Ifp 15 personal_property_and_liability_insurance

100 Financial Planning Handbook PDP

Chapter 15

101Financial Planning HandbookPDP

Personal Property and Liability Insurance

Apart from risks to life and health, a person is also exposed to risks that may cause damage to his/her property. These risks can be covered by opting for Personal Property insurance.

Let us look at some of the major property insurance types in more detail.

Householder’s Insurance

A comprehensive householder’s insurance policy covers most of the risks faced by any household. Itprotects against natural calamities like flood and earthquake and also man-made disasters like theft andburglary.

Instead of opting for separate policies for the building and for the contents of the house, the householdercan take up one package policy.

What does it cover?

The householder’s Insurance Policy broadly covers two things – building structure and contents inside thehome.

The Householder’s Insurance Policy comprises of ten sections which includes the insured’s building,fixtures and fittings, contents inside the house, jewellery and valuables, television sets and VCRs,bicycles, accompanied baggage as well as personal accident and public liability benefits.

The contents of the home are safeguarded against fire, burglary, accidental breakage or mechanical orelectrical breakage.

Motor Vehicle Insurance

Motor insurance is compulsory in India. It is essential for all motor vehicle owners since it protects themfrom legal liabilities that might arise during their vehicle operation.

There are two types of policies available for motor vehicles – third-party liability insurance andcomprehensive insurance policy.

Third-party liability insurance

This covers the insured’s liability to third parties. The owner is protected in the event of death or injurycaused by the vehicle to:

� pedestrians, occupants of other vehicles except those within your vehicle

� other vehicle’s driver

� passengers with whom your vehicle is for hire

The premiums are dependent on the cubic capacity of the car. This cover does not extend to fire andtheft accidents, for which one needs to pay additional premiums.

No vehicle can be used without this insurance cover and use of the vehicle without this insurance coveris a penal offence.


Comprehensive motor insurance

The comprehensive motor insurance takes care of additional losses and liabilities along with thosecovered in third-party liability insurance.

There are two sections under this policy.

Section I protects the motor vehicle owners from the risks of:

� Fire, Explosion, Self-Ignition and Lightning

� Riot, Strike, and Malicious act of Terrorism

� Transit by road, rail, inland waterway, air, lift or elevator

� Earthquake

� Accidental External Means

� Landslide

Categories of vehicles:

The following categories of vehicles are covered under motor insurance policy:

� Private cars: This category includes cars, station wagons, motor vehicles used for social, domestic,business or professional purposes (excluding those used for the carriage of goods other than samples)

� Motor Cycles: This includes motorcycles with or without sidecars, pedal cycles, mechanically assistedpedal cycles and motor scooters with or without sidecars.

� Commercial Vehicles: All vehicles excluding private cars, motor cycles and vehicles running on railscome under this category.

Determining the value of the vehicle

The value of the vehicle is calculated on the basis of the current showroom price of the vehicle multipliedby the depreciation rate that is set by the Tariff Advisory Committee at the commencement of eachpolicy period. This is called IDV (Insured’s Declared Value).

How is premium calculated?

The premium in a Motor Insurance Policy is regulated by the India Motor Tariffs as specified by the TariffAdvisory Council. It is governed by the following factors:

� Type of Vehicle

� Age of the vehicle

� City of registration

� Use of the vehicle

Bonus / Malus System

In case of an accident occurring in a year for which the insured makes a claim, in the very next year theinsurance company increases the premium by way of charging a malus i.e an extra percentage. On theother hand, when there is no claim lodged during the year, the insurance company grants a discount inthe premium by way of bonus.

No Claim Bonus (NCB) clause is applicable to holders of comprehensive insurance policy. The minimumbonus is 20 percent and the maximum is 65 percent.


Other liability insurance

Even if the personal property of an individual is protected through insurance, financial insecurity canarise if the person commits a legal wrong against a third party and is directed to pay damages or fines tocompensate the aggrieved party. The liability arising from such a situation is covered through liabilityinsurance.

Let us look at some of the major types of liability insurances in more detail.

Directors’ and Officers’ Liability

Directors’ and Officers’ Liability Insurance policy is specifically tailored for directors and others holdingkey positions in an organization. It is meant for those who are in the decision making process. Directorsand officers are bound by duty towards the company, its shareholders, employees, creditors, customers,competitors, members of the public, government, and other regulatory bodies. The Directors’ and Officers’Liability Insurance policy covers any financial liabilities imposed upon them.

They might become liable to pay damages arising out of:

� Misleading statements

� Errors and inaccuracy in financial statement and annual accounts

� Lack of judgment and good faith

� Unfair allotment of shares

� Mis-statement in prospectus

� Unauthorized loans or investments

� Unfair dismissal of an employee

� Unwarranted dividend payment, salaries, or compensation

� Failure to obtain competitive bids

� Using inside information

� Misrepresentation in acquisition agreement for the purchase of another company

Exclusions

The policy does not pay for:

� Prior and pending litigation and claims submitted under previous policies

� Bodily injury, sickness, disease, emotional distress, death, damage, or destruction of tangible propertyincluding loss

� Criminal wrongs

� Deliberate, dishonest, or fraudulent acts

� Pollution and/ or contamination

Professional Indemnity Policy / Professional liability Insurance

This policy is meant for professionals like doctors to cover liability falling on them due to mistakes andomissions committed by them while rendering professional service. Though doctors are supposed to beimmaculate in their profession, they are human beings and are prone to errors. As a result, they areexposed to the risk of claims from clients who have suffered loss due to negligence.


Who can take cover?

� Doctors and registered medical practitioners such as physicians, surgeons, cardiologists,gynecologists, pediatricians, pathologists etc.

� Medical establishments such as hospitals and nursing homes

� Engineers and interior decorators

� Lawyers and counsels

� Chartered accountants, financial accountants, management consultants etc.

What does it cover?

Professional Indemnity Policy covers the claims arising out of:

� Bodily injury or death caused by mistakes, negligence, and miscalculation

� Legal liability including defense costs incurred while investigation, court cases, and compensation

Exclusion:

The policy only covers civil liability claims. It does not cover:

� Any liability arising out of or in connection with any criminal act or act committed in violation of anylaw

� Acts committed under the influence of drugs

� Weight reduction

� Plastic surgery

� HIV Aids

� Radioactivity

� Blood Banks

� Non-compliance with statutory provisions

Products liability insurance

Safety of a product is of prime importance to the manufacturer and seller. Faulty and defective productscan be harmful to the consumer resulting in death or bodily injury. In such cases, the manufacturer orseller has to pay huge compensation.

Product liability insurance protects the companies exposed to the above risk by financially assistingpolicyholders in such situations.

What does it cover?

The Policy broadly covers the legal liability of the insured, where the insured has to pay damages to thethird party as a consequence of:

� Accidental death

� Bodily injury or disease

� Loss or damage to property

Exclusions

The policy does not cover any liability for:

� Product recall

� Product guarantee


� Pure financial loss such as loss of goodwill or loss of market

� The cost incurred for repairing or reconditioning or modifying the defective part of the product

� Deliberate non-compliance with any statutory provision

� Fines, penalties, punitive or exemplary damages

General Liability Insurance

This kind of insurance is the main coverage in order to protect the business from injury claims, propertydamages and advertising claims. It is also known as Commercial General Liability insurance.

Public liability Insurance

What does it cover?

The policy covers the insured against the legal liability arising out of accidents during the currency of thepolicy. Accidents can be caused due to handling of hazardous substances as mentioned in the PublicLiability Insurance Act ,1991.

Exclusions

The policy does not cover liability or costs, which arise out of the following factors:

� Earthquake, volcanic eruption, flood, storm, hurricane, tornado, or similar weather conditions

� Deliberate or willful non-compliance of statutory warnings

� Fines, penalties, and damages

� War, invasion, hostilities

� Loss of goodwill in the market

� Ionizing radiation or contamination by radioactivity from any nuclear fuel or from any nuclear wastefrom the combustion of nuclear fuel

Workmen’s compensation insurance

The Workmen’s Compensation Act, 1923, aims to provide workmen and/or their dependents somerelief in case of accidents arising out of and in the course of employment and causing either death ordisablement of workmen.

This insurance policy is essential for all employers who engage “workmen” as defined by the Workmen’sCompensation Act to cover their liability towards them under statutory and Common Law.

What does it cover?

� It covers the employer against any legal liability arising out of accident or fatal injury sustained by his‘workmen’ during work.

� Medical, surgical, and hospitalization expenses including transportation costs are also covered, onextra payment of premium.

Exclusions

The insurance policy does not pay any claims arising from:

� Any injury that does not result in a fatality or disability for 3 days subsequent to the accident

� Any injury caused due to:

� War or nuclear perils


� Influence of drinks or drugs

� Willful removal or disregard of any safety device

� Any compensation for diseases mentioned in Part ‘C’ of Workmen’s Compensation Act,1923

� Liability towards employees of the contractors of the insured

� Occupational diseases unless cover is extended on payment of extra premium

Exercise

Ravi had joined Numark recently as the Director-Marketing. He was given a car and a driver by thiscompany. The company had taken insurance, which will give compensation for other vehicles’ driver andpedestrians in case of any untoward accident involving the company car. It is mandatory for all vehiclesto take this policy. The HR manager asked that instead of taking only this cover; why not take a morecomplete one. It would also cover the car in case of any loss due to theft of the car. What are the twotypes of insurance that is being talked about?

Solution : The two types of insurance are third party insurance, comprehensive motor insurance.

Ravi will be the spokesperson of the company. He is the key person, who works as a representative of thecompany. It is important that the company takes a (Directors and Officers Liability) insurance policy.

Does it cover dishonest, deliberate or fraudulent acts?

Solution : The insurance policy does not cover dishonest, deliberate or fraudulent act.

Numark is a pharmaceutical company. They manufacture generic drugs for diabetes and hypertension.There are reputed players in the market and well known for quality products. However, they had startedtheir distribution in South East Asian countries and wanted to expand business. There is one insurancepolicy that is definitely recommended. What do you think it is?

Solution : Products liability insurance is recommended.

Numark also runs a chain of clinics across the rural areas. The brothers in partnership thought that thiswould be a good way to give back to the community. They started this business about 10 years back andit has been very successful in treating a lot of patients who would otherwise find it difficult to accessbigger cities where all the facilities are already available.More than it being a business proposition, itstarted out being a part of the corporate social responsibility.Since it was managed well, this new associateventure grew in size and geography.The philosophy was to help all the poor and needy free of cost.Thehospital became well known for its treatment and quality of service. Many people started queing up to gettreated who were not necessarily poor but came from the middle class backgrounds. This low revenueearning model, an associate of the main business was doing contributing up to 7% profits of the company.

The company hires a lot of doctors, who have just completed their education and want to train underdiverse conditions. The company want their costs to be optimized, yet give quality care. To hire youngdoctors who are yet gaining a wider range of experience was one of their ways of doing it. The managementdecided that it made legal sense to take up another policy. What policy to do think that would be?

Solution : Numark should take up Professional Indemnity Policy.


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Ifp 15 personal_property_and_liability_insurance