terms and if it were possible to cover the risk the insurance contracts will be legally. However, there is not enough knowledge to assist underwriters in making sufficiently accurate forecasts of the future and as a result they are not able to calculate premium rate for the risk.

(e) Market agreement

Some risks are excluded from insurance protection by an agreement throughout the insurance market. Certain exclusions are common to nearly all policies covering property and the standard clauses relating to these are in general use. The risks are excluded from insurance policies because the extent of loss is incalculable and as a result insurers are not able to calculate scientific rate of premium.

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(a) War risks exclusion clauseThis clause appears in every policy issued in respect of property and pecuniary insurance (other than where it would be inapplicable , say, burglary insurance, fidelity and contract guarantees) and excludes loss or damage to property related to or caused by- Civil commotion, labour disturbances, riot, strike of lock out- War (declared or not) , invasion, act of foreign enemy, hostilities or warlike

operations or civil war- Mutiny, military uprising, military or usurped power, martial law or state of siege or

any event or cause which determines the proclamation or maintenance of martial law or state of siege

- Insurrection, rebellion or revolution- Any act (whether on behalf of any organisation, body or person, or group of persons)

calculated or directed to overthrow or influence any State or government or any provincial, local or tribal authority with force or by means of fear, terrorism or violence

- Any act which is calculated or directed to bring about loss or damage in order to further any political aim, objective or cause, or to bring about social or economic change, or in protest against any State or government, or any provincial, local or tribal authority or for the purpose of instilling fear in the public or section thereof

- The act of any lawfully established authority in controlling. Preventing, suppressing, or in any other way dealing with any occurrence referred to above

(b) Radioactive contamination clause

The catastrophic potential of the developing nuclear industry created problems difficult problems for insurers and at an early state it became clear that no single insurer would have the capacity to cover the major risks involved even with help of reinsurance. The clause excludes:-

- Destruction or damage, directly or indirectly, caused by or arising from or in consequence of or contributed to any nuclear weapons material or by ionising radiations or contamination by radio activity from any nuclear fuel or from any nuclear waste from the combustion of nuclear fuel.

- Any legal liability of whatsoever nature directly or indirectly caused by or contributed to by or arising from ionising radiations or contamination by radio activity from any nuclear fuel

- Legal liability directly or indirectly caused by or contributed to by or arising from nuclear weapons material

(c) Sonic shock waves exclusion

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The clause excludes loss or damage from aircraft or other aerial devices or articles dropped therefrom, or sonic waves.

1.2 Pecuniary loss insurance

Pecuniary loss insurance business embraces the business of effecting and carrying out contracts of insurances against any of the following risks:-

(a)Risks of loss to the person insured arising from the insolvency of their debtors or from failure (other than through insolvency) of the debtors to pay the debts when due.

(b) Risks of loss to the persons insured attributable to interruptions of the carrying on of business carried on by them or to reductions of the scope of businesses so carried onn (consequential loss insurance)

(c)Risks of loss to the persons insured attributable to their incurring unforeseen expense, and

(d) Risk neither falling within any of the foregoing paragraphs, nor being of kind such that the carrying on of the business of effecting and carrying out contracts of insurance against them constitutes the carrying on of insurance business of some other class.

Examples of pecuniary insurances include loss of rent, loss of profits, book debts, accounts receivable, fidelity guarantee. Government bonds, court bonds, contract guarantee bond, etc.

Pecuniary loss insurance is primarily concerned with intangibles such as income, revenues or values in the form of money. The subject matter of pecuniary insurance is money whereas the subject matter of property insurance is tangible material capital but the same basic legal principles apply to both forms of insurance.

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CHAPTER 2

PROPERTY INSURANCE 1

2.0 PROPERTY INSURANCE 1

2.1 The sum insured as the limit of indemnity

The underlying principle of property insurance is that in exchange for a premium payment the insurer undertakes to indemnify the insured against any financial loss he may directly suffer as a result of the happening of an insured event to the subject matter of insurance.

The premium is the price charged by the insurer for the risk he undertakes and is calculated by applied a rate per $100 to the sum insured. It is therefore essential that the insurer must receive a premium which is commensurate with the risk. To this end the sum for which the subject matter of insurance is insured must represent its full value at the time of effecting the insurance and should be maintained at the full value throughout the period of insurance cover.

If the sum insured is less than the full value of the property, there is said to be underinsurance and the insured will be paying an inadequate premium into the insurer’s pool of funds from which all losses and expenses are paid. This results in equitable situation and may not receive full indemnity in the event of loss. Underinsurance on a large scale will inevitably lead to increases in rates since this is the way the insurer can receive the premium income required to build up the pool of funds adequate to compensate legitimate claimants and maintain the insurer’s profit margin. Underinsurance penalises those policyholders whose sums insured are adequate as they are also affected by the general rate increase.

Although most property insurance policies are annual contracts, it is not sufficient to merely reassess the adequacy of the sums insured at the annual renewal date. The insured should keep a watchful eye on the adequacy of the sums insured during the period of insurance. The effect of the government budget changes, replacement of older equipment of all kinds by newer and more expensive equipment, the impact of inflation and market price increases are all matters to be considered and dealt with at the time at which they arise.

When a loss occurs under property insurance policies, the sums insured are reduced by the amount paid in settlement, from time of the loss until the next renewal date. The insured must request the insurers to restore the sums insure to the normal figure and pay an additional premium and have the policy endorsed accordingly. The additional premium is charged on a pro rata basis from the date of reinstatement of the sums insured to the next renewal date. An exception to this practice if the declaration policy which contains a clause providing for the automatic restoration of the sums insured and the insured undertaking to

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pay an additional premium later. Please note that the additional premium is payable from the date of reinstatement and not date of loss.

2.2 Determination of sums insured values

The value of the subject matter of insurance is its value:-

(d) At the TIME and the PLACE of loss. Value means its real or intrinsic value, no addition being made for any sentimental value. No allowance should be made for loss of prospective profit or other consequential loss.

The insured is entitled to receive indemnity within the limits of the sum insured. The practical application of the principle is discussed below in respect of the various types of property.

(a) Buildings

The basis of indemnity for buildings is the cost of repair or reinstatement. If the damage is not extensive a builder’s estimate is obtained. If extensive work is necessary the insurer will instruct an architect to compile a specification and a bill of quantities with detailed measurements may be drawn up. The bill of quantities may be submitted for tender from contractors or be priced and presented to the insurers’ loss adjusters.

Adjustment may be necessary to compensate for betterment. Betterment can arise from:-

(e) Additions or improvements made during the rebuilding(f) The original structure may have deteriorated, so that rebuilding will give new for old.

Allowances for additions and improvements are deducted, and where rebuilding gives new for old the insured may have to contribute to the cost.

In order to expedite repairs, the occupier of an industrial or commercial building often asks for overtime to be worked by the contractors. The extra cost of this overtime is of benefit to the business as it helps to maintain turnover and production and it should be met under a consequential loss policy.

The basis of settlement need not always be the cost of reinstatement of s serious or total loss. When a mansion or old fashioned private house is affected the cost of restoration to its pre-fire condition be uneconomic or the sum insured may even never have been based on such a cost. A reasonable indemnity would then be the market value of a house with similar or otherwise adequate amenities in accordance with present day requirements.

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(b) Machinery

Where repair of machinery is possible, the basis of indemnity is the cost of restoring it to its previous condition.

If the machinery is damaged beyond economic repair, the fairest recompense is the cost of replacing it by second hand machinery of the same age, type, capacity and condition. To do this is often not practicable and new machinery must be bought. Deduction may have to be made because the old machinery is replaced by better machinery or replacement is still by the same type of machinery but must be new for old and depreciation must be taken into account. Insurers are uncomfortable with providing an extension to cover for the first difficulty as it can easily be abused. However, they are very comfortable to provide an extension to cover the second difficulty i.e paying for new machinery in place of old of the same type. They provide for this extension by making the policy subject to the Reinstatement Value Conditions.

(c) Computer records

The usual basis is the value of the materials together with the cost of clerical labour and computer time expended in reproducing such records (excluding any expenses in connection with the production of information to be recorded therein) and not the value to the insured of the information contained therein. There is an obligatory monetary limit on computer policies.

(d) Patterns, models, designs, etc.

The basis is normally the cost of labour and materials necessary to reproduce such property. Monetary limits are not unusual on any one model or pattern. Particularly valuable patterns, models or designs are usually insured separately.

(e) Retailers stock in trade

The indemnity is usual based on the wholesale price paid by the insured, not the selling price, since the latter includes profit. The cost price can easily be ascertained from the wholesalers’ invoices. Discounts should be deducted, since the insured will obtain similar discounts when goods are replaced by new stock. Depreciation may also have to be made for depreciation of stock through age and particularly for goods which have become old fashioned.

(f) Special classes – cotton and tobacco

For cotton and tobacco the calculation of indemnity is based upon custom of the trade and the basis is incorporated in the policy at inception.

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(g) Cotton

The basis usual adopted is the market value of like cotton immediately after the fire. It is also customary to allow interest on cotton if payment is not made within a certain period of the fire, say 30 days. To avoid heavy interest charges, if provided in the contract, the offices usually make payments on account when their adjusters certify such payments.

(h) Tobacco

Tobacco appreciates in value by keeping and the basis of settlement sometimes agreed is the cost price of the tobacco plus further sum to cover all subsequent charges, interest, appreciation in value, and extra cost at which the destroyed or damaged tobacco can be replaced within thirty days after the fire.

(g) Manufacturer’s stock

(i) Manufactured goodIndemnity is usually based on the cost of production immediately before the fire. This includes materials, labour, and factory overhead expenses, but excludes profit. In special cases the “contract price” clause may be added to insurances on such goods to cover loss of sold but yet to be delivered goods. The basis of settlement in this case will be the contract price.(j) Partly manufactured goods (work in progress)The basis is the cost of raw materials and manufacture incurred up to the time the goods were destroyed.

(h) Farm produceThe measure of indemnity for growing crops is the price at the nearest market less the cost of combining or cutting, threshing and transport. For corn in stacks, threshing is deducted. For hay and straw in stacks the basis is market price at the farm.

(i) Farm implementsThe measure of indemnity for farm implements is the value at the time of fire, based upon cost of replacement less wear and tear.

(j) LivestockThe market value of livestock at the place and time of the fire is the basis. Claims usually arise from lighting and are supported by veterinary surgeons’ certificates which show the cause of injury or death and the value of the animal. If there is any value in the carcases or hide a suitable allowance must be made for it.

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(k) Engineering policies

For engineering insurance the amount of indemnity to be provided and selected by the insured depends on the scope of the policy.

For the boiler policy the sum insured must cover not only the cost of the boiler and installation costs but also the cost of possible damage to surrounding property, both belonging to the insured and belonging to other people. It must also include liability for injury or death to people not in the employ of the insured. It is there advisable to consider the value and proximity of property surrounding the plant and the number of third parties likely to be in the vicinity. For example a boiler used to provide power at an outlying quary would not call for an indemnity as high as that required for a boiler situated in densely crowded part of Harare. Please note that engineering insurance contains an element of liability of insurance.

Boiler policies are normally arranged under a group indemnity basis. This means that the policy cover more than one item at one location and this saves on premiums and administration costs. The policy can cover in one indemnity limit, damage to the insured item, damage to own and third party property, and liability for third party injuries. The group indemnity can cover damage to boilers, economisers, super heaters and other steam generating plant and pressure vessels. Please note that a group indemnity can only apply to items used in connection with each other at the same location. It may also be applied to a compressor and the engine driving it, or to a pump and driving motor and it may cover several sets.

2.3 Reinstatement

Reinstatement means the restoration of the property insured to the condition in which it was immediately before the fire. In the event of total loss it is effected by rebuilding the premises or replacing the goods by similar goods. Where there is partial loss, reinstatement is made by executing the necessary repairs.

A sample reinstatement condition in the standard fire policy reads:

If the company elects to reinstate or replace any property the Insured shall at his own expense produce and give to the Company all such plans, documents, books and information as the Company may require.

The operative clause of the policy gives the insurers the option to reinstate, and this condition establishes the rights they will have if they exercise that option. Unless and until the insurers do decide to reinstate, the contract remains one to pay money. The insured cannot refuse to accept a money payment and demand reinstatement. Equally, he cannot refuse to accept reinstatement if the o=insurers elect to reinstate.

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The election to reinstate must be made within a reasonable time at the latest before any agreement has been reached to settle the claim by other means. The insurers must give the insured their clear intentions i.e. whether they are going to reinstate or make a cash payment and must not mislead the insured by their conduct. However, the preliminary investigations on the extent of the loss should not be misconstrued to mean the insurers intend to reinstate the damaged property.

2.4 Implications of the option to reinstate

The option to elect to reinstate although giving the insured value for money can have adverse implications for the insurers as discussed below:

(i) Once the insurers elect to reinstate they substitute any other methods of dischargingtheir obligation and the contract becomes a contract to reinstate property insured and not a contract to pay money.

(ii) Average cannot be applied to reduce the insurer’s liability if there is underinsurance and the insurer elects to reinstate. The damage may be partial and the cost of reinstatement may be within the inadequate sum insured but average is not applicable to reinstatement by the insurer.

(iii) The insurer’s duty will be fulfilled if the restored building is substantially the same as it was before.

(iv) Where the insurers do not fulfil their duty they are liable for damages for their failure. However, where a better building is given to the insured the insurers cannot compel him to bear a part of the cost, unless there was a previous agreement to that effect.

(v) Once the insurers elect to reinstate they must perform their contract and cannot withdraw if they find that their choice is more onerous than previously expected.

(vi) During the work of reinstatement the insurers are their own insurers of the property. If a second fire occurs the insurers must complete their work after making good the damage caused by the second fire. They cannot take any credit for work done before the fire occurred.

(vii) The insurers are liable for damages if the reinstated property is inferior to the original property.

2.5 Implications of the option to reinstate

Insurers do not often exercise the option to reinstate because of the above difficulties. However, it may be suitable in the following occasions:

(a) When the insured proves difficult in negations the insurers may find after enquiries that they could reinstate for less than the insured is demanding

(b) When there are suspicious circumstances about the cause of the fire or the amount claimed but fraud cannot be proved. Reinstatement will thus defeat any such intentions the insured may have

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(c) When the insured is difficult to deal with, the prospect of reinstatement may bring him to a more reasonable frame of mind. If the insurers do not in fact want to reinstate, however, they must act judiciously or they may find themselves committed.

(d) When two or more insurance companies insure the same property a joint reinstatement may be agreed upon.

(e) The condition is often invoked with jewellery and valuables, where the insurers can make a direct purchase and obtain trade discount on it.

(f) An insured may be compelled to reinstate where he has entered into a contract to do so. The contract must clearly state the duty of the Insured to reinstate fire damage, as for example with the Insured’s covenant in a lease to reinstate fire damage out of the proceeds of a fire policy.

2.6 The reinstatement value conditions

This is a policy extension which may be granted at the request of the insured whereby in certain circumstances the insurers will be bear the cost of reinstatement in full without any deduction for wear and tear. It may be applied to insurances covering buildings, machinery and other property but not stock.

Under this condition, the payment to be made is the cost of reinstatement to a condition equal to but not better or more extensive than that of the building when it was new, on the same or another site, and in any manner suitable to the requirements of the insured provided the liability of the insurer is not thereby increased. The following limitations apply:-

(a) The cost of reinstatement must have been incurred but not necessarily paid. If the insured gives an irrevocable order for a replacement machine the insurers would generally accept this as an incurred cost.

(b) He reinstatement must be carried out within reasonable time.(c) Where there is partial destruction only, the maximum insurer’s liability is the

estimated cost of reinstatement if the whole property had been destroyed.

If reinstatement is not carried out the policy reverts to the ordinary indemnity basis and full average will apply to the sum in insured based of value at risk at the time of loss.

2.7 Reinstatement and inflation provision

When buildings or machinery are insured on an indemnity basis (i.e. without the application of the reinstatement value condition) provision can be made for inflation by selecting a figure an adequate amount of the sums insured. The figure must be generous if the adverse effects of average are to be avoided. The sums insured can be estimated fairly accurately using the existing rate of inflation at inception. Should inflation increase during the course of the year, suitable adjustments should be made to the sums insured to ensure that it the figure remains adequate.

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2.8 Ancillary clauses in reinstatement

In calculating the reinstatement values allowance should be made for:-

(a) Additional cost of reinstatement to comply with local authority requirements(b) Professional fees e.g. architects’, surveyors’ and consulting engineers’ fees

necessarily incurred in reinstating or repairing the damaged property.(c) Removal of debris - after a serious fire it will be necessary to clear debris from site

before the work of repair and reinstatement can be carried out.

2.9 Reinstatement in engineering insurance

Under the standard boiler policy, indemnity in respect of the insured plant or property is limited to the cost of reinstatement in a condition equal to but not better than that immediately prior to the accident subject to policy limits. Where the policy limits are exceeded the insured will have to provide additional funds in order to rebuild his property or replace his plant.

2.10 Average

The application of average is a method by which insurers seek to defeat under-insurance and adverse effects upon both the insured and the insurer. Average makes the insured a co-insurer when under insurance exists, since the insurer will only pay only that proportion of any loss which the sum assured bears to the value of the property insured at the time of loss. Average or pro rata average as it is sometimes called is the subject of market agreement.

A sample average clause may read:

Whenever a sum insured is declared to be subject to Average, if the property insured thereby shall at the breaking out of any fire or at the commencement of any destruction of or damage to such property by any other peril hereby insured against be collectively of greater value than such sum insured, then the Insured shall be considered as being his own insurer for the difference, and shall bear a rateable proportion of the loss accordingly.

By invoking the average condition, insurers pay only that proportion of a loss which is commensurate with the premium they have received. For example, if property is insured for $20000 but its value at the time of loss is $30000 then the insurers 2/3 of the loss. However, it possible for the full $20000 to be paid in the event of total loss but this still leaves the insured a co-insurer for the remaining $10000.

2.11 Agreed value policies

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A valued policy is one which provides that if the property insured is totally lost due to insured peril, then the amount payable shall be the sum insured which was agreed between the insurer and insured at the time of effecting the policy. No account is taken of any depreciation or appreciation which may have affected the true value since the inception of the insurance. The insured does not need to prove the extent of his loss but merely prove that the loss has actually occurred. The insurers agree the value of the insured’s interest at inception of the contract instead of waiting for it to be proved at the time of loss. This arrangement does not violate the principle of indemnity for as long as the valuation is bona fide.

Valued policies are commonly issued for items such as paintings, sculptures and other works of art, antiques or items of jewellery. The sum insured is agreed at inception on the basis of a valuation undertaken by a professional valuer approved by the insurers.

CHAPTER 3

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PROPERTY INSURANCE 11

3.0 Property insurance

Most insurers other than Lloyd’s underwriters have employed a standard form of policy to evidence all contracts of fire insurance since 1923.The wording in general use states the insurers undertaking that on the happening of specified events the Insurer, will subject to the limits, exceptions and conditions of the policy, will:-

(a) Pay the insured the value of the property at the time of the happening of its destruction or the amount of such damage, or

(b) At its option will reinstate or replace such property or any part thereofThe perils covered are:-

(a) Fire whether resulting from explosion or otherwise(b) Lightning(c) Explosion of gas used for domestic purposes of for heating or lightning any building

3.1 Business InsuranceBusiness insurance needs fall in the following categories: Buildings Machinery and other contents Stock

(a) BuildingsThese are defined in policies as ‘the buildings landlord’s fixtures and fittings therein and thereon”. This means that the structure and everything fixed to it is insured.

(b) Machinery and other contentsThis has a wider description to ensure that it includes everything on the business premises other than stock, landlord fixtures and motor vehicles. This may be described as “machinery, plant and all other contents”. Cover on other contents is following to the following limits: account books – limited to value of the materials and labour used in recreating them

and not the value of the information plans, designs, models and similar items - limited to value of the materials and labour

used in recreating them and not the value of the information money and stamps – a nominal limit will be placed on these e.g $1000. employees and directors’ personal belongings – insured in full provided they are not

insured elsewhere by the employee’s or director’s own insurance.

(c) StockThis is described as “stock and materials in trade, the property of the insured or held by them on trust or on commission for which they are responsible” This ensures that goods or materials in the possession of the business belonging to it or not is covered.

(d) More specific items

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There are other items not covered by building, machinery and other contents and stock sections. These include:

On farms – the stock situation is different and cover for stock will be for: agricultural produce and farming stock (goods grown) livestock subject to a monetary limit per animal specific items on implements and utensils of husbandry and power driven ploughs Theft – cover is usually for specific types of valuable stock. Attractive stock e.g.

cigarettes and tobacco, wines and spirits and precious metals will need to be specifically insured.

Glass – cover glass breakage, lettering and etching. Money – policy cover refers to money in a safe, money not in a safe and money in

transit and specifies amounts and situations in which the money is covered. Description of money is widened to include postage stamps, franking machine and money-type vouchers.

Goods in transit – cover is for goods being carried usually but not necessary by road.

3.2 Insured PerilsThe standard fire policy insures against:

fire lightning explosion of boilers and gas used for domestic purposes only

3.2.1 ExclusionsThe fire peril excludes loss or damage caused by:

- explosion resulting from fire- earthquake or subterranean fire- its own spontaneous fermentation or heating- its undergoing and heating process or any process involving the application of

heat(a) ExplosionFire implies the actual ignition of something ought not to be on fire and is accidental as far as the policyholder is concerned.The rule of proximate clause is overridden by the exclusion of an explosion resulting from the fire. In practice cover is usual extended to cover an explosion resulting from the fire.

If a fire follows an explosion, insurers are only liable for the fire damage and not liable for the explosion damage unless the cover has been extended.If an explosion causes concussion damage and no fire results, insurers are not liable.

(b) Earthquake or subterranean fireAn exclusion of earthquake and subterranean fire limits the causes of fires the insurers will accept responsibility. However, they can be added as special perils for an additional premium. For earthquake cover the additional premium depends on geographical location of the property insured, whether it is an earthquake zone or not. Subterranean fire refers to volcanic activity, disused coal mines, oil fields and well and same comments will apply on the additional premium.

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3.3 Spontaneous fermenting or heating, undergoing heating process or any process involving application heat

The exclusions waive the principle of proximate cause except for the piece of property which spontaneously ferments or ignites or which is heated. The spreading fire risk is covered even though the actual cause is excluded. For example if a haystack spontaneously catches fire and the fire spreads to the farm buildings. The haystack itself is not covered but the spreading fire risk to the other property is covered.The lightning damage is not qualified and all damage is covered.The basic explosion cover is limited and only covers damage to insured property caused by boilers and gas used for domestic or non-trade purposes.

3.4 Special Perils ExtensionsPolicyholders can extend their policies to cover special perils. These will be printed on the policy form and included by referring to them on the policy schedule.The special perils include:

(i) Explosion and AircraftCover is for damage caused by full explosions and aircraft and other devices or articles dropped therefrom. Cover is available at very basic premiums.

The extension excludes damage caused by pressure waves caused by aircraft or other aerial devices travelling at supersonic speeds. The intention is to avoid being involved in widespread damage claims when an aircraft breaks the sound barrier.

(ii) Riot, Civil Commotion and Malicious DamageDamage resulting from riot and civil commotion is entirely excluded from the fire policy.Following an increase in the number of riots in Zimbabwe since 1998, the insurance industry in 2002 reviewed the coverage of this peril in property policies. Currently politically motivated riots are excluded from property insurances. Riots of a non-political nature are covered.

(iii) Earthquake and Subterranean FireThe policy can be extended to include :

- earthquake- earthquake in respect of damage caused by fire only- earthquake excluding damage caused by subterranean fire

Earth tremors are felt in Zimbabwe from time to time but is is thought to be any great risk and the demand for earthquake and subterranean cover is low. However, it is included in package deals with other special perils.

(iv) Spontaneous FermentationCover may be requested for certain materials stored in bulk where the possibility for spontaneous heating exists. Provided that the insurers are satisfied by the storage

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conditions cover may be extended. This will be subject to a warranty on the storage conditions to ensure the maintenance of a satisfactory situation.

Extensions are available coal, coke or wood blocks, organic matter such as vegetable fibres, grasses and seeds relating to fire or non-fire risks.

(v) Storm and FloodThe storm risk may be insured on its own or jointly with flood.A storm is defined as a violent disturbance of the atmosphere, usually wind and often accompanied by heavy rain or hail or snow.

A flood is defined as the escape of water from the natural confines of any natural or artificial water course, lake, reservoir, canal or dam or inundation by the sea. Southern Africa has experienced floods in recent years – Cyclone Eline in 1999. Many insurers suffered heavy losses on their property portfolios.

Exclusions will include:- damage attributable to changes in the mater table level- damage by lightning, frost, subsistence, ground heave or landslip.- damage in respect of moveable property in the open, fences and gates.- an excess in respect of each separate premises.

(vi) Escape of water from any tank, apparatus or pipeCover is available for water damage subject to a warranty relating to maintaining the property in a good state of repair, maintaining heating and storage of goods at a minimum height off the ground.Exclusions include:

- damage by water escaping from an automatic sprinkler installations- damage in respect of any building which is empty or not in use- an excess in respect of each separate premises

Sprinkler installation leakages are insured separately and empty premises are excluded because of less chance of early discovery leading to aggravated damage.

(vii) Leakage of oil from any fixed oil –fired heating installationAn extension is available for damage caused by oil leaking from fixed installations.

(viii) ImpactImpact refers to damage caused by any road vehicle or animal. Cover is restricted to damage caused by vehicles or animals belonging to third parties or under their control. The policyholder’s subrogation rights are passed to insurers.Cover can be extended to include damage caused by own vehicles subject to an excess.

(ix) Sprinkler LeakageCover is for damage arising from the accidental escape of water from an installation. Cover is arranged on first loss basis.

Cover excludes :

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- damage caused by freezing whilst the premises are empty or not in use- explosion, earthquake, subterranean fire or heat caused by fire.

(x) Subsidence, Ground Heave, LandslipCover is available for damage to the property arises from these land movements.Cover excludes:

Damage to yards, car parks, roads, pavements, walls, gates and fences unless also affecting a building insured nearby.

The normal settlement or bedding down of new structures The settlement or movement of made-up ground Coastal or river erosion Defective design or workmanship Fire, subterranean fire, explosion, earthquake or escape of water Damage existing prior to the insurance Damage resulting from demolition, construction, structural alteration or repair of any

property at the same premises Damage resulting from groundwork or excavation at the same premises Damage resulting from ground works or excavation at the same premises An excess at each separate premises

Cover is subject to the following conditions:- Insurers must be notified of any demolition, ground works excavation or

construction being carried out on any adjoining site.- The insurers reserve the right to cancel or amend the terms of the cover.

3.5 “All Risks Policy”In addition to the standard fire policy a standard “all risks policy (material damage) form is available for commercial and industrial organisations. This policy form is increasingly being used in the market. It saves the policyholder valuable time in including all of the perils and accidental damage to the property insured instead of choosing from a list of perils available for insurance. The perils are not listed but the policy promises to pay for accidental or destruction to the property insured.

However, the policy does not cover all risks – it covers those that are not excluded. Exclusions applying to individual perils are also excluded from the “all risks policy”. Risks that are better insured by other polices are also included e.g. motor vehicles, engineering plant, fidelity risks and money risks.

CHAPTER 4

PROPERTY INSURANCE 111

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4.1 Theft or Burglary Insurance

The policy covers loss of or damage to the property insured caused by “theft involving entry to exit from the premise by forcible and violent means”.The policy also covers “any damage to the premises in the course of a theft or attempted theft.Exclusions include:

- Loss or damage caused by fire- Damage to stained or plate glass- Loss or damage by persons lawfully on the premises or brought about or in

connivance with a member of the insured’s staff.- Loss of or damage to money, securities, coins, medals, stamps, precious

stones, documents, business books, manuscripts, computer systems, documents, curios, sculptures, rare books, plans, models, patterns, moulds or designs.

Theft or Burglary Insurance in Zimbabwe is influenced by crime trends in a given province or region. Crime rises as the economic circumstances of people deteriorate and insurers should strengthen their communication with law enforcement agents at all levels.

4.2 Money InsuranceThe money or “cash in transit” policy is development of theft insurance and covers “all risks’ or damage to the money as defined.

Money as expressed in the policy includes:Cash, bank and currency notes, postal orders, cheques, bankers’ drafts, bills of exchange, unused units in postage franking machines, postage stamps, revenue stamps, National Savings Certificates, Holiday with Pay stamps, Premium Savings Bonds, luncheon vouchers, trading stamps, phone cards, credit card sales vouchers and gift tokens accepted by the insured and VAT purchase invoices all pertaining to the business and belonging to or the responsibility of the insured.

The money is insured in the following situations subject to a limit:- in transit- on the insured’s premises during business hours- on the premises outside business hours and not in a safe or strong room

subject (nominal limit)- in a bank night safe- in a locked safe or strong room out of business hours- in the private residence of any principal or employee of the insured (nominal

limit)- in the custody of collectors or travellers provided it is delivered to the

insured, bank or post office within 24 hours.

The policies also cover damage to safes occasioned during theft or attempted theft.

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4.3 Goods in transitCover is designed and aimed at goods carried by road, road or post.Indemnity is for accidental loss of or damage to goods while being loaded, carried or unloaded from the motor vehicles and their trailers and temporarily garaged during transit.

Policies fall into two categories:i. On goods on the insured’s own vehicle with a sum insured per vehicle.ii. On all goods dispatched by the insured, by own vehicle, by road haulage, rail and

post subject to a limit on any one consignment

Exclusions include:- theft from unlocked vehicles- moth, vermin, insects, damp, mildew or rust- delay , loss of market, consequential loss of any kind, deterioration and changes

by natural cause- connivance by insured’s employees- goods accompanying commercial travelers- specified property such as explosives, acids, goods of a dangerous nature,

bullion, cash, bank and currency notes, deeds, bonds, securities, jewellery, precious stones, clocks, watches, curios, antiques, business books, models, moulds, patterns, designs and livestock.

The intention for the exclusion is that insurance cover for goods of this nature should be arranged under separately.

4.4 Glass

Glass is insured on an “all risks basis”. Possible exclusions include:- any from of consequential loss- removal or restoration of fixtures- scratching

4.5 Excluded Perils

The following perils are excluded from every property damage policy by common market agreement:

- damage occasioned by riot or civil commotion (unless brought back into a policy by special negotiation)

- damage occasioned by war risks i.e. war, invasion, act of foreign enemy, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, military or usurped power

- loss destruction or damage directly or indirectly arising from radioactive contamination

- sonic bangs- loss destruction or damage caused by pollution or contamination- consequential loss or damage of any kind

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- marine exclusion clause- terrorism risks- property more specifically insured

Damage from war risks is so widespread and insurers will be unable to cope with the costs involved. War is a fundamental risk which needs the intervention of the governments and even the United Nations if the costs from the damage are to be met.

Radioactive contamination and sonic bangs are fundamental risks that cause widespread damage. Insurers prefer particular risks.

The intention of the pollution or contamination exclusion ensures that property insurers are not involved in liability claims for pollution caused by their policyholders if the pollution is connected with an insured event.

Property insurers insure property. The exclusion of consequential losses reaffirms that position.

The marine exclusion clause appears on many policies because of the difficulty of arranging satisfactory contribution between fire and marine policies.

Terrorism is a fundamental risks and excluded because its damage is so widespread that insurers will be unable to cope with the costs involved.

4.6 Policy Provisions and Conditions

Property insurance policies contain provisions and conditions.

4.6.1 Provisions

General provisions include:

(a) UnderinsuranceThere will be a pro – rata condition of average wording (with the exception of glass policies) to deal with the situations where the sum insured on the policy is less than the full value of the policy.

(b) The contracting purchaser’s interest

The policy will have a clause that provides that in the event of the insured building being sold, and fire happens between the date of the exchange of the contract and its completion, the purchaser will be entitled to the benefits of the policy.

4.6.2 ConditionsProperty policies contain conditions that restate, amplify or modify the legal position to ensure that it is spelt out in the policy document.

They include the following:

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- Policy voidable through misrepresentation – modifies the principle of utmost good faith in that it states that it can be avoided at the option of the aggrieved party.

- Alteration – ensures that the duty of utmost good faith continues to operate throughout the duration of utmost good faith by imposing on the insured the responsibility to notify the insurers of any changes in the risks. If he fails to do so insurers will not be liable for losses that occur. Following notification the insurers reserve the right to accept the risk and issue an endorsement or decline the risk outright.

- Warranties – insured to abide by warranties attached to the policy throughout the duration of the contract.

- Reasonable precautions – insured to take reasonable precautions to prevent damage and should not recklessly cause the insured event.

- Claims procedures – sets in detail the action to be taken by the insured as a precedent to liability.

- Fraud – the benefit will be forfeited if fraudulent means are used to claim any benefit.

- Reinstatement – this state that insurers reserve the right to reinstate the damaged property and insured must at his expense provide required information to facilitate reinstatement.

- Insurer’s rights following a claim – allows insurers or their representatives to investigate the claim, keep possession of the building, take possession and deal with goods or property in any reasonable manner.

- Contribution and average – this restricts payment by the insurer to their rateable proportion if more than one policy covering the damaged property exists. The condition also imports average into the policy.

- Subrogation and arbitration –imports subrogation and arbitration into the policy.- Cancellation – this gives the insurers the right to cancel the policy if they wish before

expiry of the contract. The cancellation clause requires that the insurers inform the insured in writing of their decision to cancel giving their reasons.

CHAPTER 5

ARRANGING INSURANCE COVER

5.1 Assessment

The insured will be required to complete a proposal form giving all the details required by the underwriters to assess the risk. However, in practice the proposal is not big enough and thus fails to give all the required information.A survey is made by the insurer in order to fill the gaps in respect of physical and moral hazards.

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Physical hazards are features resulting from the construction, occupation and situation of the property that influences the frequency and severity of a loss.

Moral hazard is the risk resulting from the behaviour of the insured that may increase the possibility of a loss through dishonest or carelessness.

Information required on physical hazards:

- the trade or business- address of premises- type of premises (e.g. factory, warehouse or office)- use of the premises- heating and electrical information- storage and use of hazardous, thief attractive, or damage-susceptible materials- protection and security information relating to the fire, theft or other perils- adjoining premises and their function- proximity of rivers, sea or reservoirs

Information required on moral hazard:

- The condition of premises – tidiness, overcrowding, waste and litter which reflect management’s frame of mind.

- Details of present and past insurance history – special terms, cancellations, refusals to insure and loss and claims history

- Details of any convictions relative to the perils involved or of dishonesty- Attitude to risk improvement suggestions

Information of the physical and moral hazards will assist the underwriter in making any of the following decisions:

- accept the risk or decline it- acceptance terms – ordinary rates or loaded premium rates- terms and conditions to apply to the policy.

5.2 PremiumThe premium rates will be charged as follows:

Fire and special perils and theft risks - rate per cent.Money policy – rate per mille on the estimate and adjusted when the full amount is known Goods in transit – rate per cent on the value of load for companying carrying its own goods and rate per mille on annual income for haulage firms.Glass policies – schedule rates that give a premium based on the size of the glass insured.Packages policies - single “across the board rate”

5.3 Sum InsuredFire , special perils and theft risks must be insured for their full value.

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(a) Buildings and machineryThe sum insured must take into account the age, wear and tear of the insured vehicle and must be adequate at the time of loss to repair or reinstate building and machinery to their pre-damage condition without betterment.

(b) StockFor a small business an adequate non-adjustable sum assured is advisable. Large businesses can insure their stock on an adjustable basis in order to cover fluctuations. This is achieved by using the stock declaration basis:

- a provisional premium is paid at the beginning of the year based on 75% of the sum assured.

- At agreed intervals (usually monthly) the insured declares the actual value of stock

- At the end of year the declarations are averaged out and premium rate applied to the figure produced.

- Premium adjustments are made accordingly (c) Other clausesThe policy will show various clauses agreed between the parties:

- reinstatement clause giving the actual terms- stock declaration showing the actual terms- seasonal stock increase arrangement with shops or other trades showing actual

terms Extra costs to be insured:

- Public authorities’ clause agrees to pay for extra costs of repair and reinstatement in complying with statutes or local authorities bylaws.

- Professional fees clause where the insurer accepts liability for the payment of architects’, surveyors, and consulting engineers’ fees in respect of work to reinstating building or repairing the damage.

- Debris removal clause – costs for the removal of debris in order to build are included in the cost of rebuilding. However, debris may fall in a river and need to be cleared. The clause provides for insurance of such extra costs.

- Long-term agreement clause giving the actual terms

5.4 Alternative bases of InsuranceAlternative bases for a policy are available in addition to the full value sum insured basis.

(a) First lossUnder this basis the sum insured represents the likely maximum loss value. It does not represent the sum insured. This basis would be suitable for large risks where it is difficult to envisage a total lost e.g. department store insuring the theft risk. It is difficult to imagine the store being completely cleared by thieves. The policy in this case is arranged to cover just the maximum amount which the policyholder thinks may be lost.

The average is not modified in any way and the insured is required to declare the full value of the insured property.

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The premium payable is not very different from that payable on the full value basis as the underwriters always charge a premium that reflects the risk. (b) Agreed value policiesIn this case the insurers agree at inception the value of the insured’s interest. Valued policies are issued for paintings, sculptures and other works of art, antiques and jewellery. Valuations are required from reputable valuers or experts.

In the event of total loss the agreed value is paid without considering depreciation or appreciation.

5.6 Excesses and deductiblesThe insured must bear the first part of any claim under property insurance i.e. excess or deductible. The compulsory excess imposed cuts out small claims and makes policyholder take extra care. The policyholder may opt for voluntary excess in return for a premium discount.

5.7 Structure of insurance policies

5.7.1 The Policy Document and its purpose

Insurers issue pre-printed standard policies as evidence of the insurance contract. Failure to issue a policy document does not in any way invalidate the insurance contract.

In compiling the policy document a policy schedule containing details relevant to the policy is inserted in the standard policy. The policy document sets the terms of the contract in plain and precise English language free from uncertainties and ambiguities. Any ambiguities will be interpreted against the insurer.

A policy document will contain:(i) The heading – the insurer’s name and registered office’s address.(ii) The attestation clause – signature of the insurer’s authorized official(iii) Preamble or recital clause – making reference to the proposal as the basis of the

contract and payment of the premium as a condition precedent to the commencement of the policy

(iv) The operative clause - this is the most important part of the policy and it sets out in detail the cover provided by the policy.

(v) The conditionsThese lay out the rules that govern the operation of the insurance contract.

5.7.2 Conditions may be implied, express of general.

(a) Implied conditionsThese are conditions that exist even though not stated on the policy. The following are implied conditions of insurance policies:

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(i) that both parties have observed utmost good faith(ii) that the insured posses insurable interest(iii) that the subject matter of insurance exists(iv) that the subject matter of the insurance can be identified

(b) Express conditionsThese are conditions that are printed on the policy document and can be general to the whole contract or particular to an individual section of the policy.

General conditions will deal with issues relating to:

(i) policy alterations requiring notification(ii) cancellation and claims procedures(iii) fraud clause(iv) provisions for the insured to take care measures(v) subrogation(vi) contribution

(c) Classification of conditionsConditions can be classified into three categories, namely:- Conditions precedent to the contract – these operate before the contract is formed e.g.

implied conditions.- Conditions subsequent to the contract – these operate after the contract is formed e.g.

policy alteration and cancellation- Conditions precedent to liability – those that must be complied with if insurer is to be

liable to pay the claims e.g. claims procedures, subrogation and contribution.

(vi) The exclusions or exceptions

These are aspects which the insurer does not insure. Many policyholders do not read this section of the policy. They only become aware of it when their claim is repudiated.

There are some risks which by market agreement no policy of insurance will cover because the consequences of such risks are very severe for insurance companies to deal with. For example sonic bangs, radioactive contamination, war risks. Communal arrangements are normally in place for the government to look after the effects of such risks.

There are some risks which the insurer may not insure for various reasons. For example the risk may just be uninsurable or that it is insured under another policy. The insurer may alternatively exclude the risks because he wants to charge an extra premium for it.

(vii) The warranties

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A warranty is an undertaking by the insured that a certain state of affairs will or will not, continue, or that something shall, or shall not be done, throughout the duration of the contract.

Warranties are used in insurance policies to ensure that policyholders maintain a desirable state of affairs and that the premiums charged remain correct.

For example:

(a) In fire insurance, there will be a warranty that no liquids with flash points (i.e. the lowest temperature at which the vapour above a liquid can be ignited in air) below a specific point are stored in the building. This ensures that extremely hazardous inflammable liquids are not kept. The warranty in this case maintains a reduced fire risk.

(b) In theft insurance a warranty on the policy may state that an approved installer maintains the intruder alarm regularly. This ensures that the system is kept in working order.

(c) For flood risks a warranty may state that stock is kept one meter off the floor. This ensures that materials are well out of reach of any flood water entering.

Any breach of warranty by the insured at any time is sufficient to enable the insurer to repudiate the any claim even if the breach is unrelated to the claim.

(viii) The schedule

This section personalizes a pre-printed form and makes the policy production efficient and less costly. This is a separate sheet of paper that is inserted in the policy form booklet to give the complete policy document.

The schedule contains the following details:

- policy number- name and address of the policyholder- policy inception and renewal dates- first and annual premiums- details of the property insured- sum insured- amounts of any excesses- special conditions

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- agency or broker details

A new schedule is issued at renewal time in order to keep the policy detail current.

CHAPTER 6

BUSINESS INTERRUPTION INSURANCE

6.1 Introduction

Property insurance exists to provide an indemnity or reinstatement for damaged or destroyed business assets.

However, the following will be necessary before repair or building works can commence and be completed:

- the site must be cleared- plans must be drawn and approved- contractors must be appointed - machinery must be designed, ordered, manufactured, delivered, installed and tested.

While the above processes take place, the business will be losing income as customers take their custom elsewhere. Despite the loss in income the following expenses will need to be paid:

- rent and rates- insurance and taxes

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- professional fees- wages and salaries- directors’ fees- advertising- maintainance of vehicles-Business insurance exists to protect the business from loss of income occasion that the business is indemnified of any losses it incurs.

6.2 Included and Excluded Perils

A business interruption policy covers perils that are covered by the property insurance policy.

It will also contain a material damage warranty. The warranty provides that the underlying property insurance must admit liability on assets damaged or destroyed before there can be a valid claim under the business interruption policy. This ensures that funds to rebuild or repair the premises are available.

(a) Perils covered include:- Fire (assets protection policy)- Lightning (assets protection policy)- Explosion (assets protection policy)- Aircraft- Further explosion- Storm- Flood- Bursting of water apparatus- Impact- Earthquake and subterranean fire- Riot and malicious damage- Subsidence, heave and landslip- Sprinkler leakage- Infectious and contagious diseases (hotels, food processors, restaurants)- Food poisoning (hotels, food processors, restaurants)

6.3 Policy ConditionsThe policy conditions are similar to those of a property damage policy.

6.4 Arranging the Cover

(a) Difference basis

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Business interruption policy insures gross profit. Gross Profit = Sales less Cost of SalesNet profit = Gross Profit less fixed costs

When operations of a business are interrupted its variable costs are reduced in proportion to the business activity and the income generated. Fixed costs (standing charges) do not vary and may even increase and need be insured against.

Gross profit is defined as :

The amount by which:(i) the amount by which turnover, closing stock and work in progress shall exceed(ii) the sum of opening stock, work in progress and uninsured working (variable costs)

expenses.The insurance on the gross profit may be :

(i) sum insured basis subject to average (ii) declaration-linked basis (estimated gross profit used to calculate the initial

premium).

6.5 Calculating the Sums InsuredCalculation of the sum assured takes the following into account:

(i) historical figures are used but the business interruption insurance insures future losses ( trends and business plans are taken into consideration)

(ii) the maximum indemnity period(iii) business interruption may start any time – e.g. end of insurance period

Insured’s last published financial statements are used in determining gross profit. The gross profit is adjusted for inflation and any known events that may affect the business results e.g. pending installation of new machinery or plans to increase production.The length of the indemnity period will also be considered. Annual figures need to be proportionately increased for periods longer than a year.

Interruption may occur at any time even on the last day of insurance. This means that an indemnity period at least 12 months more than what is required should be applied. For 12 months – use a trend of 2 years ahead, etc.

ExampleSales $ 500 000Purchases $ 350 000Stock at 01 January 2006 $ 150 000Stock at 31 December 2006 $ 450 000Variable charges (other than purchases) $ 400 000

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(a) Assumptions and additional information(i) business will expand by 10% per year(ii) inflation will be 15% per year(iii) policy will insure gross profit on the difference basis (iv) indemnity period required is 12 months

(b) Calculation of the sum insuredGross profit is equal to:(i) The amount by which turnover, closing stock and work in progress shall exceed(ii) The sum of opening stock, work in progress and uninsured working (variable

costs) expenses.= ($ 500 000 + $ 450 000) – ($150 000 + $400000)= $ 400 000

(c) Adjust for trend and inflation:(i) Current year @ 25% p.a.Gross profit = $ 400 000 x 1.25 = $ 500 000(ii) Next year @ 1.25% p.a

Gross profit = $ 500 000 x 1.25 = $ 625 000

In calculating the sum assured interruption starting at end of insurance period is assumed and profits for one year insured ( i.e. $ 625 000).

Sum insured of say $ 1 000 000 provides a better estimate that allows for change in trends or inflation. Any premium overpayment will be refunded in terms of the premium clause.

6.6 Indemnity Period

The period during which the company is financially affected by the disruptive incident is called the indemnity period. An indemnity period is necessary because the effects of an incident are felt over time but not indefinitely. Without it the insurer would never stop paying.

This is defined by the policy as follows:

“The period beginning when the damage occurs and ending when the results of the business cease to be affected by the damage not exceeding the maximum indemnity period as shown in the schedule”

It is advisable that policyholders select longer period say 18, 24 or 36 months as shorter periods of 12 months or less normally prove inadequate.

In making a decision on the indemnity period the businesses should consider the following:(i) the time it will take to carryout repairs(ii) type of machinery used and the time it will take to replace it(iii) the amount of competition and loyalty of customers

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(iv) whether business is seasonal or not.

6.7 Measuring the Loss

The policy details the formula that will be used in determining the loss.

It will have a gross profit item and a stated sum insured. The amount payable on interruption to the business is found by:

(i) applying the rate of gross profit (percentage of gross profit to turnover in the last financial year) to the reduction in turnover (income

(ii) adding any additional expenses (staff overtime, rent of temporary premises, advertising, etc.

(iii) adjusting the result for business trends (growing or declining), savings and underinsurance

Loss measurement (summary)

decide on duration of indemnity period calculate rate of gross profit calculate reduction in turnover apply rate to reduction calculate additional cost of working check economic limit add resultant additional costs to loss of gross profit subtract savings check sum insured adjust total claim for average if necessary

6.8 Extensions of Cover

The following extensions are available:

(i) Specified suppliers – in respect of premises of named suppliers from which inputs to the business are obtained or manufactured. Cover is subject to a monetary limit.

(ii) Unspecified suppliers - in respect of premises of unspecified suppliers from which inputs to the business are obtained or manufactured. Cover is subject to a very small monetary limit.

(iii) Specified customers - in respect of premises of named customers to the business.(iv) Transit – when the property is in transit by road, rail or waterway.(v) Contract sites (vi) Deeds and documents (vii) Public utilities – public electricity supply, public gas supply, public water supply,

telecommunication.(viii) Prevention of access – due to damage to premises of nearby premises, occupation by

terrorists, unlawful occupation by third parties, bomb threats.

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(ix) Loss of book debts – destruction of records of the amounts customers owe the business may occur. Policy covers costs of tracing the customer and not collecting the debts.

(x) Advance profits – applies when a new business or an extension to an existing one is to be made by putting up a new building or by introducing new machinery. Financial loss may arise if there is a delay in putting in place the building or machinery.

CHAPTER 7

CONTRACTORS AND ENGINEERING POLICIES

7.1 Contractors’ Insurance

Contractors run the risk that property being erected may be damaged by fire and other insurable risks during construction. If this were to happen they would suffer huge losses. The following may happen during construction:

(a) Contractors may cause damage to the owner’s or neighbour’s property(b) The contractors may cause injuries to third parties(c) For larger building a lot of things could go wrong, e.g.

- excavators might strike and damage unsuspected services- foundations might sink because the site soil is unstable- material and equipment could be stolen- cranes could drop materials being lifted- the work could be done badly- substandard material could be used- the building may collapse injuring members of the public

(d) The new plant fails to work (testing and commissioning risks)

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Contractors’ insurance is used in providing cover to property under construction until it is handed over to the principal. The policies cover the following activities:- repairs to buildings- construction of houses, offices, shops, oil refineries , harbours, bridge, etc- installation of electrical systems, air conditioning and refrigeration plant- shop-fitting

They are issued to the following contractors:- builders- civil engineers- electrical contractors

and provides insurance cover for both temporary and permanent works (contract works) on site during construction until the project is complete. Cover is provided for plant, equipment and tools, site offices, accommodation, workers’ camp stores workshops and their contents.

7.2 Engineering Insurance

This has its origin in boiler insurance used during the industrial revolution. Boiler insurance was compulsory by legislation in order to deal will large numbers of explosions, injuries and loss of life. Engineering insurance provides cover to industrial plant and equipment.

Plant is spilt into the following categories: -(a) Boilers and pressure plantIncludes steam boilers, steam receivers, economizers, super heaters, steam pipes, hot water heating and supply installations, bakers’ ovens, air receivers, etc.

(b) Engine plantIncludes steam, gas and oil and diesel engines; air compressors, pumps, hydro-extractors, fans, gas producer plant, large refrigeration plants, etc.

(c) Electrical plantIncludes electric motors, generators, transformers, turbines, switchboards, rotary converters, rectifiers, etc.

(d) Lifting machineryIncludes cranes, tractors, dumpers, passenger goods and service lifts, motor vehicle service tables, excavators, etc.

(e) ComputersUsed in administrative tasks and controlling the whole manufacturing process in industry and commerce.

(f) MiscellaneousCategory is reserved for equipment which cannot fit into the above categories.

7.3 The Insured and Excluded Perils

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7.3.1 Contractors’ Insurance Risks

(a) Insured RisksContractors’ insurance policies cover the property insured against all risks of loss or damage. This means any loss or damage not specifically excluded is covered.

(b) Exclusions- all general exclusions applicable to property damage policies- defective design or workmanship- motor vehicles licensed for road use- aircraft or vessels- electrical or mechanical breakdown

7.3.2 Engineering Insurance Risks

(a) Insured Risks The following risks are covered.

(i) Boiler and pressure plantPlant insured against explosion and collapse. Explosion is defined as the sudden and violent rending of the plant by internal force or pressure. Collapse is defined as the sudden and dangerous distortion of the plant caused by crushing stress.

The following extensions to the basic policy are available:

- flue gas explosion- crack or weld failure- joint leakage- overheating of tubes- overheating of boilers and fired pressure vessels- damage to the insured’s own surrounding property caused by the explosion or collapse.

(ii) Engine plant

Is insured against mechanical breakdown. The following extensions to the basic policy are available:

- damage to bearings by breakdown or overheating- loss of transformer oil by reason of leakage- damage by extraneous causes

(iii) Electrical plant

Is insured against electrical and mechanical breakdown. The following extensions to the basic policy are available:

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- damage to bearings by breakdown or overheating- loss of transformer oil by reason of leakage- damage by extraneous causes

(iv) Lift and crane

Is insured against mechanical breakdown. The following extension to the basic policy is available:- damage to property being moved

(v) Miscellaneous plant- Insures risks appropriate to equipment being insured.

Insurers provide engineering insurance in package form. This means that all the plant and equipment the insured owns is insured on ”all risk basis” under one policy. All risks basis implies that every risk is covered provided it is not excluded.

(iv) ExclusionsThe following exclusions apply:

- perils covered by a fire or special perils policy- perils excluded by common market agreement- willful act or neglect of the insured- repairs or replacement due to wear and tear or intentional overloading

7.4 Computer Policies

These cover:- Accidental damage (including breakdown) to computer equipment and data carrying

materials and additional expenditure necessarily and reasonably incurred during the indemnity period in order to prevent or minimize the interruption of or interference with computer operations as a consequence of loss or damage other than by an excluded cause.

It is a condition of the policy that a maintenance agreement must be kept in force during the duration of the policy.

The policy can be extended to cover: - Accidental or malicious, destruction, distortion or corruption of data Cover is in respect

of costs incurred in rewriting the data and not the value of the data.- Reinstatement of data

The business interruption risk for computer policies is dependant on how a computer breakdown would affect the business. It is less if the computer is used as an administrative tool. Back up files can be used to restore lost information and the business interruption will be me minimal.

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Interruption will affect the business significantly if computers are used in controlling production or in performing vital functions and a full business interruption policy based on computer breakdown would be necessary.

7.5 Inspection Services

Engineering insurance comes with an inspection service. An insurer will send a surveyor to inspect the plant at stated intervals. Periodic inspection is a necessary requirement of the Factories Act and the Health and Safety Act. Inspection by the insurers’ surveyor satisfies the legal requirements.

The inspection service helps in detecting inherent faults and correcting them early before they cause a breakdown with obvious financial benefits to both the insurers and the insured.

A report will be issued after a thorough inspection giving full details of the plant and observations affecting its upkeep and efficiency.

7.6 Policy conditions

The policies are subject to the usual conditions relating to: (vii) policy alterations requiring notification(viii) cancellation and claims procedures(ix) fraud clause(x) provisions for the insured to take reasonable care(xi) subrogation(xii) contribution

7.7 Policy covers

7.7.1 Contractors’ Insurance policies

Cover is subject to standard terms and conditions. It will be issued in joint names of the principal and the contractor. The policy will insure the contract works for the full contract price for the period of the contract and the maintenance period (i.e. period after contract during which contractors are responsible for correcting any defects that occur after completion of the project)

The premium payable is a rate percent of the sum insured (full contract price).

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This may be determined into two ways:

(a) By considering that the value of the building starts at zero and gradually increases until it gets to its full value.

(b) By paying a provisional premium and making periodic declarations on the property value. The declarations will be averaged out and the actual premium determined and set against the provisional premium paid.

7.7.2 Engineering contracts

The sum insured depends on the scope of the policy.

(a) Boiler policy cover

The sums insured covers the value of the boiler, installations costs, damage to surrounding property belonging to the insured or other people, death or injury to third parties.

(b) Group indemnityThis can be used as an alternative to placing an indemnity against each item. A single amount can be used to cover one or more items at one location and also enjoy a premium discount. This applies to items used in connection with each other e.g. a compressor and the engine driving it.

(c) Liability coverThese are covered separately under appropriate liability policies.

7.8 Engineering business interruption policiesThe risk is usually covered under a time loss policy. The policy agrees in advance on the indemnity payable for each day of interruption up to a maximum number of days. Insurers prefer those risks where the interruption is likely to be of short duration.

The policy will also subject to a time excess in order to reduce claims on short and predictable stoppages.

7.9 Contractors’ Insurance - Risk management

The identification and evaluation process should pay particular attention to the following: - fire risks in temporary site buildings- liability risks in crowded urban construction sites- the use of cranes and lifting pulleys- the use of mobile plant- the use of trenching - the time factor of a contract which can last for long period of time- theft and vandalism risk in connection with unfixed site plant and equipment

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The control process should focus more on the following pre-loss measures:

- fire and security appliances- hard hats and other protective clothing and footwear- training- site health and safety rules- appointment of a site safety officer

The above measures should be monitored on a continuous basis to avoid complacency.

CHAPTER 8

PECUNIARY INSURANCE

8.1 Credit insurance

(a) General principles

Credit is the system of buying or selling goods or services without immediate payment being made. It is a practice whereby the purchaser receives the goods or accepts the service in return for his promise that payment will be made on or before a future specified date.

Today many commercial organisations and professional bodies give credit to their customers during the course of their activities. Frequently goods are supplied accompanied by a delivery note or invoice which is merely a list of the goods and time their prices and charges. This is followed by a statement of account which then becomes the basis upon the purchaser is expected to pay. There is risk in every transaction that the seller will not receive payment due to the buyer’s failure or unwillingness to pay, for example due to insolvency or liquidation. It is this risk of non-payment which is the subject of credit insurance. Credit insurance ensures that the seller can recoup his losses if his debtors meet

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their obligations. Traditionally credit insurance is confined to normal trade credit arising from the sale and delivery of goods and to a lesser extent provision of services.

Credit insurance does not provide the seller with protection for the whole of his loss. He remains a co-insurer for part of the risk. Thus a credit policy will generally afford cover for 80%, 85% or even 90% but never 100%.The insured therefore continues a personal interest and stake in the extent and form of credit he offers to his customers. Being conscious of this element of co-insurance he is less likely readily to assume unduly hazardous risks by offering over-generous or unjustifiable credit terms to his buyers. Further, both the insured and insurer have a common interest in minimising losses or effecting recoveries.

(b) Scope of cover

Credit insurance aims at following the pattern of trade as opposed to dictation of terms into which trade must be prescribed. This means that the background of commerce and industry must be understood and credit insurance tailored to pattern of trade instead of the rules of commerce being bent to its needs.

(c) Objects of cover

The declared object of credit insurance is to indemnify against loss arising as a consequence of a buyer’s inability to pay for goods sold and delivered to him on credit terms. It does not aim to indemnify loss of profit. For this reason, the “own retention: or uninsured percentage of loss is geared not only to the principle of co-insurance but also to the amount of mark up that might be assumed to be contained in the invoice price. The more rapidly stocks are turned over and the less processing involved, the smaller margin of profit that the seller would expect.

This means that the nearer the point of origin of raw material, the higher the percentage of credit insurance cover, a shorter period of necessary trade credit and as a result a lower rate of premium. At the other end of the scale will be found highly processed finished goods requiring longer stocking periods and higher mark-ups. Credit insurers allow lower percentages of cover and higher rates.

(d) Forms of cover

There basically two forms of cover, namely, domestic and export credit insurance.

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The domestic policy provides cover to Zimbabwean firms selling on credit terms to buyers in Zimbabwe. In Zimbabwe there this form of cover has largely been provide by specialist credit insurers, Credsure and Quality insurance companies.

The domestic policy covers only against insolvency or protracted default of the buyer. In all instances the cover is subject to the insurer having investigated the credit worthiness of the buyer and having approved a credit limit on such buyer, which also becomes the insurer’s limit of liability in respect of the buyer.

In Zimbabwe, the Export Credit Guarantee Corporation was established to act as a specialist insurance company offering export credit insurance only. With the assistance of the Government of Zimbabwe who act as reinsurers for the political risks, it conducts the Zimbabwean Export Credit insurance scheme. The export policy covers against non payment of a debt due to the insolvency or protracted default of the buyer or due to events outside the control of the seller or buyer (usually political) which can prevent the delivery of the goods or receipt of payment in Zimbabwe.

Cover for export credit insurance is usually on a turnover basis, i.e. once the markets on which insurance is to be taken, have been decided, all buyers in that market in respect of whom credit risks exist are covered. Cover is also comprehensive, i.e. all risks, commercial and political are covered and the policyholder cannot cherry pick risks ( e.g. choosing one risk like insolvency covered to the exclusion of political risks).

Terms of cover and rates of premium are dependent on the peculiarities of a particular business e.g. countries of destination, spread of risks as between small number of large accounts and a large number of small accounts, the applicant’s own loss record and the credit status of the buyers. The premium payable is usually expressed as a percentage of the turnover.

Cover for domestic credit policies, the insured can select buyers he wants covered provided this is acceptable to the insurer. However, the cover is comprehensive and the insured cannot cherry pick risks, as in export policies.

Credit insurance can be tailored to the requirements of the policyholder to give effective cover where risk could be most prevalent and to avoid cost where risks are so well spread that the policyholder could very well absorb losses himself.

Any business is subject to bad losses. To avoid a surcharge on premium to meet the normal and expected losses, cover can be arranged on a first loss basis so that benefits of the policy are only invoked when bad debt losses in a twelve month period exceed a pre-determined level. This saves on cost to both the insured and the insurer.

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In the domestic market, a closer personal bond is possible between seller and buyer and the length of credit taken by the buyer is seen as a factor expressing this relationship and also having a direct bearing on the risk. For that reason premium is levied not on turnover as in the case of export policies, but as a percentage of the balance outstanding on the account at the end of each month. Declarations are made monthly by the policyholder to the insurer of the value of goods shipped (in the case of export policies) or outstanding balances (in the case of domestic policies). Declarations must also be made if an account is not settled within a specified time after the due date. The policyholder must apply for approval of a credit limit, if he wishes to extend credit to a new buyer or increase his credit to an existing client.

(e) Functions of credit insurance

The primary function of credit insurance must be indemnification of loss. Few businesses escape bad debts losses altogether and good as the records are of so many, none can predict future freedom from calamity. Credit insurance can provide:-

Protection to an asset (often the only one left unprotected) Restoration of working capital lost through bad debts and a as a substitute for the

creation of bad debts reserves Bulwark to dividend maintenance.

Credit insurance must therefore command the serious attention of any careful trader. In addition, it constitutes a reinforcement of credit control. By its nature a credit insurance company becomes the clearing house for commercial information –usually detrimental information- so that early warnings can be given to policyholders and losses can be thus be avoided.

Credit insurance properly used is also a valuable toll of management. With its experience and detailed information, it can help in the avoidance of losses in new markets and it can control the exuberance of sales staffs whose preoccupation with turnov.er may be apt to override commercial prudence.

Credit insurance constitutes an aid to finance. It can be used as instrument in getting improved trade bill discounts facilities as an assigned policy collateral constitutes valuable collateral. The protection provided by credit insurance is of particular importance where medium and long term credit (e.g. up to 10 years after delivery) has to be granted with the export of capital goods or services

8.2 Fidelity guarantee

Fidelity implies the faithful or loyal performance of a duty, and a fidelity guarantee policy is an insurance against the results of dishonesty or disloyalty, both of which stem from a lack of fidelity.

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Fidelity guarantees can be categorised under commercial and government guarantees which are commonly referred to as bonds.

8.2.1 Commercial guarantees – general transhipment, warehouse and removal bonds

The risk always exists that employees who handle cash in the course of their employment may be tempted to misappropriate the employer’s money or property. Certain employees have access to systems operated by the employer e.g. bookkeepers, accountants, computer programmers, computer operators, directors and manager. Temptation also exists for these employees to manipulate the systems and divert large of amounts (often in small unnoticeable amount at various times). The dishonesty or fraud can be insured under a fidelity guarantee by any organisation or person who may suffer as the result of the dishonesty, failure in the loyal performance of a duty or certain cases, the mistake, of another.

The fidelity guarantee policy involves:

- the insurer- the employer (insured)- the employee whose fidelity is guaranteed

The insurer agrees to indemnify the insured for loss to any money, goods and property caused by the dishonesty of the covered employee.

Cover applies:

- during the currency of the policy- during the discovery period – i.e. period after expiry of policy during which all acts

dishonesty remain covered (12 months for example). The object of imposing a time limit for discovery of default id to prevent being faced with stale claims which could prove difficult to investigate and effect recovery.

- auditor’s fees incurred in substantiating the amount of the loss - the cost of rewriting or amending computer programs to avoid future losses

8.2.2 Policy types

The majority of policies issued are to commercial firms to indemnify the employer against direct pecuniary loss and in many cases also loss of stock, that might sustained through acts of dishonesty by an employee in the course of his employment. A large manufacturer, for example, will require guarantees not only for his cashiers and other employees handling money in the normal course of their work but also for his commercial travellers and others who may only occasionally handle money but have access to stock.

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The following policy types are generally issued dependant on the insured’s requirements:-

(i) Individual policy – issued where only one individual is to be guaranteed.(ii) Collective policy- incorporates a schedule of names and duties of guaranteed

individuals and the amount guaranteed per individual. The disadvantage of this policy is that there may be need for continuous revision due to staff changes.

(iii) Floating policy – covers the entire staff of a firm or a number of selected individuals. The name of each guaranteed individual is included in the schedule and cover for all individuals is fixed into one amount. A claim has an effect of reducing the guaranteed amount until renewal. Alternatively it can be reinstated to its previous level on payment of an additional premium.

(iv) Excess floating policy – this is collective policy with an endorsement providing a floating guarantee for any loss in excess of the amounts respectively set out in the schedule. The object of this cover is to protect the employer against loss of an unforeseen amount by reason of defaults continuing for a long time by unusually ingenious methods of concealment.

(v) Positions policy – instead of using names, the position is guaranteed for a specified amount. The beauty of this approach is that a change in the person holding that position does not affect the cover.

(vi) Blanket policy – the blanket policy covers the whole staff without showing names or positions. No enquiries about the employees are made by the insurers. Such policies are only suitable for an employer with a substantial staff and the organisation to make adequate enquiries about the antecedents of his employees. He obtains he obtains must be available to the insurers in the event of a claim. This type of policies covers employees by category only without specifying names (e.g. 2 managers, 24 cashiers, 20 clerks. The amount of guarantee can be either on a floating or a per capita basis.

Infidelity guarantees the terms “floater” or “floating sum insured” are used to indicate that the sum insured is spread over all employees as against a separate for each. When a default occurs the amount of the floater is reduced by the amount of the claim until renewal unless an extra premium is paid to reinstate the original sun insured.

8.2.3 Risk AssessmentBoth employee to be guaranteed and the employer must complete applicant and proposal forms respectively.The form to be completed by the employee should solicit for the following information:-name, address, age of the applicant, name, address and trade of employer, the position to be covered by the guarantee, the salary or other remuneration received, details of past guarantees, applicant’s marital status and dependants, if any. The extent of debts, private income, whether or not applicant has been declared insolvent, details of past employment, whether he is a householder, whether he owns furniture, and details of his life assurance.

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The employer must complete a proposal form that becomes the basis of the contract between the employer of the person to be guaranteed and the insurer. The object of the proposal form is to disclose in detail the extent of supervision exercised over the individual to be guaranteed and the system of check to minimise defaults. The proposal forms should solicit information on the duties of the employee to be guaranteed and the manner in which he is permitted to handle moneys, either cash , cheques or both, whether paying out or paying in.The underwriter is specifically interested in factors that will help him rule out moral hazard of the risk proposed.

(a) Employee - Employee’s previous history relating to employment and dishonesty. Employers must

obtain references for the employee in writing from previous employers over the past, say, three or five years and must pay attention to gaps in employment.

- Employee’s present financial situation e.g. huge debts.- Previous convictions for dishonesty(b) Employer must complete the proposal that will be the basis of the contract- Cash handling and accounting systems and the checks built into the system to prevent

fraud. The employer must correct any observed inadequacies. The insurers will make questions in the proposal form subject of a warranty or endorsement. This ensures that a satisfactory state of affairs continues to exist.

- Details on previous losses and action taken to prevent recurrence- Employer’s recruitment policy – are thorough investigations made into the background

of potential employees. - The number of employees in the following categories – employees having responsibility

for money and/or stock (e.g. cashiers, managers, storekeepers, travellers and delivery drivers) and employees not having responsibility for money and/or stock (e,g. office staff, factory hands, labourers, etc).

The primary underwriting consideration in any proposal form must be effectiveness of the system of check and the methods of supervision exercised over the person to be guaranteed. These features should be clearly revealed by the answers given to the questions in the employer’s statement. To improve the risk the underwriter should frequently make suggestions for tightening up the system of check.

The underwriter must bear in mind that in recent years there has been an increase in conspiracies to defraud by groups of criminals taking advantage of large and complicated systems which are now common both in industry and commerce. Massive frauds, particularly, in the USA have occurred in situations where it has been possible for employees to program computers to their own advantage, e.g. non-existent customers can be set up to whom payments are made. In banking, small and relatively unnoticeable amounts can be extracted from individual accounts and paid into more readily accessible accounts. It is therefore essential when investigating a system of check where a computerised system operates, to ask a number of additional questions, such as:-

- Is there an independent check of completed programs/or modules and how often?- Is it possible for the program to be run by a single operator?

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- Do systems analysts and data preparation operators have access to the computer room?

- Is anyone responsible for data preparation allowed access to control records?- How are programs changes authorised and changes kept?- Is a self-checking system incorporated for internal control?- Is there a rotational system for operational duties?- What functions do external auditors exercise in connection with the system?

8.3 Court bonds – bankruptcy and liquidation bonds

A bond is a contract issued under seal by which an insurer agrees to pay a sum of money if the person or organization that is subject to a bond is dishonest, fails to perform a duty or does not perform the duty properly.

If the event occurs, the insurers pay the amount stated in the bond or demanded by the bondholder without any adjustment. Other organizations e.g. banks, that are prepared to stand as surety for someone else can also issue bonds.

Bonds are used in the following cases:

(a) Administration of a deceased estate – bond guarantees the proper administration of the estate.

(b) Performance bonds - guarantees the proper performance of a contract by a contractor. This may be available under a bond facility. This allows a contractor to quote for new business in advance without approaching the insurer for a bond.

Underwriting of bonds is based on the integrity of the applicant for bond. The applicant is required to complete a specially designed proposal form. A flat fee is payable as premium and lasts for the life of the bond.

8.4 Government bonds

Many government departments require guarantees from persons or firms who deal with them against the risk of negligence, non-observance of various rules and regulations and insolvency. The main risk is that of insolvency and this is the reason why government bonds are usually referred to as solvency guarantees. All government bonds provide that the surety pay on demand any amount claimed under the bond.

The following are examples of situations where government bonds will be required:-

Bonded warehouses for importers of spirits, tobacco, cars, etc – bond guarantees the payment of custom and excise duties and or VAT that may due if the goods are wrongfully removed from warehouses e.g. customs and excise bonds, general removal bond, approved warehouse bond, rebate bonds, excise bond, landing, shipping and forwarding agents; bond

Other government bonds include:-

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Auctioneers’ Bonds:- they guarantee the payment of the proceeds of a sale to the seller of the goods. The amount of the bond is determined by the government in relation to the monthly turnover of the auctioneer.

Deputy Sheriff’s Bond:- The Deputy Sheriff can sell property in execution of a writ without calling an auctioneer end has to collect money from debtors. The main risk is that of dishonesty and the bond guarantees the payment of the money to creditors.

Messenger of Court Bond :- the duties of a Messenger of Court are similar to that of the Deputy Sheriff and are exposed to the same risk. A bond is required guaranteeing that the creditors will received their money.

Builders Contract Guarantees: - these have to be furnished by builders and contractors who undertake the erection of buildings and carry out other public works including construction of roads for the central and local government guaranteeing both solvency and workmanship.

Supply Contract Guarantees:- these are furnished by persons or firms supplying goods and commodities to government. The risk is mainly that of solvency.

8.5 Underwriting and claims

Most insurers use the same proposal form for all types of court bonds and questions will solicit information on the following points:

Name, address, age and profession of applicant The nature and value of the estate and the amount of the bond Lawyers acting for the applicant Personal question relating to the applicant And undertaking signed by the proposer to the effect that he will indemnify the

sureties in respect of any amount they may be called upon tp pay under the bond, submit to the sureties all copies of estate accounts when called upon to do so and pay a certain annual premium as long as his administration of the estate continues.

For government bonds, the following information is asked for:

The name in full of each partner is required in order to make sure that the name of the firm is not hiding a doubtful moral hazard. This is important because of the wide scope of the cover.

The length of time established in business gives some indication of stability or otherwise and if a limited company, an examination of the last balance is helpful.

Bankers’ and lawyers references require examination An undertaking incorporating an undertaking to indemnify the sureties in the event of

their being called upon to pay a claim under the bond.

8.6 Legal expenses insurance

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This is a new form of insurance in Zimbabwe although it has been available in Europe and USA for some time. In Zimbabwe the cover is limited and normally given as an extension to some classes of business such as public liability insurance. In this instance the amount of liability is limited to comparative small sums. The cover given is indemnity to employees or directors of the insured company against costs and expenses incurred by such employee or director with the consent of the insurer in the defence of any criminal action against such person in the course of his occupation.

CHAPTER 9

PROPERTY AND PECUNIARY INSURANCE CLAIMS

9.1 General Claims ProcedureThe efficiency and fairness with which claims are handled will give a good reputation and competitive edge in the market.

(a) First stepsIn the event of a claim policyholder should understand what the terms and conditions of their policy require them to do. The broker or agent can offer valuable assistance in notifying and supplying details to the insurer in writing of an incident likely to give rise to a claim within the set time limits.

(b) Claim formClaims for large losses are usually handled by loss adjusters or other experts who will conduct detailed investigations. The claim form is not required in such cases. However, for small claims the policyholder will be required to complete a claim form and supply the following details:

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policy number name and address of policyholder date of incident (helps in determining if incident occurred within the period of

insurance) cause of incident (helps in determining if incident is insured) details of the damaged property and the policyholder’s relationship to it (helps in

determining policy coverage and insurable interest) value of property (allows a check on the adequacy of the sum insured) cost of repairs (provides a basis for negotiation) details of persons injured (provides an idea of what claims to expect from third

parties) details of the person causing the accident (allows exercise of subrogation rights) details of other policies covering the same incident( allows exercise of contribution

rights)

(c) Claim AssessmentOn receipt of the form, the claims department will check for the following details:

that the premium has been paid and that the policy is in force that the policyholder’s name, address, occupation and insurable interest are correct. that the incident was within the period of insurance. That the property damaged and the cause of the incident are within the scope of the

policy (proximate cause) whether the policy conditions and warranties have been complied with that the amount claimed is reasonable that the sums insured is adequate If everything appears to be in order, liability will be accepted and a cheque issued in settlement

(d) ComplicationsThe following complications are usually met in claims assessment:

Amount of claim may not be known at the time of submitting the claim form. The claims department may have to wait for a loss adjuster to submit his recommendation.

The incident may be covered by more than one policy, and claims from contributing insurers must be instituted

Sums insured may be inadequate, claim may be paid proportionately if the average condition applies or declined if it does not apply (breach of utmost good faith)

(e) Final ActionsThe claim payments must be marked on the policy records in order to avoid duplicating the payment and also to assist in future renewal of the policy.

If any reinsurance exists on the policy, recoveries must be instituted accordingly.

(f)Claims on liability policies

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The policyholder does no more than notification of the claim. The insurers or experts working on their behalf will check whether the policy covers the incident concerned and that the policyholder has complied with all terms of the policy, e.g. non admission of liability and referring to insurers unanswered any communication relating to the claim.

Insurers will conduct on-the- spot investigations. They will interview and get statements from witness. They will also obtain sketches or photographs of the accident scene.

Insurers will advise the claimant accordingly if they feel that they are not liable for the damages claimed and await any developments. They will negotiate with the third party claimant if it appears that they are liable and agree on and pay the settlement figure.

Where the parties cannot agree, the case will be passed over to the insurers lawyers or legal department for further advice. This may include direct negotiations with the claimant’s lawyers. The case may also end up in court and the give will give its determination on the legal liability and amount payable. Liability policies cover legal expenses incurred in defending claims.

9.2 Use of expertsThe following experts are called to assist in large and complicated claims.

(a) Loss adjustersLoss adjusters may be called to assist in any type of claim, viz, property, interruption, personal accident, pecuniary or liability. However, they are mainly used in property and interruption claims.

They are appointed by insurers to investigate and negotiate the settlement of claims. They are usually firms which a worldwide network who employ highly qualified and experienced personnel. Their background enables them to investigate any claim e.g. fire, theft, storm, flood, explosion, earthquake, business interruption, engineering etc.

They also assist the policyholder in getting any repair work done by specialists. They maim objective is to ensure that the claim settlement recommended is fair to both the insured and insurers in terms of the policy.

They will visit the claimant on appointment. After the visit they will they will prepare and submit an initial report giving brief details of the claims and its circumstances together with an estimate of the likely cost.

A final report containing are commended sum is submitted to the insurers when

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negotiations are completed. This will be accompanied y a satisfaction note accepting the recommended sum. The claim is paid as soon as the recommendation sum is approved by the insurer.

(b) Loss assessorsLoss assessors have a similar background to loss adjusters and are appointed by the policyholder in order to safeguard their interests in handling of their claim. Their main objective is to ensure that the claimant gets a better deal from the claims settlement.

9.3 Average ConditionIt is a basic principle of property insurance that the property must be insured for its full value. This ensures that the insured contributes an equitable premium to the pool.

Full value is taken to mean the following:

(a) In respect of the building - cost of full repairs or replacement to pre-damage condition

(b) In respect of machinery - cost of full repairs or replacement to pre-loss condition(c) In respect of stock - cost of full replacement

If the insured insures for a lesser amount, underinsurance is said to exist.Commercial insurance policies contain the average condition in order to deal with underinsurance. The condition allows insurers to pay a ratio of the sum insured to the value, i.e pro rata.The following formula is used in calculating the amount to be paid:

Sum Insured x Claim amount = amount to be paidValue of property at time of loss

Underinsurance may be deliberate or be as a result beyond the control of the insured e.g. as a result of hyperinflation in Zimbabwe (1998 – 2008). Insurers should educate the insuring public on the need of reviewing the sums insured under their policies periodically in line with inflation.

9.4 ArbitrationDisputes are natural in the claims settlement process. They arise from the following:

(a) Liability

In this case insurers deny liability for the claim and refuse to pay it. The insured may take legal action against the insurers for breach of contract.

(b) Quantum to be paid

The two parties fail to agree on the how much the insurers should pay in settling the claim. Arbitration is used to resolve the dispute.

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Every policy has an arbitration condition which states that if the parties cannot agree on the amount to be paid under an insurance policy, the disagreement should be referred to an arbitrator appointed by the parties in accordance with statutory provisions.

An arbitrator is an independent expert who will give an opinion that is binding on both parties. The parties must agree to arbitration within a reasonable period.

Arbitration is cheaper and is conducted in private without attracting adverse publicity. Arbitration clauses on insurance policies are not meant to oust the jurisdiction of the courts. Litigation will remain an option.

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