Importance Of Insurance Clauses
As we know that Insurance is all about clauses so the importance of Insurance Clauses is the essence of any type of Insurance
We, in the Insurance domain, are quite familiar with the word “Insurance Clause”.
There are so many definitions of Clause but in simple language, the clause may be termed as a provision that defines not only coverage but also exclusion to specific Risk.
We can not ignore the Importance of insurance Clauses in any Insurance Documents.
For, example Startup Expenses, Shutdown expenses, Local Authority clauses, and the like.
The clause, therefore, has a major consequence in claim settlement.
Therefore, before choosing any Clause we need to understand the RISK in detail first. Sometimes it is seen that Clause which are not at all relevant to Risks taken or incorporated in the policy.
For example Accumulated Stock Clause is taken for the policy of a Power plant, without understanding that Power is the product of a power plant and this product, i.e., Power cannot be accumulated, and that is why the Accumulated Stock Clause is NOT at all required for a policy of Power Plant.
So, to select suitable Clauses applicable for any specific Risk, we need to thoroughly analyze the Risk first on the following major FACTORS, apart from some other factors:
Location of Risk,
Inter-dependency between Upstream and Downstream of the Process,
Utility (Steam, Power, Water, Gas) Dependency especially Power Dependency,
Inherent nature of raw material, finished goods, etc.
Origin of Critical Machinery
Details about Suppliers and Customers
To understand the impact of Clauses, a sample Case Study given below:
Company ABC’s manufacturing unit in Andhra Pradesh was fully dependent on Grid Power despite having a backup DG facility that was mainly for emergency needs and not for manufacturing purposes.
We all know that in 2014, extremely severe Cyclonic Storm “Hudhud” hit Vizag and caused extensive damage to properties in and around the city of Visakhapatnam and the neighbouring districts of Vizianagaram and Srikakulam in Andhra Pradesh.
Many Sub-Stations (through which insureds get power to their plant)got severely affected and power could NOT be supplied to their customers.
As a result, Insured’s could not continue their manufacturing process for many days and incurred huge loss of profits.
Insured ABC had Business Interruption cover and lodged Loss of Profit claim to their insurance company but the claim was rejected for the following reasons.
There was no property damage at the insured’s premises and the “material damage” proviso was not complied with. (Incidentally, for admissibility of Business Interruption claim, there must be indemnifiable material damage claim first.)
But if Insured had taken PUBLIC UTILITIES EXTENSION this claim would have been paid.
This Clause says -PUBLIC utility EXTENSION
It is hereby agreed to cover the insured’s loss resulting from interruption of or interference with the business carried out by the insured at the premises described within the consequence of the failure of electrical / gas /water supply at the terminal ends of the electrical service feeders /gas works/waterworks from which the insured directly obtained electric / gas/ water supply at the said premises directly due to damage to property at an electricity station, Substation, or Public electrical supply undertaking from which the insured obtained electrical/gas/water supply shall deem to be loss resulting from damage to the property used by insured at the premises. This extension covers losses due to damage by Fire, Lightning, Explosion, and Aircraft Damage (FLEXA) and AOG perils only.