Liability Insurance.

Liability insurance

Liability Insurance • Product Liability • Professional Liability • Arises if there is a violation of a person’s legal rights or a failure to perform legal duty owed to certain person or to society as a whole. • Classes of legal wrong – Crime – Breach of contract – Tort

Categories of torts •

Intentional torts: assault, battery, trespass, false imprisonment, fraud, libel, slander and patent and copyright infringement. • Strict Liability: Rylands vs.Fletcher If a person brings on his land anything which is likely to do mischief if it escapes, he will be prima facie answerable for the damage caused by its escape though he had not been negligent. • Absolute liability: liability is imposed even without negligence or fault. Examples – Occupational injury and disease – Blasting operations – Manufacturing of explosives, medicines, food products eg. M C Mehta vs. Union Of India – Owning wild or dangerous animals – Crop spraying by airplanes

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Negligence: failure to exercise standard of care required by law to protect others from an unreasonable risk of harm.

Defences against negligence • Contributory negligence • Comparative negligence – Pure rule – 49 percent rule – 50 percent rule

• Last clear chance rule • Assumption of risk

Imputed negligence • Employee employer relationship (Lloyd vs. Grace Smith & Co.) • Vicarious liability • Family purpose doctrine • Joint business venture (Hamlyn v. Houston & Co.)

Res ipsa loquitur • Meaning the thing speaks for itself. Injury or damage establishes a presumption of negligence on behalf of the defendant. • Requirements – The event doesnot happen except in case of negligence. – The defendant has exclusive control over the instrumentality causing the accident. – The injured has not contributed to the negligence in any way.

• Muncipal Corporation of Delhi v. Subhagwati

Specific applications of the law of negligence • Property owners – Liability in case of trespasser – Liability in case of licensee – Liability in case of invitee.

• Attractive nuisance doctrine : a condition that can attract and injure children. • Owners and operators of automobiles • Governmental liability • Charitable institutions • Employee employer • Parents and children • Animal owners

Special Tort Liability Problems • Products Liability: liability of retailer or manufacturer (privity of contract doctrine) • Solutions: – State of the art defense – Alteration of the product defense

• Professional liability: A genuine error of judgement by doctors, lawyers, accountants, architects, insurance brokers, actuaries etc. Spring meadows hospital v. Harjot Ahluwalia • Employer’s liability/ workmen’s compensation insurance: insurance compulsory, ESI Act • Directors and Officers Liability:

Public Liability Insurance • • • •

For individuals Third party insurance Business risks The public Liability Insurance Act,1991: mandatory for installations handling hazardous substances.

Characteristics of liability insurance • Liability may be by litigation, arbitration or agreement. • Loss is the sum finally determined by law. Law means both statutory as well as common law. • Potential liability is open-ended. • Claimant is not the insured but a third party. • Two stages of claims processing. – Whether the policy covers the claim or not; – Whether the insured is legally liable to pay or not. If yes, how the amount is to be determined.

Origin and development of liability insurance in India • Enactment of Workmen’s Compensation Act,1923, Motor Vehicles Act,1939 and compulsory third party insurance. • Bhopal Gas Tragedy in 1984. • Environment Protection Act,1986, Public Liability Insurance Act,1991. • Consumer Protection Act,1986 • Employees State Insurance Act,1948 • Supreme Court decision in the case of Shriram Food & Fertilizer Industries (vide M.C Mehta vs, Union of India) ruled that civil liability of corporation for torts also attached to directors and other officers.

PUBLIC LIABILITY INSURANCE •

Coverage : – Liability to a person and his dependants for death or injury, – Liability for damage to property, – Liability for legal costs involved in defending the case irrespective of whether the case gets decided for or against the insured.

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Add on benefits by paying additional premium – Liability due to Pollution – Liability during transportation of material including hazardous ones outside factory premises – Liability because of effluents discharge through pipelines – Earthquake risk – Technical collaborators liability.

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Target Group: A whole range of industries starting from a humble bakery or a beedi rolling unit to hi-tech aircraft hangers, chemical manufacturing plants, hydroelectric power stations and ship building units.

What is the Amount of Cover Available? • • • • •

AOA (any one accident) limit and AOY (any one year)/AOP (any one period) limits. But there is a restriction that only four ratios are permitted for AOA to AOY, i.e., 1:1, 1:2, 1:3 and 1:4. So, if an AOA limit of Rs. 50 Lacs is selected, the AOY limits can either be Rs. 50, 100, 150 or 200 Lacs. It is also important to remember that these limits are inclusive of all legal costs likely to be incurred. Factors to be considered for deciding the premium: – – – – – –

Risk group of the industry Limit of AOA Ratio of AOA to AOY If more than one unit is to be covered in the policy, number of units Turnover of the business Additional covers opted for

What Risks are not Covered in the Policy? • Excess: The first 0.5% of the AOA limit (subject to a maximum of Rs. 2 lacs) for each claim is deducted from the claim • Liability assumed by any specific contract • Loss of goodwill, market, etc. • Punitive or exemplary damages • Specific liabilities covered elsewhere such as liability due to the use of a motor vehicle, aircraft, watercraft, hovercraft, etc. • Liability covered under Public Liability Act of 1991 • Liability arising due to war, civil war, etc. • Liability due to radiation or contamination from radioactivity.

What is the Claims procedure? • •

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Liability claims are said to have a “long tail”, i.e., an incident occurring at one point of time can produce an effect much later. Claims made vs. occurrence coverage. So, the policy provides for special relaxations to the insured to register and get claims from an Insurance company much after the first incident has occurred provided the policy has been kept in force and all premiums paid on time. Normal steps for making a claim are as follows: – Inform Insurers as soon as possible of any incident, which may produce a liability claim at a future date. – The rule is to settle claims through the legal channel only. However, if the liability is clear, the insurer may prefer to compromise the claim out of court. – The basic assessment is of actual monetary loss suffered due to the incident. Some component of pain and suffering as well as loss of future earnings also are considered. – The peculiarity of a liability claim is that the insured does not have to do very much except providing the Insurer the information asked for. Insurer does the final settlement with the affected party.

Directors’ and officers’ Liability Policy •

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Coverage: ‘Loss’ shall mean legal liability of the directors or officers to pay damages or costs awarded against them and costs and expenses incurred by the directors or Officers with the written consent of underwriters in respect of investigation, defense or settlement of any claim. A wrongful Act shall mean actual or alleged breach of duty, breach of trust, neglect, misstatement, misleading statement, omission, and breach of warranty of authority or other act done or wrongly attempted by any Director or Officers. Claims : Any writ or summons issued against or served upon any directors or officers for any Wrongful Act, or, Any written communication alleging a wrongful Act communicated to any Director or Officer. Loss arising from claim first made against the Directors or Officers where company is required or permitted to indemnify the Directors or Officers pursuant to the law, common or statutory, or the Memorandum and Articles of Association Company reimbursement provision shall be applicable if such an obligation is expressly mentioned in the Company’s Articles of Association or in an agreement between the company and the concerned director or officers.

Exclusions • • •

• • • • •

Legal action or litigation brought in a court of law within the Excluded Territories Indemnity or payment is available from any source, other than the policy. Any actual or alleged bodily injury, sickness, disease or death of any person or any tangible property, including loss of use thereof arising out of, any actual or alleged seepage, pollution or contamination of any kind . (This is a subject matter of public liability policy) Made by any third party based upon breach of any professional duty owed to such third party. (This is a subject matter of a professional indemnity policy). Brought about by any circumstances existing prior to or at the inception date of the policy and which the directors or officers or the company knew or ought reasonably to have known could give rise to a claim. For tax or fines or penalties or punitive or exemplary or multiple damages or any claim deemed uninsurable under law. Based upon, actual or alleged libel, slander, infringement of copyright, infringement of patent (separate policies can be availed of) Directly, resulting from goods or products manufactured or sold or supplied by the company (this is a subject-matter of products liability policy).

Professional Liability Insurance • Also referred as Malpractice policies or errors-andomissions policies. • Professional vs. other liability contracts • Insurer needs consent of insured to settle claims out of court as it may damage the reputation of the professional. • Limit of liability not by per accident but in terms of per claim. • The act that gives rise to the claim is not accidental but deliberate. • The policy responds to suits based on professional’s error, mistake or malpractice but not to warranty successful results.

Commercial General Liability and Commercial Umbrella Policy •

• • • •

Under CGL one can insure general products and completed operations liability; personal injury; advertising liability; medical payments; and liability for damage to premises rented to the insured. Two options for events that trigger coverage: claims made and occurrence. Commercial umbrella policy is purchased to pay for catastrophic losses. In this case the insurer will require primary insurance in form of CGL, a business auto policy, workers compensation policy etc. Coverage under the umbrella includes property in the insured’s care, custody and control, worldwide products coverage. Umbrellas are written with few exclusions, and endorsements are used to limit coverage. However, in primary policies, endorsements are used to broaden the coverage. For higher liability coverage, excess umbrella policies may be purchased.

Property Insurance- Non Life Insurance • • • • •

Marine Insurance Motor Insurance Fire Insurance Health Insurance Project and Engineering Insurance

Marine Insurance • Ocean marine insurance – Hull insurance – Cargo insurance – Protection and indemnity insurance – Freight insurance

• Inland marine insurance

Fundamental concepts of ocean marine insurance •

Covered Perils: Types of covers – – –

• • • • • •

Institute Cargo Clause (C) : Named Peril basis Institute Cargo Clause (B) : Named Peril basis Institute Cargo Clause (A) offers the widest form of cover under Marine Cargo Insurance in so far as it relates to the perils covered. ICC (A) is an unnamed perils clause.

Particular Average : partial loss of or damage to the subject matter of insurance. General Average: when a sacrifice is made or an expense voluntarily incurred to preserve the rest of a venture, the loss or expense should be shared among all the interests involved in proportion to their value. General average is a voluntary and deliberate loss whereas particular average is fortuitous or accidental. General average losses are borne rateably by all the interests, which benefit, but particular average rests where it falls, and is recoverable from the insurer of the particular subject matter lost or damaged. A general average loss may include expenditure, but particular average can only be loss or damage of the subject matter insured caused by an insured peril and would not embrace any expenses. Abandonment: The cession by the insured to the insurer of the remains of his property, and rights relating to it, when a constructive total loss is claimed.

Common clauses attached to an Inland policy • • •

Warehouse to warehouse clause The Insurable Interest The Agreed Value: Normally insurance is taken for Invoice cost plus Insurance charges plus 10% loading on the total figure. • Factors determining premium: – – – – – – – – –

Commodity being transported; Types of packing; Mode of transport; Details of the Vessel used for the shipment; Length/duration of journey; Season in which the journey is to be undertaken; Volume of business; Claims experience of the Client and /or the commodity; and Voluntary excess (The minimum amount which an Insured agrees to bear out of every claim, normally in consideration of a reduction in premium rates)

The exclusions • Exclusions vary according to the type of cover opted. However general exclusions are: – Loss due to wilful misconduct of the insured. – Ordinary leakage, ordinary losses in weight or volume or ordinary wear & tear. – Loss caused by insufficiency or unsuitability of packing. – Loss proximately caused by delay, even though delay be caused by a risk insured against. – Loss caused by inherent nature of the subject matter insured – Strikes, Riots and Civil Commotion Clause. These risks are normally excluded but can be covered by payment of additional premium

TYPES OF MARINE INSURANCE POLICIES • • • • • • • •

Voyage Policy Annual policy Declaration policy Special declaration Open cover Duty policy Increased Value Insurance Marine Cum Erection Policy

Carriage of goods by Rail • •

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• •

Effective from 1st July, 1990 the new Indian Railways Act, 1989 came into force, replacing the earlier Act of 1890. The liability of the railways is of a common carrier so long as the goods are in transit and that of a bailee (under Sections 151, 152 and 161 of the Indian Contract Act, 1872) for a period of 7 days thereafter. The liability of the railways ceases on expiry of 7 days after termination of the transit. The liability of a common carrier is absolute as that of an insurer of goods for any loss, damage, destruction, deterioration, short or nondelivery, save and except where such loss, damage, etc. is caused on account of act of God, enemies of state, inherent vice or fault of the consignee himself. Liability of a bailee,on the other hand, is only for failure to take reasonable care, that is for negligence and misconduct on his part or on the part of his servants. Goods carried at owner’s risk rate

Other Modes of Transport • Carriage of goods by Road: The Carriers Act 1865 governs liability of road transporters, according to which anyone who carries goods not belonging to him for hire or reward is a common carrier. The common carrier may limit his liability by a special contract, if he chooses to do so. Otherwise his liability is absolute ‘’as of an insurer” of the goods. • Multimodal Transportation Of Goods Act, 1993 • The MTO remains responsible for the goods throughout the period from the time he takes them in his charge until the time of their delivery. The MTO shall be liable for loss resulting from: – Any loss of or damage to the consignment; – Delay in delivery of the consignment and any consequential’ loss/damage arising from such delay,

Cargo claims procedure summary • • • • • •

You should inspect cargo on arrival; You must hold the transport operators liable for any loss or damage; You should contact the nearest claims settling agent; A surveyor may be required to determine the nature, cause and extent of loss/damage; and Act swiftly - the cargo remains your property. Documentation that is usually required when presenting a claim includes: – Bill of Lading/Air Waybill – Commercial Invoice – Insurance Certificate – Copy of notice of claim reported against carrier – Documentation relating to out-turn/receipt of goods – Local Carriers Waybill, where applicable – Copy of temperature records, where available – Invoices to confirm salvage/sale price, where applicable – Copy of instructions to carrier regarding carriage temperature, where applicable – Note: For a marine insurance claim to be paid, insurers require: – evidence of physical damage to cargo; and – complete documentation.

ACCIDENT AND MOTOR INSURANCE • Material Information in Motor Insurance – cubic capacity of engine; – the year of manufacture; – carrying capacity of the vehicle; – the purpose for which the vehicle is used; – the geographical area in which it is used; and – the owner’s or driver’s convictions for traffic offences etc.

Types of Coverage • •

Liability policy (informally called ACT policy or third party policy) Package policy covers loss to insureds' vehicle on account of – – – – –

Fire, explosion, self ignition or lightning Burglary housebreaking or theft Riot and strike, malicious act, and terrorist activity Earthquake (fire and shock damage) Flood, typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm, and frost. – Accidental external means – Whilst in transit by road, rail, inland-waterway, lift, elevator or air – Landslide and rockslide. • additional benefits on payment of extra premium include: • Damage to the Electrical / Electronic fittings not part of standard equipment of the vehicle. • Damage to the CNG/LPG Fuel Kit System • Liability to the paid driver in excess of that is provided by WC Act 1923. • Personal Accident cover for occupants • Legal liability to employees while traveling or driving (not as paid driver)

Basis of Premium Calculation

Indian Insurance Industry • Ist Life Insurer in India-Bombay Mutual Life Insurance Society -1870 • Ist Non Life Insurer in India-Tritan Insurance Co. Ltd – 1850 Insurance Act, 1938 • Nationalisation of Life Insurance Industry – Incorporation of LIC – 1956 • Nationalisation of General Insurance Business – GIBNA, 1972 • Opening up of Insurance Industry - IRDA Act, 1999 • Public Grievances (Ombudsman) Rules, 1998 • Regulations of IRDA • De-tariffing of Non Life (P&C) industry – January, 2007

INSURANCE MARKET GROWTH  Phase I S-Curve of Insurance Market Development

Insurance Penetration (Premiums / GDP)

Nascent Market

 

Phase II Transitional Market

India China

Phase III Fully Mature Market

    

Brazil South Korea

Economic Development of Country (GDP / Capita) Source: Swiss Re Economic Research & Consulting, Swiss Re Sigma

US Japan UK

Insurance Market Potential in India Phase Three

Criteria

Economic Strength

Regulatory Environment

Competitive Environment

Consumer Demand

Established Distribution

Source – Swiss Re Sigma

US

Phase Two

Brazil

Phase One

China

India

Effects of liberalisation on critical parameters Millions

25,000 20,000 15,000 10,000 5,000

3,197

2,573 2,338 7,595

3,707

10,504

12,275

14,425

2001

2002

2003

4,330

16,919

2000

Total Life Premium

Total Premium Volume increased by a 5-year 20% compound annual growth rate

2004

Total Nonlife Premium

20% 4.0%

16% 3.0%

12% 8%

2.3%

4%

7.6%

3.5%

2.4% 9.1%

11.7%

12.9%

2002

2003

15.7%

Insurance Density increased by a 5-year 18% compound annual growth rate

0% 2000

2001 Life Premium Per C apita

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

0.67% 0.55% 1.77%

2000

0.56%

2.15%

2001

Life Premium % GDP

Sources: Swiss Re/sigma

2004

Nonlife Premium Per C apita

0.62%

0.65%

2.59%

2.26%

2.52%

2002

2003

2004

Nonlife Premium % GDP

Insurance Penetration can be described as “embryonic” at this stage

Peer Growth Potential Comparison Total Premium Volume 2001-2004 compound annual growth rate

India

Premium per Capita 2001-2004 compound annual growth rate

20%

Brazil

Russia

Brazil

10%

20%

30%

34%

China

25%

0%

8%

Russia

33%

China

18%

India

10%

40%

25%

0%

10%

20%

30%

40%

2004 Penetration 4

High growth and low penetration

3.5 3

0.65

1.05

2.5 1.5 1 0.5

unlimited market development

1.63

2

2.21 2.53

potential. India has put in place the 2.21

1.36 0.62

0

India Brazil Russia China Life Premium % of GDP Nonlife Premium % of GDP Sources: EIU DataServices, Swiss Re/sigma

position India, Russia and China for

liberalization and regulation process to make it happen.

Insurance Penetration (% of Premium to GDP)

Market

2003

2004

2005

World

8.06

7.99

7.52

Asia

7.51

7.37

6.83

India

2.88

3.17

3.14

Steadfast growth of Industry (raising penetration levels) Insurance Penetratin

1.93

1999

2.32

2000

2.71

3.26

3.17

3.14

2.88

2001

2002

2003

Year Insurance Penetratin

2004

2005

Insurance Density (% of Premium to Total Population)

Market

2003

2004

2005

World

469.6

511.5

518.5

Asia

183.4

194.3

197.9

India

16.4

19.7

22.7

Steadfast growth of Industry (raising density levels)

Insurance Density

22.7 19.7

14.7

16.4

9.9 11.5 8.5

1999

2000

2001

2002

2003

Year Insurance Density

2004

2005

Financial Services-Still a long way to go • • • • • • • • •

Savings accounts Insurance Policies Shares and Mutual Funds General Insurance Health Insurance Credit Cards Debit Cards Small Overdrafts Entrepreneurial Credit

Figures in % of population

Source – India today

30 04 02 2.5 0.2 03 5.6 3.6 02

Financial Savings of Household Sector (% to GDP)

Item

2003-04

2004-05

2005-06

Bank Deposits

37.4

36.4

46.7

1.1

4.9

16.0

14.2

Shares & 0.1 Debenture Insurance 13.7 Funds

Non-life at a Promising Stage Gross Written Premiums

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Despite its low penetration, nonlife premiums have increased by a 14% CAGR from 1999-2004.

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The private sector companies are growing aggressively and developing new products, sales and distribution infrastructure.

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Private players have increased market share from 6% in 2002 to over 27% in 2005.

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The four state companies have also benefited from competition, streamlining operations, investing in IT technology and launching new products.

2002

Government-owned Companies Privately-owned Companies

2005

Government-owned Companies Privately-owned Companies Sources: Swiss Re/sigma * government-owned

Booming Insurance Industry Premium Growth Life India Non Life India Global

2003-04

2004-05

2005-06

18.91%

24.31%

27.78%

11.16%

12.09%

15.61%

11.71%

9.70%

4.90%

Increase in Premium Volumes Expansion of market size Increase in Premium Volumes

Total Premium ($)

4000.00 3000.00 2000.00 1000.00 0.00 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Year Life

Non Life

Total

Growing Number

No of New Policies sold (million)

Indication of furthering penetration

43.56

41.73

47.25

52.89 35.46

25.37

2002-03

28.63

26.21

2003-04

2004-05 Year

Life

Non Life

2005-06

Market Share of Private players

Market Share of Private Companies (No. of New Policies Issued)

Indication of increasing acceptance levels

16.91

10.81

7.91 3.85

10.91

8.52 5.79

3.25 2002-03

2003-04

2004-05 Year

Life

Non Life

2005-06

Growth of Unit Linked Funds UL Funds under Management ($ million)

Increased level of awareness 70000

64720.33

60000 50000 40000 30000 20000 10000 0

18818.6 0.01 664.77 2002-03

4220.77 0.48 2003-04

1.76 2004-05

5.31 2005-06

Year Total ULIP Funds

% to Total Funds

Opening up of Insurance Sector Expectations

• Increased Coverage of population - including rural

• Choice of better products – with informed decision • Economy of operations • Better returns • Service Excellence

Regulator as Developer • Shouldering the responsibility of developing nascent insurance market • Striking a right balance between developing and regulating the industry • Protection of Policy holders’ Interests – Mission of IRDA • Interests of policy holders prime objective while framing regulations

Regulatory role - consumer protection

• Insurance Advertisement and Disclosures regulations, 2000 • Protection of Policy holders’ interests regulations, 2002 • Maintenance of Minimum Solvency Margins • Introduction of cashless transactions – TPAs

Regulatory role - consumer protection

• Widening of Distribution Channels – Increased Insurance accessibility • Regulatory norms for intermediaries – Licensing of Insurance (individual) Agents – 2000 – Licensing of Corporate Agents – 2002 – Insurance Brokers – 2002

• Entry of Banks under ‘Bancassurance’ model • Mandatory Training, Pre-recruitment exam before licensing • Accreditation of Training Institutes – Upkeep of training standards for intermediaries

Regulatory role - consumer protection • Monitoring of underwriting policy through File and Use • Constitution of Grievances Redressal Cell – Indication of operational inadequacies – triggering regulatory intervention

• Committee to study existing grievances’ mechanism to formulate uniform guidelines

Development Oriented Regulations Spread of Insurance to all sections Rural and Social Sector Obligations Rural Sector

Social Sector

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Cultivators Agri labourers Rural assets Unorganised sector BPL population Persons with disabilities Informal sector

Rural and Social Sector Obligations • Life Insurers – 7,9,12,14,16 & 18% of total policies in first six years of operation as rural obligations • General Insurers – 2,3 & 5% of total gross premium in I, II and subsequent years as rural obligations • Five, Seven, Ten, Fifteen, Twenty and Twenty five thousand of lives as social sector obligations by all insurers in first six years of operation

Development Oriented Regulations Spread of Insurance through Micro Insurance • Micro Insurance Agency by agreement – A relaxation from pre licensing training/test • Local Institutions as MI agents – Helps in spread of Insurance awareness • Micro Insurance Products subject to File and Use procedure – Expected to be self supportive • Issuance of documents in vernacular languages – to reach the targeted • Simplicity of forms – Avoidance of technical jargons desired

Grievances Redressal Mechanism Ombudsman • Introduction of Insurance Ombudsman – 1998 • A quasi judicial mechanism – Empowering adjudication of disputes • Adjudication limited to personal lines of business – A limit of Rs 2 millions contract value • Award binding on Insurer

Insurance Education • • • •

Lower level of insurance awareness Insurance not part of academic curricula Market dynamics weigh on insurance education Constitution of standalone Insurance academic institution of International standards – IIRM – IIRM International School of Actuarial Sciences – Distance Education programmes

Insurance Awareness Programmes • Programmes in Radio and Television – In 11 regional languages • Publicity campaign in de tariffed scenario • Efforts to standardise policy documents, proposal forms, sales literatures • Press Releases

Role of Insurers • Simplified policy wordings – Avoidance of information asymmetry • Updated web portals – premium calculator, rates and conditions • 24 hours toll free call numbers • Implementation of advanced Technologies

Role of Insurers • Grievances Redressal cells – Constitution of committees with an independent director • Claims review committees • Introduction of on-line payments • Representatives of consumer activists, policy holders in the board

Increased Public participation • Seminars by voluntary organisations • Works shops on health insurance, Micro Insurance • Consumers’ organisations • Notices under Right to Information Act