Table of Contents
IC 57 FIRE | Chapter 10|Consequential Loss Insurance II|ONE LINER|PARA 13.2
Insurance exams offered by the Insurance Institute of India (III Exam), consist of various papers either in Life or Non Life or Combined. Here we are providing ONE LINER IC 57, Fire Insurance Chapter 10: Consequential Loss Insurance II for para 13.2 and III exam .These questions will be very helpful for upcoming promotional exam in 2020.
IC 57 / Fire Insurance is a very important topic in insurance promotional exam. This IC 57 / Fire Insurance paper comes in all GIPSA exams which makes it very important.
Chapter 10: Consequential Loss Insurance II
- The rate of premium for C.L. policy consists of two components:
- Basis rate and
- Percentage for the Indemnity Period
- The basis rate for consequential loss resulting from material damage caused by the perils covered under fire policy shall not be less than 1.25 times the full ‘Average Fire Rate’ of the items covering the contents of the process blocks of the premises occupied by the insured for the purpose of business to which the insurance applies except where otherwise provided.
- In calculating basis rate the contents of any storage / utility blocks even if they are communicating with process blocks should not be taken into consideration
- Pilot plants and laboratories are to be taken as process blocks for rating purpose.
- Following plants carry out continuous, automatic or semi-automatic processes:
- Battery Service Stations
- Cement Factories
- Chemical Manufacturers: All factories not automatic or semi-automatic and continuous
- Detergent Factories
- Electric Power Works
- Electric Sub-Stations
- Electroplating works
- Engine, Boiler and Pump Houses
- Glass Factories
- Ice Candy and Ice Cream Manufacturing premises
- Ice Factories
- Ink Factories (excluding printing ink manufacture)
- Manmade Fibre Manufacturing Factories
- Paper and Card Board Mills
- Plastic Raw Material Manufacturers
- Sugar Factories
- Tile, Pottery and Brick Works
- Vegetable Oil Solvent Extraction Plants
- Vegetable Ghee Factories
- Wireless Transmitting Stations
- On payment of additional premium, the C.L. Policy can be extended to include “Add-on” covers included in the Fire policy such as Earthquake, spontaneous combustion, accidental failure of public electricity / gas / water supply, etc
- Extension may be granted to cover interruption of business in consequence of damage to insured’s property at locations other than the one to which the policy applies
- Insured’s Property at other Locations: This extension cannot be applied to insured’s other manufacturing premises
- Damage by insured perils at suppliers’ premises may thus affect the production at the insured’s premises. At an additional premium, the C.L. policy can be extended to cover this risk
- Damage at Supplier’s Premises: The Tariff provides that:
- The extension should be restricted to original manufacturer’s premises and not extended to intermediary trader’s premises.
- Unspecified locations and, suppliers abroad should not be covered.
- The indemnity period under the main policy and the extension should be identical.
- The rate of premium depends upon
- The extent of dependence of the business upon the suppliers, example, 5%, 10%, 15% and soon.
- Whether the dependence is on a number suppliers for similar goods
- Whether the dependence is total on a number of separate suppliers for different components
- The basic fire policy covers gross profits which mean net profit plus insured standing charges
- Methods of insuring wages
- Insurance for full indemnity period
- Annual method
- Period basis or Pro-rata basis
- Dual Basis of insurance
- Insurance for the full indemnity period, by inclusion in gross profit as a standing charge of wages
15.Annual method: Insurance for a shorter indemnity period of wages , the sum insured representing the annual amount of such wages, or if the indemnity period be over 12 months, the amount for the Period
- Annual method: By this arrangement:
- 100 per cent of wage roll is protected the first 3 months.
- 50 per cent of wage roll is protected during the next 3 months.
- 15 per cent of wage roll is protected during the last 3 months
- Period basis or Pro-rata basis: Insurance is for a shorter indemnity period of wages . The sum insured represents wages for the selected indemnity period only.
- Period basis or Pro-rata basis: wages are covered for periods of 4 weeks, 5 weeks ………………… 10 weeks, ………….. and so on
- Period basis or Pro-rata basis : This method is usually meant for unskilled or semi-skilled workers but specified classes of employees may also be covered so that workers, skilled or otherwise, may be retained to ensure that their services are available when production commences
- Dual Basis of insurance: Under this scheme wages are entirely removed from the gross profit cover, and are insured as a separate item. All wages are covered in one item and for one amount – for an initial period, and a proportion only of wages for the remainder of the indemnity period.
- Dual Basis of insurance: Two important features of this method are
- Carry over provision
- Option to Consolidate
- Dual Basis of insurance: The rates of premium vary according to the Indemnity Period, Period of full cover of wages and Proportion of wages insured for the remainder of the Indemnity Period.
- Advantages of Dual basis method: The wages are entirely removed from the gross profit cover and receive separate treatment.
- If wages are insured under Gross Profit item, they will be merged with other standing charges and it is quite likely, there may be under-insurance which is penalised by the application of average
- ‘Carry over’ and ‘Option to consolidate’ provisions provide flexibility to the insured as regards utilisation of labour according to circumstances after a loss.
- limitations apply to Dual Basis of insurance method:
- The initial period of full cover must not be less than 4 weeks.
- The following period of partial cover must be for the remaining of the indemnity period applying to the gross profit item, which must not be less than 12 months.
- The proportion of wages insured for this following period must not be less than 10 per cent
- The item must be included on a policy insuring Gross Profit and for the same indemnity period.
- The sum insured on wages shall represent the wages for the indemnity period and average shall be applied on that basis.
- Dual Basis of insurance method: the only safe method is to insure all wages under gross profit item for the full indemnity period. This, of course, will be economically viable for small businesses and medium businesses also where the workers would be retained.
- Lay-off / Retrenchment Compensation: Due to operation of certain regulations under the Industrial Disputes Act, 1947, a statutory payment has to be made by employers as per the provisions incorporated in the Act to such workers, as are laid off and / or retrenched in the event of closure of manufacturing concern due to circumstances beyond the control of the employers such as “Fire” or the operation of any other insured peril.
29.The amount payable as indemnity under this item shall not exceed the amount which would otherwise have been payable as wages to the said employees during the Period of Indemnity, had no damage occurred.( Lay-off / Retrenchment Compensation)
- If the sum insured by this policy shall be less than the aggregate amount of combined Lay-Off and Retrenchment Liability to the said employees the amount payable shall be proportionately reduced (Lay-off / Retrenchment Compensation)
- The term “Employees” shall mean employees (other than badli workmen or casual workmen) who have completed not less than one year of continuous service in the employ of the Insured, but excluding those employees whose remuneration is insured as a Standing Charge under item of Gross Profit”. (Lay-off / Retrenchment Compensation)
- A loading of 50% over the Consequential Loss basis rate is chargeable for Lay-off / Retrenchment Compensation
- The term “Lay-off” is defined in the Industrial Disputes Act as “the failure, refusal, or inability of an employer on account of shortage of coal, power or raw materials or the accumulation of stock or the breakdown of machinery or for any other reason to give employment to a workman whose name is borne on the muster rolls of his industrial establishment and who has not been retrenched
- The term “Retrenchment” is defined as “the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action but does not include:
- Voluntary retirement of the workman, or
- Retirement of the workman on reaching the age of superannuation, if the contract of the employment between the employer and the workman concerned contains a stipulation in that behalf. Or
- Termination of the service of a workman on the ground of continued ill health.
- The compensation payable by the employer for “Lay-Off” or “Retrenchment” is laid down in the Act. It is important that the sum insured fixed under this extension should be adequate to cover the total legal liability of the employer under the Act. If not, pro-rata average will apply
- The extension clause defines “employees” in line with the definition in the Act and, in addition, excludes those employees whose remuneration is insured as a standing charge under Gross Profit item.
- Under condition 3 of the policy the insured is required at his own expense to produce books of account and other documentary evidence to support his claim
- The auditor’s fees for this work can be insured. These fees are to be distinguished from normal audit fees paid in the ordinary course of business and which are insured as standing charge
- Output is defined as the quantity of commodity (to be specified) produced at the premises measured in units of …………………
- The rate of gross profit is defined as the rate of gross profit per unit earned on
the output during the financial year immediately before the date of damage.
- Rate of Gross Profit X Annual Output = Insurable Amount
- Alternative Basis Clause which reads as under “It is agreed and declared that whenever found necessary, the term output may be substituted for the term TURNOVER and for the purpose of the policy Output shall mean the sale value of goods manufactured by the insured in the course of the business at the premises.
- Difference’ Basis of Specification : specification Gross Profit is the amount by which the sum of the Turnover and the amount of the Closing Stock exceeds the sum of the amount of the Opening Stock and the amount of the Specified Working Expenses
- Specified Working Expenses (to be listed):
- All Purchases (less Discounts Received)
- % of the Annual Wage Roll (including holiday and Insurance contributions).
- Consumable Stores
- Packing Material
- Bad Debts
- Discounts Allowed
- Any other expenses to be specified.
- Difference’ Basis of Specification has several advantages:
- Since there is no need to list out specified standing charges, the chance of any of the standing charge being inadvertently omitted and, therefore, remaining uninsured is eliminated.
- Again the problem associated with the periodical review of the standing charges does not exist. Nevertheless, review is necessary to see, if any new variable charge should be excluded
- New Business Clause: For the purpose of any claim arising from damage occurring before the
completion of the first year’s trading of the business at the premises, the terms ‘Rate of Gross Profit’, ‘Annual Output / Turnover’ and ‘Standard Output / Turnover’ shall bear the following meanings and not as within stated
- Revenue Policies are used for Clubs, Hotels, Private Schools, Private Hospitals and Nursing Homes, etc
- Revenue Policies broadly follows the pattern of the turnover policy but ‘turnover’ is replaced by ‘gross revenue
- Gross revenue: The money paid or payable to the insured for services rendered in the course of the business at the premises
- Gross fees policy is suitable for professional persons such as solicitors, chartered accountants etc
- The gross fees are defined in the policy as “the money paid or payable to the insured for services rendered in course of the business of the insured
- The duties of the insured upon the happening of “damage” are set out in condition 3 of the policies
- Notice must be given to the Company forthwith
- All possible steps must be taken to minimise the interruption.
- Particulars of claim, supported by necessary evidence, must be furnished within 30 days after expiry of the indemnity period
- Payment on account
54.‘Payments on account’ already made, must be repaid in the event of non-compliance with any of the requirements of the condition.
55.For claim settlement usually material damage and loss of profits policies will be with the same insurer who can appoint the same surveyor for both loss assessments. However, depending upon circumstances different surveyors may also be appointed
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