FIRE LOP/ INDUSTRIAL ALL RISK /MEGA RISK POLICIES AND PETROCHEMICAL RISKS

1. FIRE LOP/ INDUSTRIAL ALL RISK /MEGA RISK POLICIES AND PETROCHEMICAL RISKS

2. AGENDA • FIRE COSEQUENTIAL LOSS ( LOSS OF PROFITS) POLICY • FIRE ADD-ON COVERS • INDUSTRIAL ALL RISK POLICY • MEGA RISK POLICY • PETROCHEMICAL RISKS

3. FIRE CONSEQUENTIAL LOSS (FLOP) POLICY

4. FIRECONSEQUENTIAL LOSS POLICY(LOP) • FIRE INSURANCE COVERS MATERIAL DAMAGE TO PROPERTY DUE TO THE PERILS INSURED i .e. IT DEALS WITH CAPITAL LOSS • L.O.P.INSURANCE DEALS WITH LOSS OF EARNING POWER COSEQUENT UPON DAMAGE/ DESTRUCTION TO THE CAPITAL ASSETS/ STOCKS. • THUS,SUBJECT MATTER OF LOP INSURANCE IS THE BUSINESS OF THE INSURED • ITEMS OF EXPENSES CAN BE DIVIDED INTO- 1)VARIABLE CHARGES- WHICH VARY IN PROPORTION TO THE VOLUME OF BUSINESS 2)STANDING CHARGES- FIXED IN NATURE, IRRESPECTIVE OF THE VOLUME OF BUSINESS TRANSACTED

5. CONSEQUENTIAL LOSS (FIRE)INSURANCE POLICY….contd. • DURING THE INTERRUPTION OF BUSINESS AS A CONSEQUENCE OF THE OPERATION OF THE PERIL- • VARIABLE CHARGES ARE EITHER NOT INCURRED OR GET REDUCED IN PROPORTION TO THE TURNOVER MAINTAINED • RAW MATERIALS ARE NOT CONSUMED OR CONSUMED IN PROPORTION TO THE TURNOVER MAINTAINED • LIABILITY TO PAY STANDING CHARGES CONTINUES, RESULTING IN REDUCED PROFITS OR LOSS • NET PROFIT WILL REDUCE IN PROPORTION TO THE REDUCTION IN TURNOVER • ADDITIONAL EXPENDITURE MAY HAVE TO BE INCURRED TO AVOID STOPPAGE OF BUSINESS.THIS IS CALLED INCREASED COST OF WORKING

6. TYPES OF OPERATIONAL LOP POLICIES

7. WHEN LOPPOLICYCAN BE ISSUED • There should be a material damage policy • MD proviso attaches LOP to MD policy (material damage) • Perils covered, conditions, warranties similar to MD policy • Claim under LOP Policy admitted only when liability is admitted under MD policy

8. L.O.P.JARGON • Gross Profit • Turn Over • Rate of G.P. • Working Expenses • Time Exclusion • Indemnity Period • Standing Charges • Standard Turnover • Annual Turnover

9. Definition of Specific Terms • Indemnity Period Limit--- maximum Indemnity period chosen by the Insured at the time of inception of the policy • Indemnity Period – Period during which the business is affected totally or partially arising out of the damage or destruction to the property by an insured peril • Starts from the time when the business/ production activities get affected • Ends when the activities are restored to the pre-loss situation • Standard Turnover --- Turnover during the period in the last year corresponding to the stoppage period duly adjusted for the trend of Business • Annual Turnover ----Turnover during the one year period immediately preceding the date of loss. • Net Profit--- Net profit of the financial year immediately preceding the year of loss after making due provisions for all the expenses but before tax. It relates to profit earned on the Business Turnover only and does not include income or expenditure from investments or capital items. • Gross Profit : Net profit + Insured standing charges • Rate of GP : GP/ Turnover

10. 1990 JAN APR FINANCIAL YEAR JULY OCT 1991 JAN APR STANDARD TURNOVER JULY OCT ANNUAL TURNOVER 1992 JAN APR DATE OF LOSS JULY INDEMNITY PERIOD OCT JAN 1993

11. COMPONENTS OF LOP COVER Turnover Gross Profit Working Expenses Standing Charges Net Profit

12. SPECIFIED WORKING EXPENSES • Consumption of raw materials • Consumption of utilities (net of minimum demand) • Consumption of stores/spares (variable linked to production) • Packing materials • Excise Duty • Sales/Turnover tax • Discounts/brokerage/commission • Inward/outward freight

13. SCOPE OF COVER • Loss of Net Profit --or increase in net loss caused by diminished turn-over /production in consequence of damage to the insured property resulting in interruption of business/ production activities • Loss of Standing Charges--Loss caused by having to meet fixed charges of the business that do not diminish proportionately with the fall in turnover or production • Increased Cost of Working--Increased costs incurred in attempting to maintain turnover or production under the abnormal conditions brought about by the loss/damage to the insured property

14. Increased cost of working Abnormal expenditure incurred to avert or minimise the adverse effect on the business/ production arising out of the insured peril and consequent business interruption so that loss on net profit is avoided or minimised,forEg.--- -- Overtime wages to repair damages --Hire of machinery until affected one is set right Note-- increased cost of working cannot be more then the gross profit saved during the period

15. Interruption Period - Indemnity Period LOSS time Int. P. accident I. P. I.P.L. INDEMNITY PERIOD ends, when actual T.O. reaches the same amount, as if no damage would d have occurred. e.g. - restarting requires several days - loss of market

16. SUM INSURED • ANNUAL G.P. IS MINIMUM S.I. • MINIMUM INDEMNITY PERIOD IS 3 MONTHS • MAXIMUM INDEMNITY PERIOD IS 36 MONTHS • G.P. SHOULD BE THE ESTIMATED FUTURE G.P. BASED ON TREND OF THE INDUSTRY • IF THE INDEMNITY PERIOD IS MORE THAN ONE YEAR THEN SUM INSURED WILL BE– ANNUAL GP X PERIOD OF INSURANCE • METHODS OF ARRIVING AT G.P. • DIFFERENCE METHOD TURNOVER LESS VARIABLE CHARGES = GROSS PROFIT • ADDITION METHOD NET PROFIT PLUS INSURED STANDING CHARGES = GROSS PROFIT

17. LIST OF TYPICAL STANDING CHARGES 1. Employee Salaries/Wages 2. Interest & Finance Charges 3. Repairs & Maintenance including Stores & Spare parts utilised. 4. Minimum demand charges for utilities 5.Rent, Rates & Taxes 6.Insurance Premium 7.Travelling & Conveyance 8.Communication expenses 9.Printing & Stationery 10.Advertisement & Publicity 11.Legal & Professional Charges 12.Auditors Remuneration and Director`s Fees

18. Monthly Turnover Annual Turnover Trend Standard Turnover Reduction in Turnover T.O. Reference Period Actual Turnover 1991 1992 1991 1992 1993 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 Interruption Period Indemnity Period Reference Period 12 months before the accident Indemnity Period Limited Time Date of accident

19. CLAIMS UNDER FIRE LOSS OF PROFITS POLICY Fire consequential loss policy provides cover for expenses and increased cost of working as a result of business interruption following a loss covered by the fire policy.  The claim under this policy is payable only if the liability under the Material Damage Policy is established. Indicative list of documents/information to be provided to the Surveyor/Insurer-- Claim form Books of Accounts Trends in business Details of savings in Standing charges Details of Increased cost of working

20. CLAIM SETTLEMENT UNDER FLOP POLICY Steps in the calculation methodology— Calculate the Rate of Gross Profit(G.P./TOX100) Calculate the Reduction in Turnover(STO-ATO) Claim= Rate of G.P.X Reduction in T/O Add: Additional Expenditure incurred to avoid or diminish Reduction in T/O(limited to the G.P. earned by it and if any Standing Charges are not insured then payed in proportion to N.P.+I.S.C./N.P.+T.S.C. If S/I is less than Insurable amount=G.P.R.X A.T.O then Underinsurance will apply

21. CLAIM SETTLEMENT UNDER FLOP POLICY..contd. • Example— Information available--- • G.P. insured for Rs.300000/- • Period of Indemnity=12 months • Standard Turnover =Rs.1000000/- • Actual Turnover during the period of Interruption =Rs.400000/- • Increased Cost of Working = Rs.70000/- • Reduction in T/O saved by above cost = Rs.300000/- • G.P. during previous Financial Year = Rs.300000/- • T/O during previous Financial Year = Rs.1200000/- • Annual T/O = Rs. 1600000/-

22. CLAIM SETTLEMENT UNDER FLOP POLICY..contd. Claim Working--- Step 1: G.P.R.= 300000/1200000 X100= 25% Step 2 : Reduction in T/O =1000000-400000=600000 Amount of Claim = 600000 X 25% = 150000 Increased Cost of Working limit= 300000X 25%=75000 Increased Cost of Working actually incurred =70000 Claim Working= 150000+70000= 220000 Underinsurance Check—G.P.R. X A.T.O. =1600000X25%= 400000 and S/I =300000 hence U/I will apply Claim Amount payable = 300000/400000X220000 = 165000

23. INDUSTRIAL ALL RISK POLICY (IAR)

24. INDUSTRIAL ALL RISK POLICY-IAR Salient Features – • Comprehensive, convenient and cost effective policy • Package policy of All Risk Nature. • Not a named peril policy • All perils covered except certain specific exclusions. • Tariff policy in Indian market • Eligibility – Industrial Risks having overall Sum Insured in excess of of Rs. 100 Cr. (M.D. + B.I.)at one or more locations. Note: IRDA has now permitted Insurers to file IAR Policy products for Sum Insured less than Rs.100 crs. and launch in the market after approval

25. Salient Features of IAR Policy…..contd. • Single Document Policy • Losses (MD as well as BI) due to Burglary covered. • Transit Risk inside industrial compound covered • Considerable premium saving possible due to lower rates (especially for MB cover) • Underinsurance up to 15 % is ignored • No depreciation deducted from MB loss (Total or Partial) for Limited Life Equipments. • Handsome discounts available for opting higher deductibles as well as good claims experience

26. Salient Features of IAR Policy… …….contd. • BI due to Fire & Allied perils - Compulsory. • BI due to Machinery Breakdown / Boiler Explosion / Electronic Equipment - Optional. • Compared to traditional policies, higher excess is applicable • No declaration facility available on Stocks • Insurance of Building/Plant & Machinery under IAR Policy on Reinstatement/Replacement value basis only • Stocks insured on Market Value basis

27. Scope of IAR Policy • Section I – Material Damage All Risk of physical loss/damage including --- (a)Fire & All special perils (b) Burglary (C) Machinery Breakdown (d) Boiler Explosion (e) Electronic Equipment Insurance • Section II - Business Interruption----- • Following Fire & All Special Perils – Compulsory • Following Machinery Breakdown / Boiler Explosion / Electronic Equipment - Optional

28. SCOPE-INDUSTRIAL ALL RISK POLICY BI (Fire) Machinery Insurance Fire Insurance BI (MB) optional Electronic equipment insurance Boiler insurance Burglary insurance

29. Important Exclusions under IAR Policy-Section 1 • Excluded Causes under Section I • Faulty or defective design • Defective Material or Workmanship • Inherent vice / Latent defect • Gradual deterioration / deformation / distortion • Wear and tear • Interruption of water supply, gas, electricity, fuel systems, failure of ETP systems ( Unless damage by a cause not excluded in the policy ensues and then the Insurer shall be liable only for the ensuing loss/damage)

30. Important Exclusions under IAR Policy-Section 1..contd. • Excluded Causes under Section I …..contd. • Collapse or cracking of buildings • corrosion rust extremes or changes in temperature, dampness, dryness, wet or dry, rot, fungus, shrinkage, evaporation, loss of weight, pollution, contamination, • change in colour, flavour, texture or finish, action of light, vermin, insects, marring or scratching ( Unless such loss is caused directly by Damage to the property insured by an Insured Peril) • Larceny • Acts of fraud or dishonesty • Inventory shortage, misplacement, unexplained disappearance • Impact due to floating / waterborne objects

31. Exclusions under IAR Policy-Section 1..contd. • Excluded Causes under Section I ….. contd. • Coastal or River erosion • Normal Settlement of new structures • Willful act or negligence on part of insured • Cessation of work • Delay or loss of market and other indirect losses • War, Invasion act of foreign enemy, Civil war. • Permanent or temporary dispossession resulting from nationalization commandeering or unlawful occupation • Destruction of property by order of public authority • Nuclear weapons, Ionizing radiations, contamination by radioactivity from nuclear fuel • Terrorism

32. Exclusions under IAR Policy-Section 1 Excluded Property under Section-I --Unless specifically insured, the following property is excluded - • Money, Cheques, Stamps, Bonds, Credit Cards, • Jewellery, Precious Stones, Precious Metals, • Curios, Works of Art • Goods held in trust, Documents/Manuscripts/Business Books • Computer Systems Records • Patterns / Models / Moulds • Plans, designs, explosives • Roads, Rail Lines • Dams, Reservoir, Canals, rigs, wells, tunnels, pipelines • Bridges, Docks, Jetties, Offshore Property etc. • Property in Transit other than within the Insured Premises • Property/Structures in the course of Demolition/Construction/Erection

33. Exclusions under IAR Policy-Section 2 • Special Exclusions under Section II (BI)— • Loss/damage resulting from interruption due to-- • Any restriction on reconstruction or operation imposed by the public authority • Insured’s lack of sufficient capital for reinstatement • Damage due to Mechanical / Electrical Breakdown • Damage to boilers, Turbines or any other pressure vessels • Damage to Electronic installation, computers etc. • Damage resulting from distortion or corruption of information on computer system (Unless resulting from Fire & allied perils) Note – If BI due to MB/Boiler Explosion/ Electronic Equipment is opted, exclusions 3, 4, 5 and 6 are deleted

34. MEGA RISK POLICY

35. ELIGIBILITY AND COVERAGE UNDER MEGA RISK POLICY • ELIGIBILITY CRITERIA FOR MEGA RISK Total combined Sum Insured under Property Damage and Business Interruption should be more then Rs.2500 crs. Risk Inspection report required for calculation of PML • PART A--Property damage due to – • All Risk of physical loss or damage • Machinery Breakdown • Boiler Explosion • PART B--Business interruption--- Business interruption caused due to loss covered under Property Damage Section

36. BASIS OF INDEMNITY • FOR PROPERTY (OTHER THEN STOCK & CATALYST) • Reinstatement value of the damaged property • FOR STOCK & CATALYST • Stocks : Selling price (–)Unincurred selling expenses • Stocks for specific contract : Contract price if it is higher then selling price. • Catalyst : • In Storage - Replacement cost • In Process - Actual Cash Value • Insured has the option of accepting offers from OEM provided • it does not exceed by more then 25% of the lowest available quote

37. COVERAGE UNDER PART A: PROPERTY DAMAGE SECTION 1 : AR (ALL RISKS OF PHYSICAL LOSS OR DAMAGE) This Section indemnifies the insured in respect of SUDDEN, ACCIDENTAL PHYSICAL LOSS, DESTRUCTION OR DAMAGE TO THE INSURED PROPERTY directly attributable to any cause (other than exclusions) EXCEPTED CAUSES UNDER SECTION 1-AR 1. Deliberate operation of the Insured's Plant/Machinery/ pipeline / equipment in excess of the design specification 2. Withdrawal of labour /cessation of work 3. Failure of supply of water, gas, electricity, fuel or power ( resultant loss due to any cause not excluded is payable)

38. EXCEPTED CAUSES UNDER SECTION 1-AR 4. Gradual subsidence and settlement, erosion of soil,etc. (unless loss /damage covered by policy ensues and such ensuing loss alone will be payable) 5. Fermentation, evaporation, loss of weight, contamination or change in quality (Except caused by an occurrence which is not otherwise excluded) 6. Failure, breakdown, malfunction of any mechanical or electrical or electronic machine /apparatus /equipment 7. Wear and tear, gradual deterioration, rusting, corrosion, metal fatigue, oxidation, changes in temperature/humidity, natural heating or drying 8.Short-circuiting, self heating, leakage of electrical current 9. Cost of replacing/repairing/rectifying defective materials, workmanship, design or defect in design, latent defect

39. EXCEPTED CAUSES UNDER SECTION 1-AR..contd. Note: Clause 6 to 9 above will not exclude any further destruction/damage which is covered by the terms/ conditions of the policy 10.Leakage or overflowing of the contents of any storage tank, vessel or other Container or flaring of products other than as provided 11.Loss of data, data media and records, as well as its regeneration. 12.Infidelity of employee 13. Seepage/pollution/contamination( unless caused by a cause otherwise not excluded under this policy) 14. Clean up costs other than as provided 15. Terrorism and Sabotage loss

40. EXCLUDED PROPERTY UNDER SECTION 1-AR Property in the course of construction or erection or dismantling or undergoing testing or commissioning other than as provided elsewhere under this section. Road vehicles waterborne vessels or craft, aircrafts or helicopters motor vehicles and Construction Plant and Machinery used exclusively on the insured’s premises) Land (including topsoil, backfill) runways, canals, dams, bridges, docks or tunnels Goods or property in transit, other than Transit by road of plant and/or machinery for the purpose of maintenance and general running for operational use Property which is insured by more specific policy.

41. EXCLUDED PROPERTY UNDER SECTION 1-AR..contd. Property underground other than foundations, pipelines, cabling, drains, tanks and contents thereof, utilities and related equipment. Offshore property (other than jetty facilities and oil contained in pipeline and included in the values declared). Property belonging to third parties unless specifically declared for insurance or in the insured's care custody and control and for which they are responsible. Cash, bullion, coins, cheques, securities, obligations of any kind, books of account, or other business book or records, computer records or data, manuscripts, plans, drawings, patterns or models.

42. COVERAGE UNDER PART A: PROPERTY DAMAGESECTION 2: MB (MACHINERY BREAKDOWN) This Section covers SUDDEN AND ACCIDENTAL BREAKDOWN, COLLAPSE OR RUPTURE OF PROPERTY INSURED INCLUDING PHYSICAL EXPLOSION/ IMPLOSION INVOLVING BOILERS AND/OR OTHER PRESSURE VESSELSdirectly attributable to any cause, except as provided

43. EXCEPTIONS APPLICABLE TO SECTION 2-- MB 1. Loss /damage caused by fire, chemical explosion, lightning whether direct or indirect, aircraft and other aerial devices or articles dropped there from, collapse of buildings, and theft; 2. Wastage of material, wearing out of any part of a machine caused by ordinary usage, rust, boiler scale or other deposits, corrosion or deterioration due to chemical or atmospheric conditions (Exclusion will not apply to resulting and insured accidental loss/damage ) 3. Slowly developing flaws deformation, distortion, cracks, fractures, blisters,etc. unless such defects result in damage otherwise insured under the policy 4. Loss /damage caused by the imposition of abnormal conditions resulting from testing or willful overload beyond safe limits 5. Loss of use of any machine /consequential loss other than specific coverage available under Business Interruption section.

44. EXCEPTIONS APPLICABLE TO SECTION 2-- MB…..contd. 6. Loss/damage caused by earthquake, volcanic eruption or other convulsions of nature ,subsidence, landslide, hurricane, typhoon, cyclone,, flood, inundation or escape of water from water-containing apparatus 7. Loss or damage caused by the willful act or willful neglect of the insured or his representatives. However, acts of malicious damage by employees and/or representatives of the insured are covered 8. Loss /damage by seepage or pollution( unless loss not excluded under this section ensues which would be payable) 9. The cost of removing or cleaning-up of seeping, polluting or contaminating substances 10. Loss /damage due to any faults or defects known to the insured at the time proposal and not disclosed to the insurer; or for which the manufacturer is responsible 11. Accidental damage indemnifiable under Section AR of this policy

45. EXCEPTIONS APPLICABLE TO SECTION 2– MB…..contd. 12. Loss/damage to foundations and masonry, refractory linings, exchangeable or replaceable parts and attachments,etc. cooling media, lubricants, catalysts, chemicals or other operating media. Exclusion will not be applicable when damage to these parts is part of a loss to an insured machine by a cause not excluded, and also resulting damage to the machinery insured 13. Loss of data, data media and records as well as its regeneration; 14. Loss /damage caused by flue gas or chemical explosion to boilers /pressure vessels 15. Lack of power, light, heat, steam or refrigeration unless due to sudden happening 16. Loss or damage to motor vehicles licensed for public roads, waterborne vessels, aircraft or helicopter except construction plants and machinery

46. COVERAGE UNDER PART B: BI (BUSINESS INTERRUPTION) This Section covers loss of profits due to the operation of perils covered under Sections AR and MB and indemnifies the financial loss caused by such Business Interruption .Sum Insured should not be less than the sum produced by applying the Rate of Gross profit to the Annual Turnover, otherwise Underinsurance will apply GROSS PROFIT Indemnity will be limited to loss of Gross Profit due to- (i)Reduction in Turnover and (ii) Increase in Cost of working

47. EXTENSIONS APPLICABLE TO PART B: BI Professional accountants Customers, suppliers and utilities extension Accumulated stocks In adjusting any loss, account shall be taken and an equitable allowance made if any shortage in turnover due to damage is postponed by reasons of the turnover being temporarily maintained from accumulated stocks of finished goods owned by the Insured Additional increase in cost of working

48. EXCLUSIONS APPLICABLE TO PART A & PART B War and warlike operations ,Terrorism. Confiscation, requisition, nationalization or similar act. Nuclear weapons material/ionizing radiation or contamination by radioactivity Insured’s loss as a consequence of damage to any property (other than property insured in the insured premises) resulting in the insured being unable to or prohibited by any governmental or municipal order, to obtain access to, or exit from their own premises. Policy also excludes loss originating from blockage of the port due to any cause whatsoever, resulting in the inability to use the jetty by the insured any loss/damage /consequential loss due to impact damage to jetty due to Vessels/Floating Objects.

49. PETRO CHEMICAL RISKS

50. SCOPE • Petrochemical Risks are Hydrocarbon/ Natural Gas Processing Industries. Hydrocarbons are chemicals made of carbon and hydrogen molecules- Example - CH₄- Methane C₂H6 – Ethane • Petrochemical Group of Industries include – • Petroleum Refineries • Petrochemical Plants • Fertilizer Plants • The common feature is that these Units handle highly flammable and explosive substances in large quantities • Such substances are subjected to critical Process Parameters and the PML is very high 1