Risk and Risk Management

Meaning & Concept of Risk

Life is full of risk. Risk implies unfortunate situation and hence risk has been the concern of
mankind. We hear a car accident, risk of loosing a job, risk of inflation

Some of the definitions are given below.

 Risk is the possibility of unfortunate occurrence
 Risk is combination of hazards
 Risk is uncertainty of loss
 Risk is possibility of loss

In the above definitions the underlying ideas fall into three categories:

1) Uncertainty: Risk implies uncertainty about unfortunate outcome unlike chance which
implies an outcome which if favorable. If we are sure that the unfortunate will happen, then
it is not a risk exists whether we recognize it or not. It should be outside the control of
individual involved. Further, it refers to present and future events that are uncertain.
2) Frequency and Severity: Even if we know there is a high probability of materialization
of risk, we don’t know how frequent and how severe it could be. Some risks such as
shoplifting are frequent but less severe. Accidents involving ships and planes are less
frequent but too severe.

3) Peril and hazard: Cause of eventual loss is one of the components of risk. Peril is a
prime cause that gives rise to a loss and is usually beyond the control of any one who may
be involved. Hazard is not by itself a cause but it can increase or decrease the effect should a
peril operate. An example of peril could be fire and an example of hazard could be the type
of construction material such as thatched roof.

Hazard could be physical or moral. Physical hazard refers to the physical or tangible aspects
of risk which are likely to influence the occurrence and/or severity of loss e.g. type of
construction in fire risk.

Moral hazard is concerned with the attitudes and conduct of people. This is primarily the
conduct of the person insured. Examples of moral hazard include carelessness, dishonesty
of insured and an insured who considers claims as kind of investment.

Risk Management

Risk management refers to the identification, analysis and economic control of those factors
that can threaten the assets and earning capacity of an enterprise. Generally, the risk
management process includes three major processes: identification, analysis, and control.

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1.1 Process of Risk management
Risk management process involves the following steps.
 Clarify and brief the context
 Understand/identify threats-Understand the potential with those threats for damage to
the company and its stakeholders
 Understand the likely frequency of risk damage
 Decide what risk levels are acceptable and identify those unacceptable ones
 Take action on risk deemed unacceptable by using different mechanisms
( likelihood and or frequency)
 Reduce the impact whether it be human, operational or financial
 Transfer the risk to another organization
 Prepare an incident/contingency planning
 Update and maintain the agreed risk levels as organization evolves and changes
 Communicate information on risk to all who have interest

Organizational Steps in Risk management

Develop a risk management philosophy

 To enable individual risk to be done within a framework of longer

term organization wide philosophy
 For effective benchmarking

Write basic policy statement –Objectives, risk processes and prioritization

 Decide on levels of impact to be retained

 Establish responsibility in lines of authority
 Have a reporting system-upward through the board
 Have methods of monitoring

 Identify risks-formal and structural: The risk identification activity starts with
the question ‘how the assets and earning capacity of an enterprise is
threatened’. Risk identification must be recognized as important within an
enterprise and as a responsibility of every department of an organization.

 Analyze risks –understand the relevance of individual operation and to the

organization as a whole and see the potential severity and frequency- In
measuring a risk, we gather data, analyze past information, and study the
frequency and/or severity of a risk in which an enterprise is exposed. The data
collected should be relevant and accurate because any risk control decision is
made based on such data.

Risk and impact control-what are the choices available for

prioritizing- refers to physical and economic control of a risk. Physical control
of a risk refers to steps that can be taken in order to control risk whereas
economic control refers to financial mechanisms used to control the risk. (E.g.

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 there is no point in spending of ten Birr to control a risk which can ever cost
seven Birr)

Some of the major risk control mechanisms are:

a) Risk Reduction Mechanisms:

Risk reduction can be made either by post or pre-risk loss reduction mechanisms. These are
mainly a physical risk control mechanisms.

Pre-loss physical control- the effects of a loss are anticipated and certain steps are taken to
ensure that they are kept minimum. Such as fire protection, health and safety measures,
security controls, duplication of offsite computers, create independent risks by minimizing
risk exposure. Such mechanisms attract premium reduction.

Post loss physical control- this form of risk control imagines that a risk has occurred and
steps are taken to minimize a loss after its occurrence. e.g. fire sprinklers to put off fire
damage, alarm systems.

Non-physical risk control-effective staff recruitment, employee awareness and training and
related activities

b) Risk Retention Mechanisms:

Advise smaller units and subsidiaries that losses be retained

Once a risk has been identified and controlled in some physical way, we can consider the
effect of financing the risk. It includes:-

Risk Retention - It means that the firm has to pay the cost of risk itself. In certain
situations, it may be wise to retain the risk rather than seek another form of protection
such as insurance. Risk retention is justified where;
 The risk has been properly identified and evaluated.
 The amount retained per incident and in aggregate per year is within
the financial capabilities of the firm
The cost of insurance for the amount retained would be more than the cost of retention and
hence becoming uneconomical.

Self Insurance as one of the risk retention mechanism

Self-insurance is one form of risk retention. When an organization is large enough

financially to carry on losses and because the cost by way of transfer (insurance) is higher
than the cost of retaining it could be advantageous to establish a fund than transferring risks
to insurer. Self insurance is a conscious decision to create a fund out of which losses will
eventually be met unlike non-insurance where there is no conscious decision made at all
(either by way transfer or self-insurance fund)

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Advantages and disadvantages of self insurance are given below:

Advantages of Self-Insurance

The advantages of such a scheme may be summarized a follows:

 Premiums should be lower as there are no costs in respect of broker’s commission,

insurers’ administration and profit margins;
 Interest of the investment of the fund belongs to the insured. This can be used to
increase the fund or to reduce future premium contributions;
 The insured’s premium costs are not increased due to the adverse claims experience
of other firms;
 There is a direct incentive to reduce and control the risk of loss;
no disputes will arise with insurers over claims;
 As the decision to self-insure is likely to be limited to large organizations, they will
already have qualified insurance personnel on their staff to administer the fund;
 The profits from the fund accrue to the insured.

Disadvantages of Self-Insurance

The advantages of such a scheme may be summarized as follows:

 a catastrophic loss, however remote, could occur, wiping out the fund and perhaps
forcing the organization into liquidation;
 while the organization may be able to pay for any individual loss, the aggregate
effect of several losses in one year could have the same effect as one catastrophic
loss, particularly in the early years after formation of the fund;
 capital has to be tied up in short-term, easily realizable investments which may not
provide as good a yield as the better spread of investments available to an insurance
company;
 It may be necessary to increase the number of insurance staff employed at an extra
cost;
 The technical advice of insurers on risk prevention would be lost. The insurers’
surveyors would have a wider experience over many firms different trades and this
knowledge could be advantageous to the insured;
 The claims statistics of the organization will be derived from too narrow a base for
predictions to be made with confidence as to future claims costs;
 There may be criticism from share-holders and other departments:
 At the transfer of large amount of capital to create the fund and at the cost of
dividends that year, and at the low yield on the investment of the fund compared
with the yield obtainable if that amount of capital were invested in the production
side of the organization;
 In time of financial pressure, there may be a temptation to borrow from the fund,
thus defeating the security which it had created;
 Pressure may be brought to bear on the managers of the fund, to pay losses, which
are out 1 side the cover (i.e. make ex-gratia payments), with the resultant depletion
of the fund for its legitimate purposes, and thus making statistical analysis more
difficult.
 The basic principle of insurance, that of spreading the risk, is defeated;
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  The contributions made to the fund do not qualify as a charge against corporation
tax, whereas premium payments are allowable.

Care to be taken not to retain over exposure in self insurance

 Transfer those risks that are beyond the organization by way of Insurance or any
other mechanism
 Create a fund establish by way of captive
 Transfer by way of contract
 Contingency planning (anticipate an incident and prepare to the incident could not
destroy vital organs of the organization) e.g. computer

Risk Transfer – The most common form of risk transfer is insurance. When one is
uncertain about the possible outcome of a loss or the risk is highly severe, it is wise to
transfer the risk. Through insurance we can remove the uncertainty by transferring
unknown frequency and/or severity of loss to insurer by way of known premium.

Sources of information for Risk identification

1) Internal information includes: Audit Manager, compliance manager, design

engineer, facilities manger, legal officer, product development manager and company
secretary, existing documents such as proposal forms, auditor reports
materials produced within the risk management

2) Sources of external information: Formal sources: such as police crime prevention

department, traffic police reports, National Bank of Ethiopia, professional magazine,
Environmental protection reports, etc

 Consultants as one source of information source

 Informal sources such as newspapers and magazines, Company reports,
association and institutes, interments

Risk identification Techniques:

1. where do risks lie?

 Organization chart –To demonstrate the organizations activities and organizational

structure. It helps to see risk s at a glance
 Flow chart:- pictures the route, taken by all of the crucial ingredients of the final
product, through the completion of final delivery

2. What are those risks?

 Check lists and questionnaires – Commonly used tools as aide memoir to gather
risk information.

 Physical inspection – It is a means of getting clear picture of the risk

environment through risk surveyors.

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  Brains forming - an information gathering with people having a wealth of
knowledge, experience and understanding within the organizations own
employees.

 Risk committee: group of people meeting to share experiences and concerns

about a particular risk environment.

3. How can we shape risk information for decision making?

 Fault trees: to look into chain of events, which brought together a wide range of
materials and resource to create, and deliver the finished product. The flow
reveals the source of critical parts.

 Hazard and operability studies: originated in the chemical industry it involves

four key questions.
What is the part intended to achieve?
What deviations are possible away from the usually expected?
What could be causes of these variations?
What could be the consequences of those variations?

2.1 Characteristics of Insurable Risks:

Classification of Risk
There are three major classification of risk for the purpose of insurance:

1) Financial and Non-Financial Risk:

This classification is based on effect of a risk as to its measurability.

A financial risk is one where an outcome can be measured in monetary terms, or an event
where it is possible to place some monetary value on the outcome. For example; we can
give fire damage to property and accident of a vehicle.

A non-financial risk, however, relates to situations where outcome is not measurable

financially (e.g. Career choice.)

2) Pure and Speculative Risks:-

This classification is based on outcome of the loss. Pure risks involve an outcome of a loss
or at best a break-even situation i.e. the outcome could be unfavorable or would leave us in
the same situation. Example of pure risks includes: motor accident or fire damage; and
Speculative risks is where there is a chance of gain break-even or a loss e.g. gambling.
Other examples of speculative risks include investment decisions of various kinds such as
inflation risk, or marketing new product.

3) Fundamental and particular Risks:

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This classification is based on both cause and effect. Fundamental risks are impersonal in
origin (cause) and widespread and uncontrollable in effect.

An example of fundamental risks includes natural risks such as famine, earthquake and
violent tropical hurricanes, (typhoon) or social risks such as inflation, war and
unemployment. Because of their widespread effect and being incalculable, insurers do not
usually compensate them. They rather are the responsibility of society, not individual
insurers. Particular risks have their origin in individual causes and are controllable. They
are not widespread. i.e. felt by few. Example includes motor accident risk, theft, and fire
risk.

Cost of Risk

Various statistical data are available on the possible loss or damage throughout the world.
However, such data cannot fully measure magnitude and associated losses because;
Most data are based on insurable risks

 Such data do not measure the human suffering financially

 Such data do not measure data of lost production and general economic waste
attributable to certain loss event.

There are limits of transferring a risk. Not only it is not wise, it is utterly prohibited and
may lead to criminal litigation to allow people to benefit from their own criminal action.
Therefore, it is necessary to have the knowledge of insurable risks.

The following are the major characteristics of insurable risks:

Fortuitous - the happening of a loss must be fortuitous as far as the insured is concerned.
For example, he must not deliberately damage his own property. The frequency and
severity of any risk must be completely beyond the knowledge and control of the person
being insured.

Financial Value – There must be some way of measuring the loss in financial terms.
Insurance doesn’t avoid the risk, it rather provides financial compensation of the loss to
reinstate the insured to his original position or financial status.
Insurable Interest - The insured must be in a legal relationship between the insured and the
financial loss. This is to avoid people insuring the property of others and then collecting
insurance money should anything happen, through their own machination.
Homogeneous Exposures - As the name implies Homogeneous Exposure means large
number of similar risks. Given sufficient number of exposures to similar risks, there will be
enough experience to forecast the expected extent of loss. This enables insurers to estimate
the possible actual loss (less guess estimate). It doesn’t mean, however, insurers do not
always insure for large homogeneous risks.
Example: Some risks such as satellite insurance were started without having large
homogeneous risks.

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Pure Risks – Insurance is primarily concerned with pure risks. If some one was allowed to
insure speculative risks this would bring little incentive for people to go for work and that is
why we usually don’t insure speculative risks. However, the pure risk consequences of
speculative risks are insurable. e.g. machinery loss of profit insurance.

Particular risks – As we have previously discussed, particular risks are not widespread and
uncontrollable unlike fundamental risks. The widespread and indiscriminate nature of
fundamental risks has resulted in them traditional being uninsurable. Insurers however,
insure some and selected natural fundamental risks based on their geographical location of
the property. Fundamental risks, which arise out of the nature of society, are not insurable
including changing customs and inflation.

Public policy – It is common principle in law that contracts must not be contrary to what
society would consider right or moral thing to do, that is to say that contracts to any criminal
venture are not acceptable. For example, a company can’t insure a chauffeur in the event of
convicted drink driving offense committed by a person who is banned from driving.

2.2 Functions of Insurance:

The major function of insurance includes;

a) Risk Transfer:

As mentioned in the above discussion, the major function of insurance is to serve as a risk
transfer mechanism. Through insurance, the insured can transfer the uncertainty of
loss with certainly known and reasonable premium. Insurance will not prevent the
risks from happening but provides some form of financial compensation and what one
transfers to the insurer is the financial consequence of the risk. The main function of
risk transfer is done through common pool and equitable premium.

b) Creation of Common Pool

 In the early days of insurance, merchants carrying marine insurance, who were
having goods carried on a ship would agree prior to voyage, to make contribution to
those who suffered a loss during voyage.
 The traditional burial society in Ethiopia (Edir) will enable us to share some burial
expenses as stipulated in its memorandum of associations.

The above examples have drawbacks because every member will contribute similar amounts
irrespective of risks he has brought to the pool. Moreover, under early marine adventures
members knew their contribution after the loss. The insurance company gathers together
people who want insurance and sets itself to operate and manage the pool. It takes the
contribution in a form of premium from many people and pay for losses to the unfortunate
few from such fund. The pool idea works because not everyone in the pool will have a loss
in any one year as with the same magnitude and severity.

c) Equitable Premium:

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 There can be several of the pools, one each for main type. e.g. motor risks pool, fire
risks pool, employer’s liability, risks pool, etc. The insurer is faced with differing
magnitude of hazard, and differing value at risk.

The insurer should charge what is known as equitable premium, i.e., contribution made
by each party should be fair to all parties participating. Each members of the pool will
be charged based on severity, frequency, value at risk and other factors such as
competition.

2.3 Benefits of insurance

The main benefits of insurance include:

1) Peace of Mind: The knowledge that insurance exists to meet financial consequences
of certain risks provide a form of peace of mind. One can directly deal on his business
matters than thinking of possible likelihood of a loss or event of loss occurring.

2) Loss Control: Insurers do have an interest in reducing the frequency and severity of a
loss, not only to enhance their profitability but also to contribute to the general reduction
in economic waste which follows from losses. e.g. surveyors advise of pre loss control
like flood control building.

3) Social Benefits: Availability of insurance cover to recover from losses provide

stimulus to the business activity. The social benefit is that people keep jobs, their source
of income are maintained and can continue to contribute to the national economy. Major
losses leading to a closing of a business can have adverse impact on the community and
to the economy as a whole.

4) Investment of funds: There is a time gap between the receipt of premium and
payment of claim. This vast sum of money should not be kept idle. It is invested in a
wide range of different forms of investment. By making loans available for mortgages
and other businesses, buying shares in the market, investing in bonds and others, insurers
have become major institutional investors in an economy.

5) Invisible earning: Insurance like bank and tourism is invisible trade. A substantial
amount of money is earned through service export towards improving balance of trade.
This substantial foreign exchange helps to a positive balance of trade to an economy.

2.4 How Insurance Operates

Insurance is a contract (must be a written contract, Ethiopian Civil Code Article 1723-1726)
in which one party contract with another. The proof of insurance contract is the insurance
policy (Ethiopian Commercial Code 657 No. 1) and;
Further, the Ethiopian Commercial Code Article 654 defines an Insurance policy as a
“contract whereby a person, called the insurer, undertakes against payment of one or more
premiums to pay to a person, called the beneficiary, the sum of money where a specified risk
materializes."
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The parties to the insurance contract are the insured and the insurer. The risk is what both
are involved in the contract. This can be depicted by the triangle below.
 At the apex of the triangle is the risk

Risk

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 Insurer Insured

The insured:
 Knows the nature of the risk
 Has to describe the risk to the insure
The proposer
 Looks for acceptable protection, needs special clause to be included or
excluded.
 He should know what is available in the market.
 Price is the main factor considered by most insured. In fact, service & security
are also considered.

The insurer;
 Is told about the risk by the proposer
 Insurers make some inquiries, use skilled surveyors and make physical
inspections.
 Intermediaries such as brokers who will assist insureds at various stages
during the transaction. We have the reinsurers at the angle of insurers to
offer the same kind of protection to the insurer as the insurer offered risk
protection to the insured.

2.4.1 Marketing

Marketing is the logical domain to start insurance transaction. The insurer, one who has the
service to sell, wants to market it in an attractive way to consumers, and the consumers want
the product/service offered by insurers. We should know that business exists solely or and
because of the customer. Marketing contributes fully to the determination of long term
strategic goals of a business organization.

2.4.2 Proposal Forms:

The proposal form is the most common mechanism used by the insurer to seek
answers to basic and necessary facts from the proposer. It is prepared by
insurers to record information, which is necessary to the underwriter to assess
the nature of the risk being proposed. Its length and form vary depending upon
the information required by insurer. The proposal from is the basis of the
contract. The proposal from is used for most classes of business. The
exception is in marine insurance (a slip used) and fire insurance (the risk detail
is much that all details cannot be accommodated by proposal forms and hence
we use survey reports & other means of assessing risk).

Proposal forms should be simple and easy to complete. The proposal forms
have general questions, questions asked in almost all classes of insurance and
specific questions which are risk specific to certain class.

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General questions in proposal forms include:
 The name and address of the proposer (business),
 For identification-to identify the physical and moral hazard, indicative for
nature of trade.
 for identifying geographical address.
 Occupation and age – may show whether there is abnormal hazard.
 Details of past claims and in some cases past and present insured.
 The period of time over which insurance is required.
The basis upon which premium is to be calculated. e.g. types and cost of
stock in fire insurance.
These risk specific questions vary from class of business to another class.
Details of driver, for example, are important for private motor insurance.
 Proposal forms should have declaration and warning. Since proposal form
is the basis of a contract, the proposer should sign what has been supplied
in the proposal form is the thus to the best of his knowledge and belief.
Moreover, there should be warning or important notes to urge the proposer
to reveal facts even when they are in doubt as to whether or not they should
be revealed.

2.4.3 Policy Forms: A policy is an evidence of the contract of contract of

insurance. The formation of insurance contract follows the process of offer and
acceptance.

After a proposal is completed, terms have been agreed and premium is

agreed or been paid, then there is a contract. Every insurer has its own
form of policy for the various classes of business.

The insurance policy, as stipulated in Ethiopian Commercial code of

1960 article shall show:

1. The place and date of contract;

2. The names and addresses of the parties;
3. The item, liability or person insured
4. The nature of risks insured;
5. The nature of risks insured;
6. The amount of the guarantee
7. The amount of the premium;
8. The term for which the contract is made.

Generally, insurance policies, commonly called scheduled policies, have

the following parts:-

a) Heading - The heading includes the name of the insurer, addresses of

the company and sometimes the company’s logo

b) Preamble(Recital clause) - The preamble contains three main parts;

i. The proposal as the basis of the contract and incorporated in it.
ii. Mentions that premium has been paid or agreed to be paid
iii. That the insurer will provide cover stated in the policy

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 “Whereas the Insured named in the Schedule has by a signed proposal
and declaration which proposal and declaration the Insured has agreed
shall be the basis of this Contract and be held as incorporated herein
applied to the Company named in the Schedule (hereinafter called the
Company) for insurance against the Contingencies specified herein”
c) Operative Clause - This section of the policy is the part where the
actual cover provided is outlined. It begins with the word, ‘The
Company “The Corporation will….” by stating the covers as outline.

d) Exception - Exceptions are one of the occasions on which insurance gets “bad
press”. Exceptions are the inevitable consequences of insurance i.e., all
insurers can do is to make it clear that there are exceptions and word
them in simple terms. Exceptions could be general and specific. General
exceptions refer to those which are found in almost all policies such as
war, radioactive waste, earth quake, typhoons, hurricanes and the like.
Particular exceptions refer to those which are peculiar to certain class of
insurance or which is covered by other insurance policies e.g. riot in fire
policy.

e) Conditions - At the end of policy is a list of conditions. Conditions could be

implied and expressed. Implied conditions do not appear on the policy
but are nevertheless important. In other words, implied policies are found
as legal provisions. Such conditions are implied by law to apply to all
classes of insurance. Major implied conditions include;

1. The fact that the subject matter of insurance is actually existence and is
able to be identified.
2. That the insured has insurable interest.
3. That there has been utmost good faith.

Express conditions are those, which are expressly written in the

policy. Express policies may be found as legal provision. The clauses
include in express conditions are:-

1) A conditions stating that the insured will comply with all the terms
of the policy
2) The requirement that the insured notify the insurer of any changed in
the risk (notification clause)
3) What procedures should be followed in the event of claim? This
will vary from cover to cover but will include reference to the time as
then which the claim will be notified. (Notification of claims clause).
This is five days in the Ethiopian Commercial Code.
4) The effect of fraud.
5) Reference to the fact that the insured is to take all reasonable care to
minimize the risk of loss/damage or of incurring liability. (In other
words, existence of policy of insurance is not being regarded as a
mandate for carelessness).
6) The arbitration condition relates to the amount to be paid under the
claim and not liability for the claim and not liability for the claim itself
(Arbitration clause). Here there is a difference in amount regarding the
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 claim. Most insurers who didn’t admit the claim liability will not
accept arbitration.
6) Condition will outline what will happen if there are other policies in
force covering the same loss (Contribution Clause).
7) There may be a condition allowing the insurer and the insured to
cancel the policy and saying how it is to be done (Cancellation Clause).

8) Many premiums are based on an estimated figure and adjusted once

the actual figure is known (Declaration Clause). These are common in
Stock in (fire insurance) and Workmen’s Compensation (employer’s
liability).

f) Signature - This refers to the signature of the Company’s official

who has signed to show that contract has been concluded.

g) The Policy Schedule - The schedule is the place where the policy
is made personal to the insured. Included in the policy schedule are:-
 the insured
 the address of the insured
 the nature of the business
 premiums
 the limits of liability
 policy number
 Reference made to any special exclusions, conditions
and aspects of cover.

a) cover expected claims;

b) create an estimate for outstanding claims;
c) provide a reserve to meet claims at some time in the futures;
d) meet all expenses;
e) provide for profit.

Whenever we calculate the correct premium we should consider the following important
points:

a) Inflation
b) Interest rates
c) Competition
d) Exchange rates
Essentials of Underwriting

The actual process by which risks are underwritten varies from one class of business to
another and depends on an insurer’s general approach. In fire and engineering insurance it
is common to make risk survey before risk is underwritten.

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 The underwriting process can be generally summarized as follows:
e) Assess the risk (conduct pre-risk survey);
f) Decide whether or not to accept the risk;
g) Determine the terms, conditions & scope of cover to be offered;
h) Calculate the premium
i) Policy issuance

4. Principles of Insurances -
The following are major principles of insurance.

INSURABLE INTEREST

Whosoever effect insurance policy for own benefit should be one who stands to suffer
financial loss if the insured event takes place. Insurable interest constitutes the legal right to
insure arising out of a financial relationship recognized at law between the insured and the
subject matter of insurance. In the absence of insurable interest requirement, if people were
free to insure for their own benefit whoever and whatever pleases them, it would have been an
open invitation to the unscrupulous to commit a host of serious crimes with the view to the
realization of profit. Situation is clearly not in the public interest or is out of Public Policy.

Insurable interest is created when one stands in relationship with some subject matter whereby
the benefits from its safety and prejudiced from its loss/destruction. One can also insure for
an amount not greater than the value of his interest.

An example of how insurable interest is created is given below:

Life Insurance - No monetary value is placed on human life. The extent of insurable interest
on ones owns life has no limit. But when one insures the life of another is different. As per
Ethiopian Commercial Code a person can insure the life of another but only with the consent
of the person to be insured both as to the assurance and amount of assurance;

- A creditor or guarantor can insure the life of debtor to the extent of loan and interest
- A partner can insure the life of his partner to the extent of the latter's financial interest.
- An employer has insurable interest in the life of his employees to the extent of possible
financial loss or legal liability.

Property Insurance - absolute owner has insurable interest to the extent of financial value of
the property.

- Mortgages - Lender has insurable interest in the property to the extent of the loan and any
interest.
- Persons holding goods in trust for others and where they are responsible for the safe
keeping of goods either by law or by contract such as carriers, hoteliers, laundries,
warehouseman etc. can insure to the extent of the value
- An agent can insure property on behalf of his principal

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- A joint owner of property can insure for full value of property financial interest, as does so
an agent for the other part of joint owner
Liability Insurance - amount of liability can't usually be known in advance. Recover under
the policy is limited to the award even where the limit of policy per the policy is greater.

In majority cases, the existence of insurable interest in non-life insurance must exist at the
time of loss, not necessarily at inception. Non-Life policies are contracts of indemnity and a
person can be indemnified only if loss is incurred. Insurable interest need only exist at
inception in the case of life policy since life policy is not a contract of indemnity

If one has no insurable interest, its effect is that there was no enforceable contract at all or the
policy is void.

UTMOST GOOD FAITH

In the context of insurance, the essence of utmost good faith is one, which the law imposes on
both insured and insurer. In the process of insurance negotiation, each party must provide the
other with truthful and sufficiently complete information to enable one arrive at a decision
whether to enter into an insurance contract. The duty is reciprocal. While the propose can
examine a specimen of the policy before accepting the terms, the insurer is at disadvantage as
he cannot examine all aspects of the proposed insurance which are material to in and
therefore, the responsibility of disclosure heavily rests on the proposer. The proposer should
have all facts that he knows and which have a material bearing on the risk being proposed.
On the other hand, the insurer should state the exact terms, exceptions and conditions of
insurance.

The proposer is expected to answer the questions and requests truthfully and also is
responsible to voluntarily disclose material facts on aspect of the risk not covered by the
proposal form.

It should be noted that not all facts need to be disclosed. Facts to be disclosed should be
material such that it would be one that would influence the insurer in accepting or declining
the risk or in fixing the premium or terms and conditions of the contract.

Regarding duration of material fact, the duty to disclose material facts starts from the time of
negotiations for the contract and continues to the moment of contract formation. There are
also duties on the part of the insured, as per the 1960's Commercial Code article 669, to
inform the insurer any increase in the risk subsequent to the formation of the contract.

The duty discloses revives at the time of renewal as well as during the currency of the policy.

The duty of disclosure is violated where there is misrepresentation and non disclosure.
Representation refers to an oral or written statement of fact made at the time of negotiation for
a contract with the intention of inducing the other party to enter into the proposed contract.

The remedies for breach of utmost good faith are stated in the Ethiopian Commercial Code of
1960 Article No. 668

PROXIMATE CAUSE

16
MEANING
Obviously, when a loss does occur, it is essential to determine its cause or causes in order to
decide whether or not the loss is covered by the policy.

Where the loss is the effect of single cause, the decision as to admission of liability under a
policy is relatively simple. All that is needed is reference to the policy to see whether the
causative event is named as an insured peril. If it is so, liability will be admitted; but if it is
not, liability will be denied.

On the other hand, there are also cases where two or more events produce loss. Under such
cases, too, if all the events involved are insured perils or if all of them are expected or
unnamed perils, the matter of admission of liability is rather straightforward: admission or
denial respectively. But where the events represent combinations of insured, expected and
unnamed perils, it becomes necessary (if at all possible) to identify the loss caused by each
event. Thus, each event will be the proximate cause of the loss that it alone produces. But if
such separation of cause and effect is not possible, it becomes instrumental in bringing about
the loss.

MORE THAN ONE CAUSE

These events may be either a chain/train of events or concurrent events.

In respect of a series of events, proximate cause has been defined as follows: "Proximate
cause means the active, efficient cause that set in motion a train of events which brings about
a result, without the intervention of any force started and working actively from a new and
independent source."

There is an initial Event 1 which is cause for the happening of Event 2. Event 2 in turn causes
Event 3 and so on until the chain of events stops at some point. that is, each event is the
logical or natural effect of the immediately proceeding event and the logical cause for the
immediately proceeding event and the logical cause for the immediately following event.
Each event along the chain may or may not produce a loss; what is definite is that there is
some loss at the end.

Unbroken Sequence: Where the link between the first and last events in the chain is
unbroken, the proximate cause for the whole loss is the first cause.

Broken Sequence: If at some point in the chain the sequence is broken, it becomes necessary
to isolate the loss caused by each event, and thereby each event will be the proximate cause
for the loss brought about by it.

Remote Causes: the description of chain of events outlined above envisages a situation
where the time interval between the happenings of two consecutive events is too short to
effect measures for the prevention of further loss. If in fact time was too short, then the initial
cause is usually held to be the proximate cause. On the other hand, if there was sufficient
time between two consecutive events the original cause is deemed to be too remote a cause
for the loss produced by the later event. "It should be noted, however, that where damage is

17
serious and further loss is almost inevitable, the initial cause will be the proximate one while
attempts at removing the danger are made and until the danger is remover."

Concurrent events : These are events which are independent or unrelated to one another but
which occur simultaneously by chance to produce loss(es)

Under such a case, there is not necessarily one proximate cause but two or more. The effect
of each will have to be isolated If possible; then each event is the proximate cause for the loss
produced by it.
The Importance of Identifying the Cause of Loss

It is obvious that the cause of a loss must be reasonably established before insurers are
considered liable. A peril of some kind will have caused the loss, but not all perils are
insured. In fact, there are three basic types of peril:

a) Insured perils: These are plainly understood, such as fire under a fire policy
and burglary under a burglary policy.
b) Excepted perils: These are perils which are specifically excluded from the
insurance cover, either because it is not practicable to insure them at all or
because they cannot be insured at the premium applicable to the policy.
Examples would be suicide under a personal accident policy, or spontaneous
combustion under a standard fire policy.
c) Uninsured perils: These are perils which are not mentioned in the policy
document, but which are clearly outside the scope of cover, such as fire damage
under a burglary policy and death from natural causes under a personal accident
policy.

POLICY WORDING

The principles outlined above need to be applied in light of policy wording so as to:

 Determine the nature of perils relevant to the application of the doctrine

of proximate cause; i.e. insured, excepted and unnamed perils;
 Ascertain whether or not the policy wording modifies application of the
doctrine or there is any reference to "indirect" causes.

INDEMNITY:

MEANING

18
The central purpose of insurance in general is to provide to the insured compensation in
money or money's worth equal to the amount of the financial loss he might sustain if the
insured event takes place.

This is the concept of indemnity. That is, "for the purposes of insurance contracts, indemnity
could be looked upon as the exact financial compensation sufficient to place the insured in the
same financial position after the loss as she enjoyed immediately before it occurred." (Refer
also commercial code of 1960 article 678).

The essence of the principle is that ideally compensation should be equal to the loss; neither
more nor less. If compensations is greater than the loss, the insured will have made a gain,
and this is clearly at variance with the basic purpose of insurance as noted on the chapter on
insurable interest. On the other hand, if compensation is smaller than the loss, he will not
have been indemnified.

LINK WITH INSURABLE INTEREST

In the event of a claim the insured cannot recover under a policy a sum greater that the value
of his financial interest in the subject matter of insurance.
APPLICABILITY

The principle of indemnity applies to all forms of insurance other than those on the life of
persons (notably life and personal accident insurances). The explanation is not difficult to
find. As noted in the chapter on insurable interest, the value of a human being cannot be
measured in terms of money. Therefore, it generally is meaningless to try to ascertain the
financial loss incurred by the death of a person, or as the result of the loss of limb, eyesight,
etc. This is expressed by saying that these are not contracts of indemnity. They are rather
contract of benefits.

Nevertheless, life and personal accident insurance policies can be made to be contracts of
indemnity for certain specific purposes. A creditor or a debtor may insure a debtor for no
more than the amount to the debt. A partner may also not insure another partner for an
amount greater than the sum the partnership. These are all insurances of indemnity. A
personal accident policy can also be a contract of indemnity where for example an employer
effect such a policy on his staff specifically so as to provide himself with any amount he
would have to pay in wages to disabled employees. In short, many of the policies affected on
the life another person can be viewed as contracts of indemnity.
HOW PROVIDED

Indemnity may be provided in one of four ways. The choice as to which method to apply is
usually given to the insurers by the policy.

These four methods of providing indemnity are the following:

Cash Payment
The amount of claim payable under the policy is paid to the insured in cash.
Repair
Damage to the insured object is made good by repair at the insurer's cost.

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Replacement
Where the insured object is lost or destroyed beyond economic repair, the insurer undertakes
to replace is with a like object.

Reinstatement
As a method of providing indemnity, "reinstatement" refers to rebuilding or restoring a
damaged building.

MEASUREMENT OF INDEMNITY

In effect, measurement of indemnity is measurement in money terms of the loss sustained by

the insured. But is should be pointed out at this stage that settlement under the policy may be
for a different amount as shall be show later in this chapter.

Measurement of indemnity under the main forms of insurance can be summarized as follows:

Marine

Marine policies cover cargo and ship. Marine policies fall into two categories. Valued and
unvalued. The more usual marine policy is the valued policy. A valued policy is one in
which the value of the subject matter insured is mutually agreed between the insured and the
insurer at inception. The cargo policy allows the insured to insure the cost price of goods,
freight and the insurance premium as well as his profit. Because the element of profit is
included, a commercial indemnity, rather than strict indemnity is provided.

In the event of total loss, the measure of indemnity is the value fixed by the policy. Where
there is a partial loss of goods, the loss will be a proportion of the total agreed value. In the
case of a partial loss of a ship, indemnity is equal to the cost of repairing the damage.

Property

There are several classes of property, the main ones being building, machinery and contents
(other that stock), and stock-in-trade. In all cases, the general rule is that where property is
lost, damaged or destroyed (in whole or in part), indemnity in respect thereof or represented
not by its cost but by its value at the date and at the place of loss excluding any element of
prospective profits but including any increase in value during the currency of the policy
subject to the application of average.

Building: Indemnity is the cost or repair or reconstruction at the time of loss less an
allowance for betterment. There will be betterment because old materials will have been
replaced by new, and some features which did not exist before the loss might have been
added.

Machinery & Contents: Indemnity is the cost of repair or replacement less any allowance
for wear and tear. Where the replacement is new, allowance for wear and tear will be
deducted but where the replacement is by an identical secondhand item there is no such
deduction.

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Stock-in-trade: Indemnity is the cost of replacing the stock at the time and at the place of
loss.

In the Case of Manufacturer's Stock:

Raw Material: replacement cost including delivery to site;

Other Stock: cost of replacement at prices ruling on the date of loss.

In the Case of wholesalers' or retailers': includes transport and handling costs to the
insured's premises.

Salvage: In all property or marine claims, the value of any salvage is deducted from the
amount of indemnity determined as above. If this is not done the insured will be more than
indemnified.

Pecuniary Insurance
Under a fidelity guarantee policy, indemnity is represented by the actual monetary loss
sustained by the insured as a result of the dishonesty of an employee or employees.

In consequential loss insurance, indemnity is the prospective profit lost due to interruption of
business after a fire.

Liability Insurances
Indemnity is easily measurable. This is simply the amount awarded by a court or negotiated
out of court plus costs and expenses incurred in connection with the claim.

FACTORS LIMITING THE PAYMMENT OF INDEMNITY

As noted earlier above, payment under a policy may not be equal to indemnity; it could be
less for one or more of the following reasons;

Sum Insured
The maximum amount payable under a policy is the sum insured (or limit of indemnity or
limit of liability). Thus where this amount is less than indemnity, the insured will not be fully
compensated by his policy and, therefore, will have to bear part of the loss himself.

Average
If there is under-insurance (i.e. where the sum insured is less than the full value of the subject
matter insured), the insurer's share of any loss is =
Sum insured X Loss
Value at risk
The insured bears the balance of Full Value
(See Eth. commercial Code of 1960 article 679 and 680.

Franchise//Excess/Deductible
These require that the insured himself bear the first Birr X of each claim, in which case the
sum payable under the policy is less than indemnity.

21
Limits of Liability
These place a maximum limit payable under a policy for any one item irrespective of its
value. Here again, the policy will pay to these limits, the insured bearing the balance, if any.

EXTENSIONS IN THE OPERATION OF INDEMNITY

There are also cases where payment under a policy will amount to more than indemnity.

Reinstatement Memorandum
An insured can request that insurance in respect of buildings and machinery be subject to the:
reinstatement memorandum". In such a case, settlement will be made without deduction for
wear, tear and depreciation.

New of Old Policies

This is for household gods are destroyed within the first three to five years of their purchase;
settlement will be for the cost of new items without deduction for wear and tear.

Agreed Additional costs

an insured can arrange for his policy to cover costs for the removal of debris, architects' and
survey9or' fees incurred for supervision of work when rebuilding after a fire.

SUBROGATION
MEANING
There arte certain cases where a third party is legally liable for the loss sustained by the
insured. Under such a case, the insured will have two sources of compensation his insurance
policy and the third party. If the sum of the compensation received from both sources exceeds
the value of the insured's loss, he will have been more than indemnified; i.e., he will have
made a gain; a situation which should not be allowed to happen. Therefore, the principle of
subrogation (which is a corollary to the principle of indemnity) is required to secure the
objective of indemnity and it requires the insured, after having been indemnified by his
insurer, to account to the insurer for any profit he might make from the insured event.

This is effected by the insured subrogating or relinquishing his rights and remedies against the
third party to the insurer who then pursues these rights and remedies in the name of the
insured and recover whatever amount is due from the third party.

APPLICATION
The principle of subrogation is needed to support the principle of indemnity. Therefore, it
does not apply to life and personal accident insurances since, as noted in earlier chapters;
these are not contracts of indemnity.

HOW SUBROGATION ARISES

Subrogation rights may arise in one of three ways as follows:

Civil Wrong
If an insured sustains a loss due to the wrongful act of another person, then the insurer, after
having indemnified the insured, is entitled to take legal action to recover his outlay from the
wrongdoer.
Contract
22
Where the insured has been indemnified he cannot also retain any available salvage as this
would give him more indemnity. The insurer is entitled to the salvage.

WHEN DOES SUBROGATION ARISE?

Subrogation does not normally arise until the insurer has admitted and paid it. This could,
however, give rise to some problems as the insurers would not have complete control from the
date of the loss and their eventual position could be produced by delay or other action on the
insured's part.

To ensure their position is not prejudiced, insurers place a condition on the policy giving
themselves subrogation rights before the claim is paid. The insurer cannot of course recover
from the third party before he has actually settled with his own insured but the express
condition allows the insures to hold the third party liable pending indemnity being granted to
the insured person. In marine insurance policy condition as above is not used and the claim
must be met before the underwriters have subrogation rights.

EXTENT OF SUBROGATION RIGHTS

An insured's subrogation right is limited to the amount of claim paid under the policy. In
order words, an insurer is not entitled to recover more than he had paid out and must not make
any profit by the exercise of subrogation rights. (See Commercial Code of 1960)

"Where the insured has been considered his own insurer for part of the risk, as in the case of
excess or the application of average, he is entitled to retain an amount equal to that share of
the f\risks out of any money recovered. Where the insurer makes an ex-gratia payment to an
insured, the insurer will not be entitled to subrogation rights should that insured also recover
from another source.

This follows from the fact that an ex-gratia payment is not indemnity and subrogation rights
only arise out of the need to supp-ort the concept of indemnity."

5. CONTRIBUTION
MEANING
The principle of contribution is another corollary to the principle of indemnity and is intended
to secure the objective of indemnity in a case where an insured has two or more policies with
as many insurers covering the same loss.

The position as similar to that discussed under the chapter on subrogation; i.e., the insured has
more than one source of compensation from which he stands to make a gain if allowed to
recover from all sources.

The principle of contribution prevents this by apportioning the claim among the insurers on
some equitable basis.

HOW CONTRIBUTION ARISES

Contribution applies where the following conditions are met:

 Two or more polices of indemnity exist;

 The policies cover a common interest;
23
  The policies cover a common peril which gave rise to the loss;
 The polices cover a common subject matter;
 Each policy must be liable for the loss.

THE BASIS OF CONTRIBUTION

'' The loss will be shared by the insurers in their ratable proportions''

There are two interpretations of how ''notable proportioned should be calculated. Firstly, one
could argue that each insurer should pay in proportion to the sums insured or limits of liability
on the policies.

Alternatively, one could argue that each policy should pay in proportion to its liability for the
loss, since account should be taken of restrictive terms, which might vary from policy to
policy. This approach is called the '' independent liability method''.

Some Notes on Classes of Insurance

Underwriting and Claims
All Risks Insurance

The risk assessment procedure

i. proposal form completion
ii. Pre acceptance survey
iii. Examination of risks
iv. Acceptance and rating

All risk Insurance:-Its object is to indemnify the insured against loss or damage by fire, theft
or any other accident or misfortune not specifically excluded under the policy; cover provided
for property other than personal effects and household goods and the like.

Subject Matter of Insurance

Gold, silver articles, jewellery, furs, pictures including personal effects and wearing apparels
shall be covered where sum insured in respect of each article is listed. The sum is the
maximum liability.

Selection of risks is made in a very careful selection of risks with special attention to moral
hazards

Burglary Insurance
Fidelity Guarantee Insurance
Covers any act or fraud or dishonesty committed by the insured’s employees up to amount
guaranteed. The policy is issued on named basis only unless authorized by higher body of a
company.
Fire and Allied Perils Insurance
The object of fire and allied perils insurance against financial loss which he may sustain by
reason of the property insured being damaged or destroyed by fire or other perils. Indemnity
is made by replacement, reinstatement or monetary payment subject to the sum insured being
limit of liability.
24
Cover on stock is given on declaration basis based on declaration condition. When issuing
declaration policies, the sum insured should not exceed the company’s retention. A
provisional premium not less than 75% of the annual premium calculated on the sum insured
shall be paid in advance. The value at risk shall be declared on monthly basis such as average
value at risk on each day of the month, the average of the highest value at risk in each week of
the month, the highest value at risk during the month, the value at risk on specified day of the
month. The minimum premium of not less than 50% of the provisional premium in respect of
policies on monthly declaration is to be retained. Declaration basis policy is issued only for
policies not less than twelve months.

Credit history and risk selection of risks shall be made during renewal and at the time of
acceptance.

Provision of an indemnity for losses during a period interruption after fire or special perils
loss is to be given under consequential loss policy.

Rent insurance in respect of loss of rent due to an insured peril could be provided at the
applicable rate according to rent clause is provided

Reinstatement value insurance can be provided on reinstatement value conditions only to

buildings and contents (other than merchandise or and stock-in-trade) and plant, subject to the
memorandum as contained in the last page. Valued policies are not provided.

In case of floating policies, where merchandise in two or more risks are covered in one sum
insured the rate applied is shall be the highest one.
Mortgage clause is required to be made subject to it appropriateness.

Insurance on Architects and Consulting Engineering Fees may be granted at the applicable
Fire Rate provided where scope of cover is as per the clause.

Any alterations in risk may be subject to premium increase. Discounts shall be provided for
 Fire extinguishing appliances

Consequential Loss Policy:

The consequential loss or loss of profit Insurance policy covers losses arising out of fire
insurance policy in respect of gross profit, wages, and on auditors’ charges. The loss of gross
profit is limited to loss in reduction in turnover and increase in cost of working and amount
payable as indemnity under shall be
a) In respect of reduction in turnover: the sum produced by applying the
rate gross profit to the amount by which the turnover during the
indemnity period shall in the consequence of the damage, fall short of
the standard turnover.
b) In respect of increase in cost of working: The additional expenditure
(subject to the provisions given in the memo) necessarily and
reasonably incurred for the sole purpose of avoiding diminishing the
reduction in turnover which but for that expenditure would have
taken place during the indemnity period in consequence of damage,
but not exceeding the sum produced by applying the rate of gross
profit to the amount of the reduction thereby avoided. Less any sum
25
 saved during the indemnity period in respect of such of the insured
standing charges as may cease or be reduced in consequence of the
damage.

Provided that if the sum insured by this item be less than the sum produced by applying the
rate of gross profit the percent annual turnover, the amount payable shall be proportionally
reduced.

Motor Insurance
The main objective of motor insurance is mainly to cover losses to third party
liability to persons and property as well as accidental own damage to the same
due to overturning or collision depending upon the type of cover.

Subject matter of Insurance: The subject matter in motor insurance is motor

vehicle. A motor vehicle is defined by Road Traffic Act of the UK as a
mechanically propelled vehicle intended or adapted for use on roads. Road
means any highway and any other road to which the public has access and
includes bridges over which a road passes.

Classification of Motor Vehicles:

For the purpose of motor insurance motor vehicles are classified as follows:-
a) Private Vehicles: a vehicle is classified as private vehicle if it is used
solely for social, domestic, pleasure and professional purposes or business
calls of the insured. The term private use does not include use in
connection with the motor trade, racing, commercial traveling and hire
and reward.
b) commercial Vehicles: These are
 Goods Carrying Vehicles: It is used to describe different types
of vehicles that are intended or designed to carry goods. It
ranges from trucks to small goods carrying delivery vans. Such
vehicles can be used for the carriage of goods for hire or reward
(general cartage) and the carriage of own goods plus carriage for
hire and reward.
 Passenger Carrying Vehicles: This group includes vehicles such
as taxis, minibuses, buses, etc. generally, it is divided into
 Public Services Vehicles
 own service vehicles
Public service vehicles are vehicles used for the carriage of passengers for hire
or reward. These include public hire vehicles, private hire vehicles and buses.
Public hire vehicles are usually with a carrying capacity of less than 12 seats.
c) Vehicles of Special Construction: Such vehicles are designed or
constructed to perform specific purposes such as mobile cranes, fire
trucks, mixers, breakdown vehicles, dumpers, dozers, graders etc.

26
 d) Agricultural and Forestry Vehicles: This group includes tractors, trailers,
balers and combines harvesters.
e) Motor Cycles: This group is two or three wheeled vehicles used for
personal or business purposes.
f) Motor Trade: This class of risk relates to vehicles used by dealers and
repairers in during drive test, in custody and other related activities in
motor trade.
g) Learners: they double clutch and brake pedals used for training drivers.

TYPES OF COVER GIVEN IN MOTOR INSURANCE: Ethiopian Road

Traffic Act called Vehicle Insurance Against Third Party Risks)

The most popular types of cover offered by insurance companies in Ethiopia

include:
a)The Road Traffic Act (Ethiopian Third Party Risks): It is believed that
government has to assure that road victims are left uncompensated. In Ethiopia
until the recent times, there was no compulsory third party motor insurance.
Recently however the Council of Representatives has adopted a proclamation,
proclamation No 559/2008 to this effect. Accordingly, compulsory third party
motor insurance limit of liability as given in article 16 of this proclamation as
follows
 .Birr 40,000 in case of death
 Birr 15,000 in case of bodily injury; and
 Birr 100,000 in case of damages to property
This does not mean the victims right to claim is jeopardized. The Act requires
one to have third party motor insurance and hand on to police when requested.
This proclamation sets out the minimum cover for third party liability in respect
of death and bodily injury as well as third party property up to a limited amount.
The cover further stipulates that an injured person will get medical help in
hospitals up to birr 1,000 immediately even if it is uninsured because the
medical center can get refund from the insurance fund. Like other developed
countries, when an accident occurs by unknown drivers (untraced drivers) and
uninsured drivers, a bureau established by levies from insurance companies and
government contribution will handle claims in this case. A bureau is established
in the proclamation.

b) Third Party Only: This could be a possible cover which the market may bring
to give some additional covers in addition to compulsory insurance. Probably it
may cover additional costs and expenses as well as it may have additional cover
legal liability to third party property and persons apart from that is given by the
Road Traffic Act.

27
c) Third Party, Fire, and Theft Cover: This policy extends the third party cover
to incorporate covers that relate to the policyholder's own vehicle or motorcycle.
The additional covers include theft and fire risks. Theft includes intention of
permanently depriving of a thing from its place. In motor insurance, it also
includes loss or damage due to unauthorized use of motor vehicle such as joy
riding. Fire includes external fire, fire resulting from wear and tear, mechanical
or electrical breakdown or failures.

d) Comprehensive Motor Insurance: It is wider cover than those given from (a)
to (c). The cover includes, apart from given above, accidental damage due to
collision or overturning to the vehicle insured.

The Nature of Motor Insurance Contract:

A motor insurance contract includes documents such as proposal forms, the

certificate of insurance, the policy booklet and the schedule. The proposal form
contains information provided by the policyholder and upon which details of the
policy is completed and rated and the premium calculated. The certificate of
motor insurance is also a proof of motor insurance in case of Road Traffic Act
covers.

Comprehensive Motor Insurance Policy:

The main covers include
 loss of or damage to the insured car and accessories or spare
parts

 accidental collision or overturning to insured vehicle to

consequent upon insured perils
 loss due to fire, external explosion, self ignition, lightning
 Theft or attempted theft
 Malicious acts
 Whilst in transit (including the process of loading and
unloading, incidental to such transit) by road, rail, inland
waterway, lift or elevator
 by impact damage caused by failing objects
 Liability at Ethiopian law for compensation including law costs
for death of or bodily injury to any person caused by the use of
any motor vehicles as well as damages to any other person's
property as described in the schedule

28
EXCLUSIONS
a) Any excess amounts as stated in the policy schedule
b) Loss of use, depreciation, wear and tear, mechanical or electrical
breakdown
c) Damage to tires(Wheel) from braking or by roads puncture, cuts or bursts
d) Loss, destruction or damage caused directly by pressure waves resulting
from aircraft and other aerial devices traveling at sonic or super sonic
speeds.
e) Any reduction in the market value of the insured vehicles following any
repair whether as a result of any claim or other reason
f) Loss or damage to telephone or communication equipment of any kind
such as mobile telephone or radios
g) Loss or damage as the result of deliberate act by the insured person
h) Loss of car by deception by someone who claims to be a buyer or selling
agent
i) driving the car without driving license
j) liability for death of or injury to any person arising out of and in the
course of his employment by any person insured under the policy
k) Accident sustained outside the territory of Ethiopia

l) Accident arising out of or in connection with flood, typhoon, hurricane,

windstorm, volcanic eruption, or other convulsion of nature
m) Accident sustained due to war, invasion, act of foreign enemy, hostilities
or warlike operations, whether war is declared or not, civil war, riot,
strikes
n) The policy does not cover theft arising if ignition key is left in or on the
car
o) It does not cover loss or damage as a result of ionizing radiations or
contamination by radio active from any nuclear plant
p) Death due to explosion of a boiler forming part of or attached to or on the
insured vehicle
q) race making speed testing and test driving
Excess:
Excess is the first part of a claim amount which has to be borne by the insured.
Hence, the insurer is relieved from the excess amount. The main purpose of
excess is
 to make the insured his own insured for the specified amount of the
excess thus perhaps encouraging greater care.
 To relieve the insurer from dealing minor claims and hence reduction in
administrative costs
 To relieve the insurer from inevitable losses
 To reduce cost of claims by excess amount
 to counter unsatisfactory underwriting
29
TYPES OF EXCESSES
a) Compulsory Excesses: is an excess amount which is imposed by insurers.
A compulsory excess generally, may not be deleted even if the insured
wants. Compulsory excess include standard excess, young and
inexperienced driver excess, fire and theft excess as well as breakage of
glass excess.
b) Voluntary Excess: is an excess which is voluntarily accepted by the
insured over and above the compulsory excess to obtain discount in
premium.

Other Parts of the Motor Insurance Loss or Damage Section:

OBLSOETE PARTS OR UNOBTAINABLE PARTS CLAUSE:
When damaged accessory can not be found in the market, the insurer will pay
manufacturer's dealers last quoted list price for the accessory or part the value of
the accessory or part at the time of the loss not exceeding the plus a reasonable
cost of fitting such accessory or part.
. The options in indemnifying the loss are left to the insurer and hence the
options exercised in case of motor insurance are repairing the damage, replace
the parts or pay in cash.

RADIO AUDIO EQUIPMENT:

In private car policies, radio audio equipment is covered up to a limited amount
as outlined in the policy.

BREAKAGE OF GLASSES:
Many insurers cover cost of windscreen cover usually by imposing compulsory
excess. Due to recurrent nature of these risks, insurers arrange its cost of
replacement with glass manufacturers.

PERSONAL EFFECTS AND CLOTHING:

It covers personal effects, clothing and rugs with the exception of mobiles,
money, stamps, tickets, documents or securities, samples carried in connection
with any trade of business, wear and tear, and vehicles accessories This cover is
found in private motor insurance.

Personal accident Benefit

This section provides modest personal accident benefits for injury or death
directly connected to the use of the car in the schedule or while traveling in or
getting into or out of any other car in private motor insurance.
The injury should be supported by treating doctor's certificate at the expense of
the insured. In the case of death, it should be supported by copy of death
certificate. The cover provided in this section is a benefit, not an indemnity.
30
MEDICAL EXPENSE: The medical expense covers medical expenses while the
driver or any passenger is injured and it covers up to the amount specified in the
schedule. The benefit is usually low.

PRINCIPLES OF RATING AND UNDERWRITING INDIVIDUAL

RISKS IN MOTOR INSURANCE

2.1 GENERAL PRINCIPLES OF RATING AND UNDERWRITING

The accurate rating of risks is very important to insurers as well as the insured
public because it may end up in loss bringing about inability of paying claim.
This will lead either to charging higher rate to those with less risk and loose
market for such insurers. A motor insurance premium is made up of
 Amount of money to pay claims expressed in percentage terms
 Allowance for both fixed and variable costs such as fixed costs such as
building, administrative and general expenses such as agent commission
 Expense Ratio
 Profit margin expected

Motor insurance is highly competitive in any market. It is usually not profitable

by itself. Profit is mainly from investment income.
2.2 RATING AND UNDERWRITING FACTORS FOR MOTOR
INSURANCE
The main rating factors in motor insurance are
 Vehicle to be insured includes factors such as the power to weight
ratio and the cost of repairing accidental damage
 The age of the vehicle-the older the vehicle the higher will be the
possible loss
 value of the vehicle usually when it is of high value
 Security devices
 The proposer and other drivers driving the vehicle
 The geographical area of use and or garaging
 The use to which the vehicle is put
 The cover required-whether it is third party, road traffic Act, Third
party, fire and theft or comprehensive including possible extensions
2.3 CONTENTS AND LEGAL REQUIREMENT : in regard to Third party
motor insurance
 The certificate of motor insurance details include certificate number,
details of vehicle insured, name of policyholder, effective date of the
commencement of cover, date of expiry, person or classes of persons
entitled to drive, limitation as to use, declaration and signature of the
company official issuing the certificate. Certificate of motor insurance
shall be issued by authorized insurers.

31
  The Temporary Cover Note: When the customer wants instant cover and
when it is not possible to issue permanent certificate of insurance the
temporary certificate or simply cover note is issued. The cover note
provides the policyholder with the main details of the cover granted whilst
awaiting the permanent documents including the policy. It also acts as a
temporary certificate.

2.4 POLICY OF MOTOR INSURANCE AND ITS CONTENTS:

The contract of motor insurance includes the proposal form, the certificate of
motor insurance, the policy booklet and the schedule which gives details of the
insured items and insured persons. The policy structure is typically that is found
in most insurance policies: the preamble, the operative clause, exceptions,
conditions, schedule, and signature.

Operative clause is the heart of the policy because it is where the cover is
generally described. Unique feature in motor insurance is what is called no
claim discount.

NO CLAIM DISCOUNT:
No claim discount is the feature of private as well as commercial policies.
However, more discounts are given in private motor insurance. No claim
discount (NCD) is reward granted to policyholders who have not made a claim
up on their policy during the preceding period of insurance, normally twelve
months.

Originally, NCD was introduced to encourage loyalty as it would be easier to

renew existing policy in terms of sales. However, NCD is now a mobile
commodity as all insurers are willing to accept proof of claims free years to give
discount. Now NCD is rather a prize for good claims experience.

SUSPENSION OF COVER:
At times a vehicle may not be in use because of major repair undergoing on it.
Provided the period is sufficient to the insurers requirement, and other
requirement such as
 Notice be given to the insurer in writing
 Certificate of motor insurance be returned to the insurer
 The vehicle must be laid up for a minimum of at least 4 to 12
consecutive weeks for private and commercial vehicles respectively
32
  The vehicle is not out of use due to damage or loss for which claim has
been lodged are fulfilled, insurers will extend the policy for the same
number of weeks it was laid off.

GENERAL CONDITIONS IN MOTOR INSURANCE

CONDITIONS PRECEDENT TO CONTRACT:
These are conditions that must be met before contract is formed. These are in
other ways implied conditions such as the existence of insurable interest, road
worthiness of the vehicle to be insured, the existence of the subject matter of
insurance, the duty of utmost good faith to be exercised in the formation of the
contract, are some of the main items.

CONDITION SUBSEQUENT TO THE CONTRACT:

These are conditions to be complied once the contract is formed. These include
 keeping the motor vehicle in road worthy condition
 informing any change of risk during the currency of the policy

CONDITIONS PRECEDENT TO LIABILITY:

These are conditions to be met before the insurer pays claim and subsequent to
the happening of the damage or loss.
 care to motor vehicle after the accident such as guarding
 Notification of accident within a period mentioned in the policy
which is usually from 24 hours to five days
 Not to admit any claim to any person claiming. Admission of claim
does not mean admission of liability
 Not to claim fraudulently
 Not to be compensated from two insurers for the same claim from
two insurers what is called contribution
 to cooperate insurers in their attempt to right of recovery or in other
words to cooperate in producing any relevant evidence in the
insurers attempt to subrogate
 When there is arbitration condition, the insured is required to settle
differences to the decision of arbitrators

RENEWAL OF MOTOR INSURANCE POLICIES:

Insurers place a great deal of importance to renewal of policies. It is cost

effective to renew policies than new one. The renewal retention is very
important measure of an account and over the years numerous renewal retention
schemes have been devised.

FIRE & SPECIAL PERLS INSURANCE

33
1.1 INTRODUCTION

The basic fire policy covers the insured property the insured property against loss or damage
by fire or lightening and boiler of domestic explosion. Lightning damage include cracks in
walls, burn out of electrical and other metal fittings. As a result of the application of the
principle of proximate cause, other types of loss/ damage as listed below are also covered
although not directly caused by fire or lightening.
- Property damaged by water or other extinguishing agents used for extinguishments
purposes;
- Damage done by the fire brigade in the execution of its duties;
- Property blow up to prevent a fire spreading;
- Loss of or damage to property removed for a burning building caused by, sea rain or
damage during removal, provided that the insured takes steps as soon as reasonably
possible to protect the removed property.
Fire implies actual ignition, something on fire which should not have been in fire and no
connection between the insured and the fire (fire be fortuitous). Apart from standard fire
cover there are special perils such could be chemical, social, natural and miscellaneous.
Chemical includes explosion, spontaneous combustion and social includes riot, civil
commotion, strikes, locked out workers and malicious persons. Natural perils include
storm, flood, earthquake, subterranean fire, subsidence, ground heave and landslip. There
are also other factors such as escape of domestic water, sprinkler leakage, falling air/space
craft or pieces from them and impact by road/rail vehicles or animals.

1.2. SUBJECT MATTER INSURED

The property insured under a fire policy comprises the following:

- Buildings,
- Properties such as offices, hospitals, warehouses, factories, etc;
- Stock and materials in trade such as raw materials, work in progress and finished
products which re property of the insured or held in trust or on commission for which
the insured is responsible.

1.3 SCOPE OF COVER

As pointed out above, the basic seeks to indemnify the insured for the direct loss of or damage
to property as the result of fire or lightning and domestic boiler.

1.4 EXTENSIONS

Any one or all of the following special perils can be added to the cover for additional
premiums; explosion, spontaneous combustion, strikes, riots and malicious damage,
earthquake, storm, tempest and flood, subsidence and / or collapse, bursting or over flowing
of water tanks, apparatus or pipes, impact road vehicles or aircraft, bush fire.125

1.5 EXCEPTIONS

In summary, the exclusions relate to:

- Loss by theft during or after the occurrence of fire;
- Loss/ damage combustion or by its undergoing any heating or drying process;
34
 - Loss/ damage due to the burning of property by order of any public authority, or
subterranean fire,
- Loss/ damage from nuclear risks or radioactive contamination.
- War or war like hazards, civil commotions or the acts of bandits,
- Earthquake (Unless specifically insured), or volcanic eruption;
- Typhoon, hurricane, tornado or other atmospheric disturbances (Unless there is
specific cover for storm and tempest).
- Loss/ damage due to the burning of bush (Unless specifically covered) forests, jungle,
clearing of lands by fire.
- Loss of or damage to certain types of property such as goods held in trust or
commission, money, documents, explosives, etc.
1.6 CLAIMS DOCUMENTS:- Scope of Cover of Fire Insurance

The basic intention of fire insurance is to provide compensation to the insured person of
whom their property is damaged by the insured peril. However, it is not commercially
possible to issue a policy that can cover all the perils.

Recall that fire policy covers damage to property caused by fire, lightning or limited
explosion (Explosion of domestic cover). The agreements made between the insured and the
insurer upon fire insurance is evidenced by a written document termed as Fire Insurance
Policy. Fire insurance contract is a contract of indemnity. In this respect, indemnity is meant
to place the insured to the same financial position as he was before and the forms of
indemnity includes cash payment, replacement - replacing a cost or damaged item with
similar item (e.g. provide a new TV after a burglary) reinstatement- restoration of the
damaged buildings to their original state such as by rebuilding it as it has been before. There
is no definition of the word FIRE in the standard policy wording. But we can have common
understanding based on the meaning of the policy. Accordingly, three things must be fulfilled
to constitute fire:
 there must be actual ignition;
 there must be something on fire which ought not to be on fire;
 The fire must be accidental or fortuitous in its origin as far as the insured is
concerned. It must not be willful or intentional on the part of the insured.
However, a fire caused by the negligence of the insured will not prevent the
insured recovering under the policy.

Where these conditions are fulfilled, any damage caused proximately by fire itself or by
the heat and smoke generated is considered as damage by fire.

Examples of damage which fall under the heading of fire damage, although not actually
mentioned in the policy are:
 smoke damage caused by fire within the meaning of the policy;
 water damage in extinguishing the fire;
 property demolished by the fire brigade to prevent a fire from spreading;
 damage done by firemen in executing their duties;
 losses incurred by the insured in attempting to check the progress of a fire or to
save property;
 losses by theft where property is removed from the premises to prevent its loss
by fire and is subsequently stolen in the confusion of the fire.
35
The reasons that such incidental losses are covered are firstly, that they have been caused
during the insurer's duty in trying to minimize the loss and secondly that, speaking
generally, fire is the proximate cause.

What do we mean by lightning: When property is struck by lightning, sometimes a fire

results but where lightning is unaccompanied by ignition there is no fire damage in the
ordinary sense. The standard fire cover specifically includes DAMAGE by lightning.

What do we mean by limited explosion: explosion is generally excluded under the

standard fire policy unless expressly stated to be covered. The following points are to be
noted in order to distinguish which type of explosion risk is covered and which is not.
 Destruction or damage caused by explosion with no fire occurring is not
covered, except in the case of boilers or of gas used for domestic purposes;
and provided that the explosion is not caused by any excluded peril.
 Destruction or damage due to a fire caused by an explosion is covered; provided
the explosion is not due to an excluded peril.
 Destruction or damage due to an explosion caused by a fire; the initial fire
damage is covered but not the subsequent explosion damage.

Domestic purposes has been defined by the courts as purposes found in the home
irrespective of the occupation of the building. A boiler used for supplying hot water for
washing or gas used for heating in a factory is used for domestic purposes.

It should also be appreciated that the actual gas explosion need not take place in the
insured premises for the policy to operate: it may occur in a neighboring building.

In the third situation mentioned above it is often difficult to decide the dividing line
between the fire damage and the explosion damage and the insurer would have to prove
that part of the damage to be excluded.

What risks would you assume for properties such as BUILDINGS, MACHINERY &
PLANT?

There might be a risk of damage to the building caused by flood, fire, earthquake or the
machinery might be broken or stolen. This means there is a risk of fire, a risk of
earthquake, etc which can bring unfavourable outcome, a loss. The cause of the loss is
called PERIL. In our example FIRE is one peril and FLOOD is another peril. These
perils can bring about a financial loss. That is why people transfer these risks to insurers
and insurance is known as a risk transfer mechanism.

Excepted Causes of Loss

The doctrine of proximate cause applies equally to exceptions, and where the fire is
proximately caused by an excepted peril the insured cannot recover under his policy.

In determining whether or not the loss falls within the terms of an exception the following
rules apply:

36
  Where the subject matter of the insurance is not burned, but is destroyed by
an excepted peril, the insured cannot recover. For example, where there is an
explosion during a fire, the concussion damage falls within an exception against
explosion, even though the explosion is merely incidental to the fire.
 Where the subject matter is burned, but the fire which burned it was brought
into operation by, and was the natural consequence of, an excepted peril, the
excepted peril is the proximate cause of the loss, and the insured cannot recover.
 If, however, the fire is only the accidental consequence of the excepted peril,
the excepted peril is the remote cause of the loss and the insured can therefore
recover, since the loss is a loss by fire (the same principles apply to spreading
fires).

 The following passage deals with the circumstance where the fire and the
excepted peril are concurrent causes:

Where the fire and the excepted peril are concurrent causes, and are
both in operation at the time of the loss, the existence of the excepted
peril does not prevent the Assured from recovering for the loss which is
caused by the fire. The Assured must, however, be able to distinguish
the consequences of the excepted peril; otherwise he must fail, seeing
that the cause of the loss is as much the excepted peril as the fire.
Where a risk not insured, such as aircraft, causes a fire, the fire
damage is insured, as the cause was an uninsured rather than an
excepted peril. The impact damage caused by the aircraft is not
recoverable in these circumstances.

Spreading Fires

The insurers are exempt from liability only if the loss is proximately caused by a fire
attributable to an excepted peril. In ascertaining whether a particular fire is attributable to
an excepted cause or not, the following rules apply:

 Where the fire which destroys the insured property has its origin in an excepted
case the exception clearly applies.
 Where the fire destroying the property has a completely independent existence,
although a fire from an excepted cause is raging at the same time, the
exception does not apply:
 Where the fire spreads in the natural course of events from an excepted fire,
the exception equally applies to the spreading fire. The original nature of the
fire has in no way changed.

37
  Where the fire has its original source in an excepted fire but spreads from it,
not in the ordinary course of events, but by reason of the intervention of some
unexpected and unlikely cause, the exception does not apply, since the fire
actually causing the loss has become a new fire.

2. Special Perils:

These are perils that can cause damage to a building and/or contents. These extra perils
are excluded by the standard fire policy but normally can be covered by charging
additional premium. These perils may be grouped under the following broad headings:

 Perils of a chemical type: explosion, spontaneous fermentation or heating.

 Social perils: riot, civil commotion, strikers, locked-out workers, persons taking part in
labour disturbance and malicious persons.
 Perils of nature: storm, flood, earthquake, subterranean fire, subsidence, ground heave
and landslip.
 Miscellaneous perils: escape of water, aircraft and impact.

Explosion: It covers explosion damage not covered within fire peril but does not include:
Explosion caused by the bursting of a boiler, economizer or other vessel, machine,
or apparatus in which internal pressure is due to steam only and belonging to or
under the control of the insured. It has to be covered in engineering policy. If any
such vessel is under a combination of steam & other pressure the exclusion will not
apply.

Although a detailed study of an explosion is difficult, the following notes can give
us an insight:

 The standard fire peril covers all fire damage, before or after an
explosion; that is, all ‘IGNITION’ damage, but no CONCUSSION damage,
except concussion damage by explosion of domestic boilers and domestic
gas;
 The explosion peril covers concussion damage by explosion, not
domestic, of any kind but not damage by explosion of steam pressure
vessels.

Aircraft: It indemnifies the insured against material loss caused by the crashing of an
aircraft or part of an aircraft on the property insured. The standard fire cover covers
fire, whether proximately caused by an aircraft crash or not, and therefore the
aircraft extension is concerned solely with damage other than by fire.

Other Aerial Devices: insurers have introduced the phrase other ‘aerial devices’ to
include cover against damage by guided missiles and rockets. The phrase embraces
spacecraft or falling debris from spent satellites. It does not however include the
results of damage by meteors should they ever fall on an industrial building.

38
 But this cover excludes damage by pressure waves caused by aircraft or other
aerial devices travelling at sonic or supersonic speeds.

Riot: Riot has been legally defined as follow:

Riot, Civil commotion, strikers, Locked-out workers, or persons taking part in

labour disturbances or malicious persons acting on behalf of or in connection with
any political organisation.

The following particulars indicate perils of riot risk:

 there must be at least three people present (the number of people may
vary according to the objective situation of the localities);
 there must be a common purpose, lawful or unlawful violence;
 there must be execution, or inception, of the common purpose;
 they must intend mutually to assist one another, by force if necessary,
in the execution of the common purpose;
 there must be force or violence displayed in such a manner as to alarm
at least one person for reasonable firmness & courage.

Specific exclusion of riot

a) damage arising from confiscation (take or seize by authority), requisition or

destruction by order of the government or any public authority. This is to
mean that the insured will be able to apply to the authority for compensation.

b) damage arising from cessation of work

This exclusion is deliberately incorporated by insurers because the effects of
cessation of work could cause considerable losses or could result in damage
over a large area of the country.
e.g electricity generating stations

Malicious damage: This is part of riot but this is to include all other damage done by
vandals (persons who wilfully destroy), hooligans (disorderly persons making
disturbances) and other persons of malicious intent in addition to political malicious
acts which are done by those persons acting on behalf of or in connection with any
political organization. But you must remember that fire caused by non political
malicious acts are not excluded from the standard fire cover.

Storm: It is some form of atmospheric disturbance involving wind, rain or snowstorm, or

any combination of them.

Flood: It involves water rising to an abnormally high level. The escape of water from the
normal confines of any natural or artificial watercourse, lake, reservoir, canal or

39
 dam. Floods are often caused proximately or remotely by storms and for this reason
flood cover is usually written as an extension of storm cover.

Subsidence: Subsidence is settlement of the ground on which the premises stand, due to:

 uneven settlement of ‘made-up’ ground;

 movements, falls or changes in underground workings;
 movements of foundations made on dissimilar types of ground which have
been affected by changes in the moisture content (sand and clay react
differently to such changes, for instance); or
 other changes in moisture content (for instance because of drought).

Ground Heave: is what happens when ground previously having had a low moisture
content is suddenly able to absorb more moisture. Post-drought conditions are an
example; another is the ground on which recently felled trees used to stand.

The ground takes up moisture as quickly as it can and swells in an effort to attain its
optimum volume for the moisture it can absorb. Inevitably this cannot be done
evenly, and heave results.

Landslip: It is a rapid downward movement under the influence of gravity of a mass of

rock or earth on a slope.

It may occur, for example, after prolonged heavy rain on a sloping site. There is an
extension to ‘the site’ to some extent in the end of exclusion a), where two points are
made:

 DAMAGE to various items in the vicinity of the property is excluded; but

 If a building insured is DAMAGED and the policy includes yards… fences
in the property insured, then DAMAGE to such insured yards, fences etc. is
recoverable.

Earthquake and Subterranean Fire: These below ground natural perils can bring a huge
damage if they are materialized. The damage may be either:
 fire damage caused by earthquake;
 fire damage caused by subterranean fire; or
 damage (not by fire) caused by earthquake.

Bursting or Overflowing: currently the peril is replaced by “escape”. It includes the

effect of bursting of water tanks, apparatus, pipes or water systems. Bursting of
water mains or overflowing of swerves is also included under this peril.

Impact: This peril refers to damage by road vehicles and animals.

Spontaneous Combustion: This peril refers to fire resulting from the property’s own
spontaneous fermentation or heating. Underwriting is a critical factor for this peril
because:

40
  the property to be insured is usually prone to self heating (e.g flak, jute,
hemp, grain, seeds, agricultural produce, particularly if allowed to get
damp).
 if it self-ignites it is very difficult to extinguish.
 Salvage prospects are low.
 Very careful control of storage is essential.

Note: the cover is freely available for non-hazardous stock such as coal, wood
blocks and coke.

Fire Insurance Policy Wording

In practice it is essential for the policy document to be prepared with greatest care.
Although there is particularly no punctuation, as it has being globally practiced in the
standard fire special perils policy, the Fire and Lightning Insurance Policy of EIC is
prepared based on the international practices.
The Structure of Fire and Lightning Insurance Policy of EIC

Heading :-

Recital clause/preamble

It recites the parties involved (by naming them as “the insured” and “the insurer”), the
schedule and the proposal forms as part of the policy. A typical example of a preamble
can be written as follow.

Operative Clause//Insuring clause

It sets out the circumstance in which the insurance is operative. This indicates:

- what the insured must do first; and in return

- what the insurer promises to do;

Conditions

The standard fire and special perils policy has different sections: Definition (of the perils
insured), General Exclusion, General Provisions, General Conditions and Claims
Conditions. However the Fire and Lightning Policy of EIC incorporates all these items
under one title known as conditions.

Parts of the Standard Fire and Special Perils Policy

It was a known practice for insurance companies to group different aspects of a policy
under one title, i.e., Standard Conditions. However, some revision has been made to
identify and bring together similar aspects so that users can refer to specific points easily
as follows:

General Exclusions

41
 Because of the potential widespread damage to property the under mentioned
risksare generally excluded from the standard Fire and Special Perils Policy.

a) war risks
b) ionising radiations
c) pollution or contamination
d) terrorism
e) properties insured under Marine Policy
f) General Provisions

The major point included here is the condition of overage. This is mostly encountered
when there is under insurance.

General Conditions

These are conditions to be fulfilled by the contracting parties in order to make the policy
in force. Many conditions are common to other policies but warranty is found mainly in
marine and fire policies. Warranties are conditions that provide breach of which
permits the insurers to avoid their policy (if there has been an increase in risk). These are
applied to factors which insurers do not wish to see changed: for instance frequency and
destination of waste removal, control of quantities and types of storage vessels for
flammables. If the factor is not maintained as warranted, and the insurer is able to
establish a consequent increase in risk, it may avoid the policy and reject to entertain the
policy because of increase in risk during the current period of the policy. Should the
insured comply just before renewal and continue to do so during the next period, cover, is
restored in the affected area for that subsequent period.
Reasonable precautions: The need to act as if uninsured has always been implied.

Claims Conditions include

 Action by the insured
 Fraud
 Reinstatement
 Insurer’s Right
 Contribution & Average
 Subrogation
 Arbitration

Pre-risk survey: It is common in commercial insurance policies. In fire insurance, the

surveyor should physically inspect the type of construction, the heating system, hazardous
goods/processes, fire protection, employees and working hours, occupation,
housekeeping, special perils, and the security system. Following the survey he will
prepare a report, which includes plans of the building and other risks. The report includes:

42
 a) A full description of the risk: This may include the plan of
the premises, the process being carried on at the premises, details of the
insured, etc.
b) An assessment of the level of the risk: This will take into
account all the relevant hazard facts, and provide the underwriter with some
idea of the degree of the risk. The surveyor will also be able to comment on
surrounding property.
c) A measure of the maximum probable loss (MPL): This MPL or EML
(estimated maximum loss) is the maximum that the surveyor believes will be
the subject of a loss. (The MPL is applied only for the fire damage).
d) Recommendation: The surveyor will also make known the insured what steps
should be taken to protect the risk
e) Adequacy of the insurance being requested: The surveyor’s view on the
adequacy of the sum insured is an extremely important issue and the
underwriter will want to ensure, as far as possible, that the insured is not
under-insuring the risk.

Premium Calculation: The premium which an insured pays represents that insured’s
contribution to the common pool. This contribution must be fair and must reflect the
degree of hazard which that insured brings to the pool. In other words, the premium must
be sufficient to:

Premiums are normally arrived at by applying a premium rate to a premium base. The
rate could be a RATE PER CENT Or PER MILLE applied to a figure which is the
premium base.

The type of construction and the nature of the hazard attached to the business carried on
determine the premium rate.

Type of construction

The principal materials for buildings are:

i. Hollow or solid concrete blocks/stone (9 inches 229 mm thick);

ii. Corrugated iron/profiled metal;
iii. Corrugated asbestos cement;
iv. Timber or bamboo;
v. Glass

We are always taking the type of construction into account to calculate the premium of a
building.

43
Buildings made up of stone, bricks or hollow concrete blocks are categorized as first class
construction.

On the other hand, buildings constructed from inferior materials which can be easily
burned are classified as third class construction.

However, buildings constructed from the mixture of the above mentioned materials are
categorized under second-class construction provided that the total surface area of the
building made up of inferior materials is not more than about 45%.

The premium of 1st class construction building is charged less than 2 nd class construction,
and 2nd class construction building is cheaper than 3rd class construction building.

Arranging stock insurance to allow for fluctuating amounts at risk

When a stock is to be issued on a declaration basis the sum insured should represent the
maximum sum likely to be at risk during the year. A provisional payment is made of 75%
of the premium on this amount at the appropriate rate. The insured is required to declare
at agreed intervals, generally monthly, either the value at risk on a certain day or the
maximum at risk since the last declaration. This declaration must be made on a specified
day or within 30 days thereafter, otherwise it is assumed that the sum insured is the
amount declared. On the expiry of the policy the premium is calculated on the average
declaration and an additional premium charged or return made depending upon whether
this premium is greater or less than the provisional payment.

The maximum sum insured is the highest declaration that can be accepted as the insurer’s
liability cannot exceed this figure.

Specimen adjustment

Let us assume:

- The sum insured at the start of the policy (representing maximum likely to be at risk)
is Birr 200,000
- Rate is 0.15%
- Provisional premium = 200,000x0.15% x 75% = 225
- Monthly declaration:
January 160,000
February 150,000
March 140,000
April 140,000
May 120,000
June 110,000
July 130,000
August 150,000
September 180,000
October 180,000
44
 November 190,000
December 180,000
Total declaration 1,830,000

Average declaration 152,500

Premium = 152,500 x 0.15% = 228.75
Less provisional premium paid 225.00
Additional premium 3.75
Had the monthly declaration for November been Birr 210,000 , in calculating the
adjustment only the maximum sum insured of Birr200,000 would have been used.

Average applies to the sum insured on declaration policies. The limit of liability is the
sum insured. The declared amounts are used as a guide to the value of the property at the
time of a loss. Declarations should always be checked by the underwriter so that if one
exceeds the sum insured the insured can be advised of the need to increase their cover.
Conversely, a number of very low declarations may require a reduction in the sum
insured.

The wording incorporated in the Stock Declaration policy when stock is arranged on this
basis reads:

The insurance on stock and Materials in Trade as insured under the item(s)stated in The
Schedule as being subject to this Additional Clause is subject to the following

1. You must declare to us the value of the property on

a) the last day of each month if the schedule states that montly declarations are required
or
b) the last day of each of the months of March, June, September and December if the
schedule states that quarterly declarations are required.

2. If you don not provide us with written confirmation of the values within 30 days of the
due date, we will take the sum insured stated in the schedule to be the value declared.

3. If you declare a value greater than the sum insured, we will take the sum insured stated
in the schedule to be the value declared.

4. The first and annual premiums paid on these items are provisional.

At the end of each period of insurance we will calculate the actual premium by applying
the rate to the average amount declared.
5. If the actual premium is more than the provisional premium paid, you will pay the
difference.

If the actual premium is less than the provisional premium paid, we will refund the
difference but this will not exceed 331/3% of the first or annual premium respectively.

6. The item sum insured will not be reduced by the amount of any claim. However, you
must pay the additional premium required to reinstate the sum insured.

45
2. MACHINERY INSURANCE

2.1 INTRODUCTION

Machinery insurance was developed to give industry cover against the economic loss suffered
as the result of damage or destruction of machinery due to accidents.

2.2 SUBJECT MATTER INSURED

All types of machinery, plant, mechanical equipment and apparatus may be covered under
machinery insurance such as, for example:

- Power generating units (boilers, turbines, generators),

- Power distribution plant (transporters, high and low tension equipment),
- Production machinery and auxiliary equipment (machine tools, wearing looms, paper
machines, pumps, compressors etc).
A few items having a short service life compared to the plant as a whole are normally
excluded from machinery insurance; i.e
- All types of exchangeable tools such as dies, moulds,
- Parts which by their use and / or nature suffers a high rate of wear or depreciation
- Objects made of glass, be its, ropes, wires, rubber;
But also serves as an insulating agent.

2.3 SCOPE OF COVER

The policy covers unforeseen and sudden physical loss of or damage to the insured items,
necessitating their repair or replacement. Loss or damage covered under machinery insurance
is mainly due to one of the following causes:

- Faulty design (Calculations, plans, drawings and specifications), faults at workshop or

in erection, defects in casting and material);
- Faulty operation, lack of skill, negligence, malicious acts;
- Tearing apart on account of centrifugal force;
- Short circuit and other electrical causes;
- Shortage of water in boilers;
- Physical explosion (as apposed to chemical explosion);

2.4 EXCEPTIONS

The exclusions relate to loss/ damage caused by:

- Fire, lightening, chemical explosion, theft and burglary;

- Inundation, flood, earthquake, subsidence, landside, impact of land borne, water borne
or airborne craft,
- Willful act or gross negligence on the part of the insured or of his representatives;
- Faults or defects existing at the time of commencement of the insurance which ought
to have been or were known to the insured;

46
 - Faults or defects for which the supplier is responsible either by law or under contract
(losses covered by warranty);
- Nuclear reaction, nuclear radiation or radioactive contamination.

2.5 SUM INSURED

The sum insured should be the new replacement cost of the insured machinery (Value of
the new item plus customs duties, transportation and installation charges). This is
because, if repairs are carried out, new ones replace old part, and in this way the value of
old machines is frequently increased substantially. Thus, the insured is indemnified in
respect of total cost of repairs without allowance being made for depreciation. A certain
minimum deductible is also imposed on the policy, which is the share of each claim that
the insured should bear for on own account. The premium will be reduced if the
deductible is increased; thus, the insured’s requirements can be duly taken into account.

2.6 INDEMNITY

In the event of damage, which can be repaired, the policy will indemnify the insured in
respect of the expense incurred in restoring the damaged machinery to its working condition
prior to the damage. These expenses mainly include the costs, ordinary freight charges,
customs duties and expenses for the employment of specialists (but excluding of
modifications and improvement of damaged items carried out in the course of repair).

In the event of a n insured item being totally destroyed, the indemnity is based on the market
value of the item on the date of loss, the value of any scrap or remains being deducted from
the sum payable to the insured.

3. CONTRACTOR’S ALL RISKS INSURANCE

3.1 INTRODUCTION

Contractors’ all risks (CAR) insurance is one branch of engineering insurance. The basic
concept of CAR insurance is to offer comprehensive and adequate protection against loss or
damage in respect contract works. Construction plant claims in respect of bodily injury or
property damage in connection with the execution of a building or civil engineering project.

3.2 SUBJECT MATTER INSURED

CAR insurance covers any type of building or civil engineering project such as:
- Residential and office buildings, hospital, school:
- Factories, power plants:
- Roads, railways, airports:
- Bridges, dams, water supply and drainage systems, canals, harbors.

In particular, the cover comprises the following:

47
Contract Works: all the operations to be carried out by the contractor and his subcontractors
in compliance with the building contract, including preparatory work on the site, and the use
of all materials stored on site which are to be incorporated in the structure.
Construction plant and equipment: this comprises work’s accommodation, storage sheds,
preparation and mixing plant, scaffoldings, utilities, etc.
Contraction machinery: this includes earthmoving equipment, cranes and the like as well as
site vehicles not licensed for use on public roads (whether or not such machinery is owned or
hired by the contractor). Costs of clearance of debris: that is expenses incurred for the
removal of debris are from the site in the event of a loss covered by the policy.
Third party liability: this refers to legal liability arising out of property damage or boiler in
connection with the contract works on or near the building site, however, any claims from the
insured’s employees or workmen who are connected with the construction project are not
indecipherable.

3.3 SCOPE OF COVER

As the name implies, CAR insurance provides cover on all –m risks basis; i.e. every cause of
loss is covered unless specifically excluded by the policy. The most important cause of loss
Identifiable under a CAR policy include: fire, lightning, explosion, crashing aircraft, flood,
inundation, rain, windstorm, earthquake, subsidence, landslide, rockslide, bad workmanship,
lack of skill, malicious acts or human error.

Exclusions
The exclusions specified in the policy are in summary:
- Loss/damage due to war and war like risks, strike, riot, civil commotion, cessation of
work, requisition by order of any public authority;
- Loss/ damage due to the willful act or willful negligence of the insured or of his
representatives;
- Consequential loss of any kind or description whatsoever, such as claims for penalties,
losses due to mechanical and/ or electrical breakdown or derangement of construction
machinery, plant and equipment (I.e loss/ damage not caused by exterior influences,
whereas any deficiencies in the contract works (e.g. use of defective or inadequate
material). However, loss of damage to correctly executed items resulting from the
inadequacy.

3.4 PERIOD OF INSURANCE

The cover attaches as from the commencement of work or after the items entered in the
schedule of the policy have been unladed at the site and terminates when the completed
project or any completed part thereof is taken over or put into service. The insurer’s liability
for construction machinery and construction plant and equipment commences from their
unloading at the site and expires on their removal there form.
In addition, it is possible to extend the period of cover to include a maintenance period.

3.5 SUM INSURED

The sum insured will be equal to the contract price and separate sums are fixed for:

- Construction machinery and construction plant & equipment;

- Clearance of debris,
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 - Third party liability cover.

Deductibles, which vary according to the type and size of a construction project and the
hazards involved, are agreed. The deductible is the share in each loss that the insured has to
bear on his own account, and will be different amounts for the contract works, the
construction plant and equipment as well as for the construction machinery.

4. Burglary INSURANCE
4. 1. INTRODUCTION

The object of burglary insurance is to indemnify the insured in respect of loss of property by
theft but only if accompanied by actual, forcible and violent breaking into or out of a building
or any damage to the property insured or to the premises falling to be borne by the insured
and which shall be due to any such theft or attempt theft.

4.2 SUBJECT MATTER INSURED

The subject matter insured can be any of the following:

- Stock and materials in trade belonging to the insured;
- Property held by the insured in trust or on commission; and
- All other contents within the insured premises such as machinery, fixtures, fittings,
furniture. Etc.
Burglary Insurance

Burglary Insurance indemnifies the insured in respect of loss of property by theft.

But the theft must be accompanied by forcible and violent entry into or exit from
the premises of the insured.

In the past ‘Theft Robbery and Burglary’ were often used to describe incidents of
the same nature. However, by law they now have Different meanings.

Theft

It is the act of a thief dishonestly appropriates property belonging to another with

the intention of permanently depriving the ownership of others: it is immaterial
whether the appropriation is made with a view to gain, or is made for the thief’s
own benefit.

Robbery

Robbery is the act of a thief using force on any person or puts or seeks to put any
person in fear immediately before or at the time of stealing.

Burglary

1. Entering any building or part of a building as a trespasser(trespass means

unlawful interference with the rights of another) and with intent to:

49
 - steal or attempt to steal anything in the building or that part of it or inflict
or attempt to inflict on any person therein any grievous (causing suffering)
bodily harm;
- commit offences of stealing anything in the building or part of a building,
of inflicting on any person therein any grievous bodily harm or raping any
woman therein, and of doing unlawful damage to the building or anything
therein.

2. Entering any building or part of a building to steal an inhabited vehicle or

vessel at times when the person having a habitation in it is not there as well as
at times when he is.
Aggravated burglary: is theft during such time the burglar has with him any
firearm or imitation of firearm, any weapon of offence or any explosive.

In all aspects, Theft Insurance/ Burglary Insurance provides cover against theft
involving entry to or exit from the premises by forcible and violent means.

Therefore this restricted theft wording does not cover entry into the premises:

- by a key;
- by a trick;
- by hiding in the premises whilst open for business (unless the thief
subsequently makes his exit by forcible and violent means).

Cover may also include the risk of ‘holdup’: theft accompanied by assault or
violence (or the threat of it) to the insured, or his employees, irrespective of
whether forcible entry takes place.

Operative Clause of Theft Insurance

The Company agrees that if during the period of insurance:

1) any of the property while within the premises shall be lost, damaged or
destroyed as a result of:
a) theft, or attempted theft, involving entry to or exit from the premises by
forcible and violent means; or
b) theft following assault or violence or threat thereof to the insured or
any director, partner or employee of the insured; or

2) the premises shall sustain damage for which the insured is responsible, as a
result of theft, or attempted theft, involving entry to or exit form the premises
by forcible and violent means.

Then the Company will by payment or, at its option, by repair, replacement or
reinstatement indemnify the insured in respect of such loss or damage to the extent
of and subject to the terms and conditions of this policy.

This policy applies only to the business and no other for the purpose of this
insurance.
50
 - The wording under 1(a) indicated violent entry into or exit from the premises,
which we call it ‘restricted theft wording’.

- The wording under 1(b) shows us that the cover extends beyond theft. It is a
robbery wording, whereby the actual physical defences of the building are not
overcome.

- The wording under 2 indicates physical damage to the buildings and/or the
contents is covered if there is obvious evidence that it is caused in the
furtherance of theft, or attempted theft. However, if there is not any evidence of
theft, the damage may be covered by the malicious damage peril under fire
insurance.

- The last paragraph informs, us that the policy provides cover for items which
have related to the business of the insured and already made known to the
insurer by the schedule of the policy.

Burglary insurance, therefore, provides cover against theft (‘theft’ as defined) for

1. Property while within the premises; property includes:

- stock: stock refers to stock and materials in trade which are either the
property of the insured, or which are on commission or are held in trust
for which the insured is responsible.

N.B ‘Target’ stock such as photographics, television and audio

equipment, video cassettes and wines, spirits and tobacco are
separately identified as these are risky and carry higher rates. To
this and insurers may add an exclusion of this stock unless
otherwise specifically mentioned.

- Business equipment: It refers to trade equipment, fixtures, fittings,

machinery, plant and all other contents which are either the properties of
the insured, or which are on commission or are held in trust for which the
insured is responsible, but excluding stock.

‘All other contents’

The term ‘All Other Contents’ requires separate definition:

a) deeds, documents manuscripts, and business books, but only for

the value of the materials as stationery together with the cost of
clerical labour expended in writing up and not for the value to the
insured of the information contained therein;
b) computers systems records but only for 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

51
 therein) and not for the value to the insured of the information
contained therein;
c) patterns, models, moulds, plans and designs: and so far as the
same are not otherwise insured-
d) directors’ and employees’ clothing , personal effects and pedal
cycles for an amount not exceeding Birr------ to any one person.

2. Damage to the premises for which the insured is responsible.

Premises: (refers to that part of the building or buildings situated at the

address(es) indicated in the schedule and occupied by the insured in
connection with the Business) exclusive of any garden, yard or open
space or out building unless specifically mentioned.

This limits cover to the premises, or part of the premises, occupied by the
inured for the business detailed. Should the location be in ‘multi-tenure’, that
is to say, occupied by various businesses or trades, the cover is then
restricted to that part of the premises occupied by the inured. Similarly, if
cover is to be extended to include property in the open, then the exclusion
relating to garden or yard, for example, needs to be re-defined.

Limits of Liability of Burglary/Theft Insurance

The liability of the company during any one period of insurance shall not exceed:

a) In respect of each item of the property the sum insured shown against it
in the schedule. In the event of a claim such sums insured shall for the
current period of insurance be reduced by the amount of the loss or
damage unless the company shall consent on payment of an additional
premium to reinstate such sums insured.
b) In respect of damage to the premises the sum required to make good
such damage for which the insured is responsible.
c) In respect of all loss or damage the total sum insured.

Exclusions

The main exclusions are:

- theft of property in the open

- theft while the premises are unoccupied or disused;
- disappearance, unexplained or inventory shortage (this effectively excludes
losses by petty pilfering and shoplifting), misfiling, misplacing of information
or denial error;
- theft involving collusion of the insured or any director, partner or employee or
member of the insured’s household;
- fire

52
 - explosion (unless not otherwise insured);
- theft of target items such as cigarettes, computers, non-ferrous metals unless
specifically mentioned in the schedule;
- the first Birr --- of each loss

Covers Available at Additional Premium

- Collusions (secret agreement): Losses are excluded where the insured or any
director, partner, employee or member of the insured’s household is
involved as a principal or accessory.
Insurers will offer the cover at additional premium where they are satisfied
by enquiring that no abnormal risk is present or suspected.

- Secretion risk: Thieves conceal themselves in the premises until close of

business then breaking out with stolen goods

- Other extensions -<full cover>

If ‘forcible and violent entry or exit’ is omitted,
‘walk-in’ thefts and theft following entry via unlocked doors or windows
will all be covered with additional premium. But there have to be certain
restrictions such as:
- Pre-cover survey to assess the likelihood of ‘walk-in´ theft following
unauthorized entry. As a result the insurer may set requirements to be
observed by the inured in order to minimize the additional risk.
- The ‘non forcible and violent entry or exit’ element of the cover is usually
made subject to a higher excess than that applying to the basic cover.

- The following exclusions are retained:

 Unexplained/inventory shortages and omissions;

 Collusion cover
 Loss of property where the insured in good faith parts with title to the
property having accepted consideration purported to have value to the
insured.

Cover in respect of property in the open can be considered depending on certain factors
such as the attractiveness to thieves of the property, its size/weight and the theft
precautions in place.

Underwriting and Rating Considerations

A Rating Factors
What factors are critical to the underwriting of a theft policy?
Nature of product (commodity to be insured)
How a particular business functions is not a noticeable effect for theft insurance.
What is important for theft insurers is:

53
 - what the product is
- the raw materials used

Accordingly, we can have the following list of business risks, as an

example, categorized into classes of ascending order of hazard:

- Class I (least hazardous)

- Class II (more hazardous)
- Class III (most hazardous)

Class I

Bakers, booksellers, butchers, chemists (excluding cameras and

electrical goods), china dealers, confectioners (excluding tobacco),
dairymen, fruiterers, furniture dealers, ironmongers (excluding power
tools), newsagents (excluding tobacco), restaurants (excluding wines,
spirits and tobacco), stationers.

Class II
Cycle dealers, dyers and cleaners, electrical goods dealers (excluding
audio, television and video), fancy goods dealers, grocers, gunsmiths,
laundries, licensed victuallers (often treated as Class II), opticians,
photographers.
Class III

Antiques dealers, men’s and women’s outfitters (manufacturing,

wholesale and retail), including boot and shoe dealers, clothiers,
costumiers, drapers, hatters, milliners, tailors (not including furs),
photographic dealers, radio and television dealers, sports and leather
goods dealers, tobacconists, wine and spirit merchants, video libraries,
non-ferrous metal stockists.

54
 1. Locations of Premises

B. Risk Assessment

An underwriter will need to be aware of the following:

- Moral hazard;
- Security: physical securities such as locks and grilles and alarm
protection;
- Occupancy: Is that occupied overnight by the insured?
Is the risk located within own premises or other occupants?
- Construction: can access be gained into the premises other than by the
normal openings;
- Loss history: have previous thefts reflected a poor clams experience?

In addition to the various factors we have examined, an underwriter will take

into account review of business or trades where specific underwriting
measures are normally needed such as approved alarm systems, physical
security, conditions, excess, etc.

For example, furriers are probably the least desirable of risks. The goods
handled represent high value in small bulk and identification is almost
impossible in the event of a loss, so chance of recovery is poor. In such risks
there is a possibility of ‘arranged’ losses.

4.3. SUM INSURED

Property can be insured either for full value or else on first-loss basis. The meaning of “first-
loss insurance” has already been properly described; Thieves or burglars cannot (for hopefully
obvious reasons) clear all contents within the insured premises during a single act. Thus,
insurance would be required not for the total value of contents but only for that part of the
total value that is practically thought to be the subject of a single loss. Nevertheless, it is
important for the insured to declare a reasonably realistic full value (and not anything less)
because, if at the time of loss/ damage the property is found to be of greater value that the sum
declared, the insured will be considered as being his own insurer for the difference and,
therefore, required to bear a ratable proportion of the loss.

4.4. SCOPE OF COVER

The burglary policy pays compensation for:

- Loss of or damage to the insured property while within the premises by theft or any
attempt threat but only if accompanied by actual forcible and violent breaking into or
out of a building; and
- Any damage to the premises falling to be borne by the insured caused by theft or
attempt thereat.
The intention of the policy is to cover loss/ damage of property which result from the
breaking down of the theft defenses of the premises, thus the requirement that there be
forcible entry into or exit out of the premises.

4.5 Conditions

55
The policy requires the insured to:
 The proposal of burglary is to be accepted with fire insurance of the same risk.
- Take all ordinary and reasonable precautions for the safety of the insured property,
and as far as practicable make use of all locks, bolts, fastenings and other means of
securing the premises;
- Keep complete and accurate books of account, including up-to date records of all
business purchases, sales and deliveries in relation to any merchandise, stock
4.6 EXCEPTION:
 Entry by skeleton keys or merely releasing the bolts of a door or through an
open door or window is not covered by the policy.
- Perpetrated directly or indirectly by the insured’s family, business staff or servants, or
by any other person lawfully in the premises;
- If material alterations to the premises are made or if any of the safeguards for securing
the premises are changed or relaxed
- Happening during the progress of or following upon fire ore explosion;
- Of glass (which should be specifically insured under a separate glass insurance
policy).
- Of livestock, money, checks, share certificates, bonds promissory notes, documents,
etc.
- Directly or indirectly occasioned by war and warlike hazards.

5. FIRE LOSS PROFITS INSURANCE

5.1 INTRODUCTION

The fire policy provides compensation for the direct financial loss suffered due to destruction
or damage of the insured property by fire or by whatever other peril covered by the policy so
that after Indemnification buildings and their contents are restored to their pre-fire condition.
Thus, indemnity is for material damage only. But if the property was being used for
production or trading purposes, business activates may cease or be significantly curtailed
depending on the extent of the material damage. Consequently, the capacity of the business
concern to earn profits will be impaired. This consequential loss is of profits insurance.

5.2 SUBJECT MATTER INSURED

The loss of profits policy can be thought of as an extension of the basic fire policy under
which the subject matter insured is the physical property (buildings, content, etc.) in the
business premises of the insured. Indeed, it is a provision f the consequential loss policy that
there be in force insurance covering the property of the insured and that payment shall have
been made or liability admitted therefore before the consequential loss policy is called up on
to cover loss of profits.
What the loss of profits undertakes to do in the event of business interruption brought about
by loss damage of the physical property is to pay to the insured the sum of:
- The gross profit that would have been earned during the period of business
interruption, and
- Increases in cost of working, which is additional expenditure incurred with the consent
of the insurer to minimize the loss of gross profit which would otherwise result from
the fire. This might take the form of renting temporary premises, the hiring of
machinery or the purchase of manufactured goods to complete contracts.

56
8. MONEY INSRANCE
8.1 INTRDUCTION

One form of pecuniary insurance is money insurance which compensates the insured for loss
of money sustained as the result of fortuitous circumstances including though the unlawful
acts of other persons such as burglars and thieves.

8.2 Underwriting Measures:

The main users of money insurance include bankers, collectors and round men traveling
salesmen, and all other companies and people with personal businesses.
It is clear that controlling the handling and transporting of cash involves high target risks.
Security level is also required to be first class. Material facts in underwriting the risk include
 Frequency of transit
 Method of conveyance be and protection afforded
 Distance of transit
 No of employees engaged in any one transit
 Estimated total value of all money in the year
 Limit to apply to any one loss In Respect of money in transit, in
locked safe, details of safe and strong room
 Security arrangement
8.3 SUBJECT MATTER INSURED

The money policy takes the term “money” to mean: cash, bank notes, currency notes, cheeks
(except crossed checks), postal orders, money orders, postage stamps and revenue stamps
belonging to the insured or for which the insured is responsible.

The cover applies:

 money in transit between the insured’s premises and the bank or post office
 money in transit between other points if specifically agreed; and
 money in the insured’s premises whilst in a blocked safe or strong room (if desired by
the insured)
 it covers loss or damage to money by reason of robbery, theft or any other fortuitous
cause whilst in transit liability limit per sending applies liability limit for policy period
applies.

8.4 LIMIT OF LIABILITY

The policy provides cover for an estimated aggregate annual carrying (furnished by the
insured) and a limit of liability for any one loss based on the insured’s requirements.
A provisional premium is charged on the basis of the estimates supplied by the insured but is
adjusted at the end of the policy period based on the actual amount of money movements
during the insurance period, any different being paid by or allowed to the insured as the case
may be.

8.5 SCOPE OF COVER

57
Cover is on “all risks” basis,; i.e. the policy covers loss due to any cause which is not
specifically excluded. Further, in addition to the loss of money (as defined above), the policy
covers loss of or damage to any safe or strong room belonging to the insured caused by
burglars or thieves.

8.6 EXCEPTIONS

The policy does not cover:

 Any loss directly or indirectly caused by or consequent upon war and warlike risks
(including “armed or unarmed robbery, armed or unarmed shiftta action, holdup or
any act of banditry”):
 Any loss arising from the dishonesty of any messenger or employee of the insured;
 Shortage due to errors or omissions or loss due to depreciation in value;
 Any loss occurring outside Ethiopia;
 Loss from an unattended vehicle
 war and allied perils, volcanic eruption, earthquake, flood
 loss not discovered within the time limit given in the policy

8.7 CONDITIONS

The policy requires the insured to:

 Take all ordinary and reasonable precautions for the safety for money;
 Immediately give notice to the policy of any loss and to take all practical steps for the
discovery and punishment of the guilty person(s) and for tracing and recovering and
property lost;
 give notice in writing to the corporation of any loss within seven days thereof, and to
subsequently submit evidence to substantiate the claim;
 Keep accurate records of money to enable adjustment of the provisional premium, and
to assist in qualifying any claim.

9. FIDELITY GUARANTEE
9.1 INTRODUCTION
The fidelity guarantee policy provides compensation to an insured for loss suffered due to the
fraud or dishonesty of his/her employees. Thus, an employer can protect himself from the risk
of fidelity of his staff especially those whose main duty involves the handling of money or
security.

9.2 SUBJECT MATTER INSURED

The policy indemnifies the employer against any direct (as opposed to consequential) loss of
money, stock etc... That be sustains through acts of dishonesty of employees in the course of
their employment. This can include not only employees who handle cash or have access to
stock but also others who through falsified accounting can perpetrate fraud against the
employer (such as, for example, the “computer hackers”)

9.3 INDIVIDUAL GUARANTEED AND LIMIT OF GUARANTEE

58
The policy incorporates a schedule containing the name, location and position of each
guarantee specified in the policy, pro-rata premiums being charged for addition during the
period.

9.4 SCOPE OF COVER

The policy seeks to compensate the insured for all the direct loss sustained as the result of any
at of fraud or dishonesty committed:
 by a guaranteed employed:
 during the employee’s period of guarantee, and
 while the employee’s period of guarantee, and
The maximum payment to the insured is the amount for which the defaulting employee was
guarantied

Exceptions

This relate to the period of discovery of loss resulting from the dishonest act of an employee.

The policy states that, unless otherwise endorsed thereon, that there shall be no claim:
- In respect of acts committed by any employee prior to the date of his/her inclusion in the
policy;

- for losses not discovered and reported to the corporation within three calendar months
from the date of death, retirement, resignation or dismissal of a defaulting employee;

- for losses occurring during a defaulting employee's period of guarantee but not discovered
within three calendar months from the date of termination of the policy or of its expiry
due to non-renewal.

Conditions

The policy requires the insured to:

- duly observe and put into practice statements he made on the proposal as to the
circumstances and conditions of employment of guaranteed employees, and the
precautions and checks for securing accuracy of account and limiting the amount of
moneys entrusted to or left in the custody of employees at any one time;

- give immediate written notice to the corporation upon the discovery of any act of
fraud/dishonesty by an employee or upon reasonable suspicion of such act or any want
of integrity on the part of an employee, and thereupon the corporation shall be relieved
of all liability in respect of any subsequent acts of such employee;

- deliver to the corporation full and satisfactory particulars and proof of the loss;

- deduct from the sum payable under the policy any money payable by the insured to the
defaulting employee, and any money of the employee in the custody of the insured;

59
 - Give all necessary information and assistance to enable the corporation to pursue its
subrogation rights.

WORKMEN'S COMPENSATION INSURANCE

1. INTRODUCTION

statutes exist which hold an employer liable for death, bodily injury or illness befalling
employees from circumstances connected with their work or the workplace. The workmen's
compensation policy protects the insured employer from any loss he might have to suffer as
a result of his having to meet such liability. As stated in the Operative Clauses of
Employers’ Liability Insurance the insurer will indemnify the insured against all sums
which the insured becomes legally liable to pay as damages in respect of injury to an
employee caused in the course of their employment by the insured in the business during the
period of insurance

The ‘Insured’ as defined in the policy refers to the person(s) or company

named in the schedule

2. SUBJECT MATTER INSURED

Needless to say, the subject matter insured are persons in the service of the insured.

3. SCOPE OF COVER

The policy covers the insured employer's legal liability for death, bodily injury or illness
sustained by an employee "at the place assigned to him for work or arising from
his work and during the time of his work".

Exceptions

The exceptions stated in the policy relate to:

- liability arising directly or indirectly due to war or warlike hazards, the acts of
shiftas and bandits;

- liability directly or indirectly caused or contributed to by intentional self-

injury, suicide or attempted suicide, provoked assault, dueling or fighting
( except in bona - fide self defense), venereal disease or indulgence in drink,
narcotics or drugs;

- death/injury while traveling in any aircraft except as a fare-paying passenger in

an aircraft operated by a recognized air transport company;

60
 - Any accident or occupational disease resulting from any violation of a
regulation to which the worker's attention has been specially drawn in writing.

- Liability for any sum which the insured may be entitled to recover from any
party.

Conditions

The policy requires the insured to, among other matters:

- take reasonable precautions to prevent accidents and industrial disease to comply

with all statutory obligations;

- maintain complete and accurate records of wages and salaries for the period of
insurance as a basis of adjustment of the provisional premium at the end of such
period, and to allow the corporation access to such records.

4. BENEFITS PAYABLE

Workmen's compensation policy is as a matter of practice issued to provide the

following benefits:

Death : Occurring within 12 calendar months from the happening of the accident
Or the onset of occupational disease: 5 year's wages, with a minimum
Of Birr 10,000 and a minimum of Birr150, 000 per person, as per schedule

Permanent total disability: Occurring within 12 calendar months from the happening
Of accident or onset of occupational disease: percentage of the death
. benefits, such percentages being specified in the policy itself for several
types of disability ranging from 3% for loss of a toe to 100% sight of
both arms or both legs etc.

Temporary total disability (TTD):

- 100% of first Birr 250 of wages per month plus 75% of additional monthly
wage in excess of Birr 250, but in total not exceeding Birr 1,500 per month for
up to one year (52 weeks).
- TTD compensation of the first three months is not deductible from final
compensation payable under Death, PTD and or Permanent Partial
Disablement.

- TTD compensation beyond three months is deductible from final Permanent

Total Disablement or Permanent Partial Disablement compensation.

- Medical, pharmaceutical, hospital, funeral and other expenses necessitated

employee as the result of an accident Birr 2,000 per person in addition to the
benefits payable for death or disability.

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 - Maximum liability any one event is Birr 2.2 million. Workmen’s
Compensation Insurance

An employer will be liable in law for damages to its employee where the employer has failed
to discharge its duty of care to that employee
As per Ethiopian Labor proclamation No 377/2003 article 12 and 92 the duties of the
employer includes . (¾›W]“ W^}— Ñ<Çà ›ªÏ lØ` 377/96 ›”kê 12 “ ›”kê 92)

a) employing competent employees

b) making working environment & practice suitable & safe
- safe place of work
- safe and suitable plant
- safe system of work

c) compliance with statutory duty

Limit of Indemnity

The liability of the insurer to indemnify the insured shall not exceed the limit of Indemnity
shown in the schedule.

In the case of Ethiopia, the maximum liability is 5 years salary of the insured person as
indicated in the scale of benefits here below:

1. Death: five year wages

- maximum limit Birr 150,000.00
- minimum limit Birr 10,000.00
2. Permanent Total Disablement: percentage of the death benefit as stated in the Scale of
Permanent Disablement

4. Medical Expense up to Birr 2000

Injury is defined as bodily injury, death and disease.

Employee shall mean any:

a) person under a contract of service or apprenticeship with the insured;

b) person under a contract of service or apprenticeship with some other employer;

c) labour master or person supplied by them;

d) person supplied by a labour-only sub-contractor;

e) self-employed person performing work under a similar degree of control and

direction by the insured as a person under a contract of service or apprenticeship
with the insured;
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 f)driver or operator of hired in plant;

g) person provided under the terms of a work experience agreement or similar

scheme;

h) voluntary worker

Caused in the course of their employment

This refers to the time of starting and finishing work. When employees enter their employer’s
premises for the purpose of going to work they are usually acting in the course of their
employment from the moment they pass through the boundary gates. The injury must be
caused in connection with the business. However, it is usual to extend ‘The Business’ to
include ancillary activities of the insured which form indirectly a part of their business, such
as:
a) the ownership or occupation of premises and their repair and maintenance;
b) the provision and management of catering sport and welfare organizations
and fire first aid medical and ambulance services by the insured;
c) the provision of, or attendance at training courses or outward bound
courses;
d) Private work undertaken by any Employee with the prior consent of the
insured for any director, partner or senior official of the insured.
The injury must be caused during the period of insurance
Exclusions
- War

- Intentional self-injury, suicide or attempted suicide, venereal disease or indulgence in

drink, narcotics or drugs.

- Mounting into or dismounting from or traveling in aircraft except as a faire-paying

passenger of regular scheduled air transport passenger services.

- Any sum which the insured would have been entitled to recover from any other party.

- Any accident or occupational disease resulting from any contravention (violation) of a

regulation to which the worker’s attention has been specially drawn in writing.

1. Claims Notification Procedures

- The insured must give notice of any occurrence which may give rise to liability under
the policy.

- The insured must forward the insurer every latter, claim, writ, summons and process to
the insurer immediately on receipt.

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 - The insured shall not make any admission of liability or negotiate the settlement of
any claim without the written consent of the insurer.

2. Premium Adjustment (Declaration basis policy)

If the premium is based on estimates, the insured needs to keep an accurate record to
submit to insurers at the end of the policy year.

3. Cancellation
The insurer may cancel this policy by giving 30 days notice in writing to the insured at
their last known address whereupon the insured shall receive a pro rata return of
premium for the unexpired period of insurance subject to the premium Adjustment
condition and any minimum premium applicable.

Personal Accident Insurance

It Provides compensation in the event of an accident causing death or injury (Specified

injuries such as loss of limbs or sight).

The cover is extended to include:

- weekly benefit
- temporary total disablement
- permanent total disablement
- medical treatment

It is also possible to arrange personal accident insurance for employees of organizations in

group scheme which we call it Group Personal Accident Insurance (GPA).

Personal Accident Insurance covers the consequences of

- Accidental bodily injury
(resulting solely and directly from accident caused by external, violent and visible
means)

- This bodily injury

results in
- Death
- Disablement (permanent or temporary)
- Medical expenses

Remember: If any other cause (other than the accident which has caused that bodily injury)
contributes to the result, the insured event has not occurred. That means, if the bodily

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 injury is proved that it is not caused by accidental, external and visible means
(meaning that it is aggravated by bodily defects or infirmities), the policy does not
respond. Thus disease from natural causes is excluded. However, disease proximately
caused by accident is bodily injury (it is covered by Personal Accident Insurance).
Policy Benefits

Death: a lump sum payment

Total loss of sight or eyes: a lump sum payment

Total loss of limbs: a lump sum payment

Loss of limbs means the loss by physical severance or the total and permanent loss
of use of an entire hand or arm, or of an entire foot or leg.

Permanent total disablement: a lump sum or an annuity. This payment may take time (say
12 months or more) as it must be certified by a medical referee at the end of the
treatment.

Definition of Permanent Total Disablement

- disablement from gaining employment of any and every kind;
- disablement from the insured’s usual occupation and any other occupation for
which the insured person is fitted by knowledge and training;
Eg If a partner were to be temporarily disabled, say, for six months, he
might at the end of the time lose his partnership under the terms of the
partnership agreement.
- disablement from the insured person’s usual occupation

Eg A dentist might be unable to follow his profession following an injury

to his hands, but might be capable of working, for example, as shop
assistant.

Temporary total disablement: weekly benefit (as agreed in the policy)

It may be difficult to know the extent of damage of the injury immediately

subsequent to an accident. The injured person may be unable to carry out his usual
occupation temporarily, or he may be under medical treatment (or sick leave) until
the permanent disablement is determined by medial referee. In either way, the
insured is unable to work but his wage (weekly benefit) is to be paid.

Permanent partial disablement: smaller percentage of the entire percentage of limb or eye.

It is permanent disablement which is not total. It is intended to refer to disablement

which is less sever, i.e, a smaller percentage than that paid for the loss of an entire
one. This is useful because the possibility of a person losing part of a limb as a
result of an accident is more likely than the loss of an entire limb or eye.

Personal accident can be issued on:

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a named basis for specific members of a proposer’s workforce
or
an unnamed basis for all members of a company’s workforce.

Personal accident insurance is requested by the proposer either for some key employees or as
an employment benefit for the workforce or it can be justified that the business can be
affected if a member of the workforce suffers a serious accident because of:
- continued payment of wages;
- cost of replacement personnel;
- possible production/customer service issues.

Insurers should consider the risk of claims of each activity undertaken by employees in order
to produce the overall rating of each group. The following table illustrates the way we
approach different risks in calculating premium:

Example

Low risk Medium risk High risk

Shop assistant Motor mechanic Woodworker
Waitress Chef Window Cleaner
Architect (not concerned in the Architect (Supervising Electrical engineer
direct supervision of manual site) (working)
work)

Risk can be covered for named employees or any employee while working or it can be
provided on a 24- hour basis (it covers the risks even though not related to the business).

Personal accident policies are not policies of indemnity; they will pay benefits in respect of
the happening of events irrespective of whether the insured sustains a pecuniary loss. Had it
been a contract of indemnity, the amount recoverable is measured by the extent of the
insured’s pecuniary loss. The difference between a contract of indemnity and a benefit policy
is:
- a benefit policy provides for the payment of a specified sums on the happening of
certain events (a certain contingency);
- under a contract of indemnity the amount recoverable is measured by the extent of
the insured’s pecuniary loss.

Who decides the amount of benefits of personal accident insurance?

Benefits are defined in units (as a package). The following specified units can be taken as an
example:

Birr 50,000
- Benefit for death
Birr 50,000
- Benefit for permanent total disablement (loss of limbs/eyes)
- Benefit for temporary injury (temporary total disablement
Birr 100 per week
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 for up to 52 weeks)

A number of units can be selected by the insured up to a maximum, say 2,3,4 etc. unit.
However, insurers try and reflect the proposer’s normal earnings in the level of benefits
offered. The benefits should never be so excessive that motivate the insured to arrange
accident.

Benefits of EIC Personal Accident Insurance;

Events Payment
 Death
 Permanent total loss of sight of both eyes, loss of two limbs or Capital Sum
any other injury causing permanent total disablement
 Permanent Total Disablement & Permanent Partial Percentage of the
Disablement capital sum
(which entirely permanently prevents an insured person from
attending to his business or occupation of any and every kind.)
 Temporary Total Disablement (TTD) Weekly benefits up
(which entirely temporarily prevents the insured from to a certain (fixed)
attending to formal duties) amount for 52 weeks
 Temporary Partial Disablement (TPD) A lower level of
(which prevents the insured from attending to substantial part benefit than
of his usual duties or the insured is incapable of attending to a Temporary Total
definite part of his or her normal duties) Disablement

Sum Insured: It is a capital sum for death (say 1,2,3 4,5 year salary or a limited amount per
week/month for the remaining benefits).

The premium of Group Personal Accident Insurance is calculated on estimated annual wage
roll adjustable at expiry on actual wages paid.

In the case of EIC, the benefits of PA/GPA is based on five year salary wages income of any
one person and medical expenses are limited to Birr 2000 per person (but currently the limit is
being increased upto Birr 5000).

Exclusions

- The insured person being under the influence of or being affected (temporarily or
otherwise) by alcohol or drugs.

Some insurers exclude intoxication. This is a state which can be caused other than by
alcohol.

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 The exclusion of drugs may state that these are drugs other than those taken in accordance
with treatment prescribed and directed by a qualified registered practitioner, but not for
the treatment of drug addiction.

- The insured person willfully exposing himself or herself to needless peril (except
in an attempt to save human life) or the insured person committing or attempting to
commit suicide.
The exclusion may, alternatively, refer to self- inflicted injury or disease.

- The insured person suffering from any physical defect or infirmity which existed
prior to an accident.

- The insured person engaging in aviation, other than air travel which shall men
mounting into traveling in or dismounting from any fully licensed passenger carrying
aircraft as a passenger but not as a member of the crew nor for the purpose of engaging in
any trade or technical operation therein, or engaging in motor cycling, polo, racing on
horseback or on wheels, winter sports or mountaineering necessitating the use of ropes or
guides.
Some insurers will cover all flying as a passenger with no qualification as to the aircraft
concerned. There may be no specific exclusion of other hazardous sports and pastimes,
but the proposal form is often so worded that the answer to the relative question elicits
whether such other sports and pastimes are undertaken, and enables the insurer to take the
appropriate action. Insurers are often willing to include some of these sports and pastimes
on payment of a suitable extra premium. Alternatively, these may be covered subject to
an exclusion of the first fourteen days of disablement. Some insurers will cover sports by
a percentage reduction in the benefits, e.g. rugby 50% of benefits.
- Childbirth, pregnancy, venereal disease or AIDS.

- War, invasion, act of foreign enemy hostilities (whether war be declared or not),
rebellion, revolution, insurrection or military or usurped power.

Naval, military or air force service or operations.

Hunting, driving in any kind of race, winter sports, or driving or riding motor cycles,
potholing, skin-diving or any other sports or part-time involving exceptional risk of
accident.

The insured being in or upon or entering into or alighting or falling from aircraft other than
any fully licenced aircraft, owned or operated by a recognised Air Line, operating over
regular scheduled air routes, in which the insured is traveling as a fare-paying passenger.

PUBLIC LIABLITY INSURANCE

1. INTRODUCTION

The duty of care that each of us owes of us owes to others has already been amply clarified
by the previous speaker. Suffice it here to mention that the public liability insurance
policy covers the insured against damages for which he may be held legally liable to a
member of the general public.
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2. SCOPE OF COVER

EIC's public liability policy provides cover for:

- all sums which the insured becomes liable to pay for compensation in respect of
bodily injury to or illness of any person, or loss of or damage to property, and

- all costs and expenses of litigation recovered by any claimant against the insured, and
any such costs incurred by the insured with the consent of the corporation.

Exceptions

Liability under the policy does not apply to:

- liability assumed by the insured by agreement and which would not have attached in
the absence of such agreement;

- liability in respect of claims that should be covered by workmen's compensation

policy;

- liability in respect of loss of or damage to property belonging to or in the charge of the

insured, a member of his household, or any worker/ agent of the insured;

- liability in respect of any product supplied or manufactured by the insured;

- liability arising from any vehicle, vessel, craft or lift, escalator etc. not specified as
being insured in the policy;

- liability from any steam boiler, economizers, or any vessel/

- liability arising from war or warlike risks, acts of bandits or shiftas, nuclear risks,
radioactive contamination, etc..

Conditions

Among other matters, the policy requires the insured to:

- exercise reasonable care and precaution to prevent accidents and to maintain his
premises in sound condition:

- keep an accurate record of all pertinent particulars if the premium or part thereof
has been calculated upon estimates supplied by the insured to the corporation;

- notify the corporation of any change of interest in the policy.

3. LIMITS OF INDEMNITY

Currently, the limits of indemnity covered by the policy are:

a. Birr x amount any one accident or series of accidents arising out of one event; and

b. Unlimited during any period of insurance.

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 The limit stated under (a) above can be increased up to a maximum of Birr 2 amount
for additional premium as per polices schedule

OTHER NON LIFE INSURANCES

Other non-life insurances offered by the EIC are:

1. PLATE GLASS :

Glass Insurance

The adverse trend in theft, arson (act of setting something on fire intentionally and
unlawfully), and more general malicious damage has accentuated (give more force
or importance) the need for glass damage insurance. The advancement in use of
glazing in new structural concepts has increased the awareness to insure against
glass damage.

Scope of Cover
This is an all risks policy which indemnifies that insured for the breakage or
destruction of fixed plate glass by any accident or misfortune of fortuitous
character. This includes windows, door glazing, fanlights, showcases, fixed
mirrored glass and glazed partitions.

- Damage by scratching or chipping is normally excluded and damage to any

lettering or similar ornamental work upon the glass is only covered if caused
by the actual breakage of the glazing on which it is fixed.
- Fire, lighting and explosion is excluded as this is usually insured under a fire
policy.
- Extensions of cover are sometimes available to include the following subject to
additional premium.

a) Damage to shop-front contents resulting from broken glazing. This will

not include losses from theft, fire, lighting and explosion.
b) Washbasins and sanitary fittings in hairdressing salon and private
dwellings.

Underwriting Considerations

Underwriters need to take account of the following:

 Previous loss history. Properties which have already been the subject of
regular glass damage, obviously present undesirable risks.
 Location. Buildings in areas of known vandalism, etc, such as properties
close to football grounds, will require special consideration.

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  Occupation. Unoccupied buildings, bookmakers, clubs and public houses
will present increased glass damage hazards which need specific
underwriting action.
 Construction. The manner in which a property is built will have a direct bearing on
the underwriting of a risk; for example:

-greenhouses present an obvious increased hazard by their lightweight

structural make up;
- Modern office blocks built extensively of glass, often referred to ‘curtain
glazing’, offer high cost damage potential.
- Churches and similar property with stained and/or colored glass windows
also offer above normal replacement values following damage.
An underwriter may deal with the aforementioned by the following actions:

 Depending on the extent and regularity of the previous incidents of damage, he may
decline the risk unless he can be satisfied that specific measures have been taken by
the proposer to reduce or even eliminate the level of losses. In the latter case, a rate
and/or excess increase may be sufficient.
 Again, in areas with poor loss histories, a declination may be made. More
commonly, to particularly accommodate a known insured, a higher excess will
probably be imposed.
 Unoccupied buildings are particularly prone to malicious damage and would
normally be avoided for glass damage. Other premises detailed will be
underwritten on their individual merits but as a minimum an increased excess will
be considered sufficient. In some instances, the use of grilles to protect glazing
may be felt necessary.
 Regarding construction:
- Greenhouses will often be avoided, unless there are strong commercial
reasons to provide cover. Large excesses can be imposed in order to provide
only for the catastrophe risk, e.g. extensive storm damage;
- ‘Curtain walling’ is expensive to replace, but generally fairly strong and will
resist minor knocks, etc. An underwriter will see these risks as requiring an
increased excess only to provide some self insurance upon the insured,
because of the high value loss potential;
- picture, colored or stained glass normally warrants an increased rating
depending on location.

Whilst remaining an individually purchasable commodity, most insurers will seek to

provide glass insurance cover only as support to the more common front line policies of
material damage, fire and theft. Written separately, glass insurance leaves the insurer
prone to selective losses without the significant funding that goes with the
aforementioned major insurance programmes.

2. BONDS : These are bid, performance, supply and maintenance bonds.

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 Here the EIC assumes the position of a surety guaranteeing the
faithful performance by a "contractor" of his obligation to an
employer.

3. PERSONAL
ACCIDENT : This policy compensates the insured person in accordance with
a scale of benefits ( specified in the policy) for bodily injury caused by
accidental means.

Benefits are paid for:

- Death
- Permanent disability
- Temporary total disability
- Temporary partial disability
- Medical expenses
4. LIVESTOCK : This policy insures cattle, sheep and goats. Their death entitles the
insured to compensation so that he can buy a placement animal and
thereby
continue his productive activities.
10. MOTOR INSURANCE:
10.1 INTRODUCTION
10.1.2 CLASSIFICATION OF MOTOR INSURANCE:
10.1.3 PRIVATE AND COMMERCIAL MOTOR INSURANCE
10.2 SUBJECT MATTER INSURED
10.3 LIMIT OF LIABILITY
10.4 SCOPE OF COVER
10.5 EXCEPTIONS
10.6 CONDITIONS
11. MARINE CARGO INSURANCE
11.1 SCOPE OF COVER:-
11.2

Following are the important underwriting and rating aspects in cargo insurance:

A. UNDERWRITING

1. Nature of Commodity-
 Hazardous, extra hazardous or non hazardous
 Fragile or delicate
 Liquid or solid
 Normal size or over size
 Bulk or pack
 Containerised
1. Value at risk- per bottom- to assess reinsurance need
2. Nature of packing
3. Conveyance or carriage- by sea, by rail, by road, by post parcel, by air, by couriers
service etc.
4.
5. Standard of conveyance
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 a) Ship
 Classed or unclassed
 Flag - FOC and others
 Built - war built unknown registration
 Maintenances - good, sub standard
 Nature of transport - liner or tramp
 Approval of Vessels by underwriters

b) Other Conveyances:
 Reputation of carrier
 Open or closed wagon lorry
 Bank approved or not
6. Time and duration of voyage
7. Geography of route of transit
8. Port conditions
9. Types of cover required
10. Possibility of recovery from the carriers
11. Ship owner credentials as a carrier
12. Nature of inland transit involved
13. Weather condition enroute
14. Supervisory control of loading, stuffing, unloading etc.
15. Political conditions enrome
16. Moral hazard
17. Peculiarities of special trade, example timber, rubber, tea, coffee, iron, crude oil,
grains, fruits, food articles etc.
18. Special aspects involved-
 On deck cargo
 Transshipment
 Towage
 Purpose built vessels like heavy lift cargo, roro vessels, crude carrier,
containership etc.
 Tail end risk
 Extra Liabilities
 Storage Risk
 War and SRCC Risk
 Political risk
 Duty cover requirements
 Terms of contract of sale
 Consequential Loss Coverage
 Package cover requirements
19. Experience of insurers in cargo underwriting for the market as a whole
for the last 5, 10 and 20 years:

a. Commodity wise
b. Total cargo results
c. Total insurer's results of all portfolios
d. World market trend on cargo coverage
20. Market is state controlled or free market and whether any tariff rating
exists or not.
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B. RATING

1. Minimum risk ICC (C) - Base Premium

2. Loading for extra cover under ICC (B)
3. Loading for fuller cover under ICC (A)
4. All rating based on nature of commodity and duration of risk - range guide ling may
be used.
5. On deck extra
6. Overage extra
7. Class extra
8. Special transshipment extra
9. Containerised or non - containerised - lesser rate for containerised
10. Claims experience -commodity wise, conveyance wise
11. Turnover discount
12. accommodation cover
13. War and SRCC extra
14. Storage extra
15. Loading and unloading supervision charges
16. Excess to be borne by the assured
17. Special commodity extra - e.g. fragile, delicate, perishable etc.
18. No rating possible for bad moral hazard
19. Special rating - package cover petroleum products, tea, project materials, oversize
consignments etc.
20. Loading and discount for bad and good record respectively.

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