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An Insurance Department Newsletter L & T Construction

PREMIUM
Volume 4, Issue 4 April 2014

D ear Readers,

Tidbits 2 In the previous issue, we presented the feature of software system developed by us in
EIP to facilitate smooth processing of insurance requirements from various ICs. This issue
Know your policy 4 would speak of something new. Having covered the risk under a policy of insurance,
we should be able to recover the losses from the insurers who should have adequate
5
financial stability and reserves to pay catastrophic losses.
Case Study
Insurers usually reinsure the risks beyond their retention capacity through an
6
arrangement of reinsurance. The insurers are responsible for payment of claims to the
Did you Know
insured. When the insurer becomes insolvent and unable to pay claims, the insured is
put to hardship and for the recovery of the losses from insurer, the insured shall have to
Quiz 7 resort to judicial remedies, which is time consuming. The insured cannot claim the losses
from the reinsurer, as there is no contract between them.
Glossary & Cartoon Corner 8 To mitigate this hardship, a condition, called cut through clause when incorporated in
an insurance policy may come to the rescue of the insured. This issue would elaborate
this further for better understanding of the said clause.
Apart from the above, this issue carries many interesting articles as usual.
Wishing all of you good days ahead from Insurance department.
Happy reading.
Warm regards

R. Jayakumar
An Insurance Department Newsletter L & T Construction

Page 2
Premium

TID BIDS
General Insurers total premium rises 12.23% in FY14:
The gross direct premium underwritten by four public sector insurers was at
Rs. 43,292.24 crore in FY14 as against Rs. 39,405.70 crore in FY13

The gross direct premium underwritten of all non-life insurance companies in India
increased 12.23% to Rs. 77,538.25 crore in the last financial year 2013-14
from Rs. 69,088.69 crore in FY13.
The gross direct premium underwritten by the private sector was at Rs.
34,246.01 crore in FY14 as against Rs. 29,682.99 crore in FY13.
The gross direct premium underwritten by four public sector insurers was at Rs.
43,292.24 crore in FY14 as against Rs. 39,405.70 crore in FY13.
The four PSU insurers include National Insurance, New India Assurance, Oriental
Insurance and United India Insurance.
Total premium income of non-life insurance companies increased by 10.6% to Rs
7,904.83 crore in March 2014.
The gross premium collection of public sector insurers rose by 7.3% year-on-year to Rs 4,422.32 crore in
March 2014.
Total premium collected by 24 private insurers increased 15.1% to Rs. 3,482.50 crore in March 2014.

Driving history, parking slot may decide motor cover cost.


Now the driving history, the colour or even the parking slot of your car
will be taken into consideration by the insurers when they determine
your motor insurance premium.

After all, it is the driver and not the vehicle that causes accidents.
Therefore with an experienced and mature driver, the chances of
accidents are lower. Moreover, an inexperienced driver is more likely
to engage the clutch than an experienced driver, which in turn results in
greater wear and tear.

But its not just about careful driving. Even your daily car parking spot (whether closed, open or roadside
parking) may have a bearing on the premium. And even the colour of the car could have a bearing on its
premium. Black cars are generally prone to accidents while white cars are more prone to thefts.

These additional factors result in a 10-15% additional to the overall premium calculation.
An Insurance Department Newsletter L & T Construction

Volume 4, Issue 4 Page 3

Errors and omissions Insurance for Sony TV.

One of the General insurance companies has insured Sony Television for errors and omissions insurance.
The insurer has provided insurance cover for loss arising out of covered Media Activities that include
gathering, recording or collection of matter in the covered media, distribution, production, exhibition of
covered media.

The policy covers liability arising out of defamation copyright infringement, trademark infringement,
invasion of privacy, emotional distress, misappropriation (IPR), excluding patents/trademarks, plagiarism,
negligence, false arrest, detention or imprisonment.

Complaints against life insurers rise, non-life dip


Complaints from life insurance policyholders grew 9.2 per cent to 3.4 lakh in 2012-13 compared with
3.09 lakh in the previous year, according to an IRDA report. Of all the complaints received during FY13,
50 per cent relate to unfair business practices followed by life insurers.

The nature of complaints includes malpractices, misappropriation of premiums, single premium policy
issued as annual premium policy, difference in promised and actual features in products, non-refund of
premium on policies cancelled during the free-look period, tampering or forgery of proposal forms and
alteration in policy tenure without consent.

The reason why grievances arise in insurance is because information flow is not symmetric across people.
Customers may not know the entire thing that is being given to them. IRDA is making all out efforts for
improving awareness of insurance that would address these issues of mis selling.
An Insurance Department Newsletter L & T Construction

Page 4 KNOW YOUR POLICY Premium

Insurance Protection against Insurers


Cut-Through Provisions in Reinsurance Agreements
A reinsurance agreement is a contract of indemnity between a ceding
insurer (i.e., the direct insurer) and a reinsurer. The reinsurer and the
ceding insurer enjoy privity of contracta contractual relationship
between two parties that is recognized by law. Normally, entities that are
not parties to the reinsurance agreement may not enforce rights under the
agreement because these non-parties do not enjoy privity of contract.
Even the insured may not enforce any portion of the reinsurance
agreement because it does not enjoy privity of contract with the reinsurer
or the ceding insurer under the agreement. A "cut-through" provision, however, changes this relationship.

A cut-through provision allows a party not in privity with the reinsurer to have rights against the reinsurer
under the reinsurance agreement. These cut-through rights generally are limited and are triggered only by
specific events enumerated in the cut-through provision. Cut-through provisions may take the form of a
specific clause or an endorsement attached to the reinsurance agreement. A cut-through clause is usually
employed where the ceding company has an insufficient financial rating to attract large commercial
policyholders. The clause applies when the ceding company becomes insolvent, a time when the direct
insured most needs the security. It is triggered on the ceding insurer's default in payment, insolvency, or
upon entry of a liquidation or rehabilitation order.

A cut-through endorsement is a separate agreement between the reinsurer and the direct insured that
becomes a part of the original reinsurance agreement. Like the cut-through clause, a cut-through
endorsement usually applies when the ceding insurer becomes insolvent. It can be used in other situations,
however, such as in a fronting arrangement, where the reinsurer is not licensed in a particular jurisdiction
and intends to retain all of the risk from the original policy.

Whether the reinsurance agreement contains a cut-through clause or endorsement, a reinsurer may be
subjected to duplicate liability. A cut-through provision often makes the underlying insured a beneficiary
under the contract. Thus, a reinsurer usually will draft the cut-through provision so that when the reinsurer
makes payments to a third-party, it will not be required to make payments to the reinsured or to a
statutory receiver.

Why Use a Cut-Through Provision?


From an insured's perspective, a cut-through provision provides security and comfort where the only
available insurer is not as financially sound as one would like. It avoids the risks associated with insurance
insolvency (assuming the reinsurer remains solvent), including having to file claims with state guarantee
funds and/or with the insurer's insolvent estate. It also allows the insured to have more control over the real
insurer interest in cases where the administration and claims handling is provided by the reinsurer.

From a ceding insurer's perspective, a cut-through provision is useful where the ceding insurer lacks the
financial standing to attract large commercial customers. The reinsurer bolsters the ceding insurer by
providing a guaranty of payment, which enables the ceding insurer to market itself to large commercial
risks. The reinsurer benefits from the increased ceded premiums, fees, and market penetration.
Contd
An Insurance Department Newsletter L & T Construction

Volume 4, Issue 4 Page 5

The insured benefits by gaining a primary right to the reinsurance upon the triggering event, most often the
cedent's insolvency, without which the insured becomes just another policyholder creditor of the ceding
insurer's estate.

From a reinsurer's perspective, a cut-through provision allows a reinsurer to do business with its clients in
markets where it is not licensed. The ceding insurer acts on the reinsurer's behalf by issuing the underlying
insurance policies consistent with local regulatory requirements, but the reinsurer administers the insurance
program, including the handling and payment of claims. A cut-through provision also gives a reinsurer the
opportunity to assist a new ceding company that has not yet developed a sufficient financial rating to do
business, thereby developing a client relationship for future reinsurance business.

CASE STUDY
Insurer cannot reject claim under add on Insurance to
Credit Card
The Nagpur District Consumer Disputes Redressal Forum has held an insurance
company guilty of default in service and has ordered to pay Rs 2 lakh as
compensation to the insured. The forum ordered a compensation in an interesting
case where the insurance was offered as an add on to a credit card and the
insurer later refused to pay compensation. The Forum ordered the insurance
company to pay Rs 2 lakh along with 9 per cent interest from the date of
repudiation to the actual payment of the claim.
According to the applicant, Sneha Jambhulkar widow of Kishor Jambhulkar, the
comprehensive insurance cover was provided on an ICICI credit card taken by Kishor. Kishor passed away
in a road accident on May 25, 2001. Sneha subsequently approached the ICICI Bank with a death
claim. The bank directed her to submit relevant papers to the Divisional Manager, National Insurance
Company (NIC) Kalyan. The NIC in turn forwarded the papers to Medicare Foundation Ltd, Andheri,
Mumbai. Sneha and her son Mihir waited for settlement of the claim, but neither the ICICI Bank nor the NIC
responded, the complainant alleged. She even submitted chemical analysis report (dated July 10, 2001)
along with report of forensic laboratory. Both the reports had clearly stated that there was no poison or
alcohol in the viscera. Despite these reports a fresh clarification was sought from the Government Medical
College, Nagpur.
The complainant charged ICICI Bank and NIC with deficiency in service and causing undue mental
harassment. None of the respondents "" the ICICI Bank, Civil Lines Nagpur and Medicare Foundation ""
bothered to attend the proceedings despite being served with a notice. The insurance company filed its
reply challenging the jurisdiction of the forum. It claimed that the post-mortem report suggested that small
amount of alcohol was present and the deceased Kishor Jambhulkar was under the influence of liquor and as
such his accidental death was not covered under the death policy. The National Insurance Company further
denied that the deceased Kishor was a credit card holder of ICICI Bank. After hearing the counsel for the
parties and perusing the record the Forum directed the National Insurance to settle the claim of the
complainant within 30 days.
An Insurance Department Newsletter L & T Construction

Page 6
Premium

The project insurance policies can be extended to cover Maintenance


visits.
During the Maintenance Period this insurance shall cover solely loss of or damage to the contract works
caused by the insured contractor(s) in the course of the operations carried out for the purpose of complying
with the obligations under the maintenance provisions of the contract.
This cover should be granted at the inception of the policy only. It cannot be granted just prior to
commencement of maintenance period. The cover can be granted for any period irrespective of policy
period.

Please answer below:


1) Engineering policy extension confirmation should be only through EIP =
True / False.
2) In a particular B&F Project, the original policy expired on 30th April, 2014
and extension of the CAR policy is pending for Clients approval. There
was a major fire accident on 14th May, 2014 at the project site and loss
amount was to the tune of Rs. 1.50 Crores. The extension of the CAR Policy
was sought by the Insured (XYZ Co., ) after the fire accident.
A) Whether the Insurer will extend the CAR Policy?
B) To extend the CAR Policy, what is the defence available to the Insured?
C) If, the Insurer extends the validity of the CAR Policy, whether the claim is payable under the
Policy,
D) For the claim to be admissible under the CAR policy what a prudent insured should have done
before the expiry of the policy period.

Answers to Issue 3 - Quiz

1) TPL Cover is not compulsory to run a Motor Vehicle on a Public Road = YES / NO

Cntd...
An Insurance Department Newsletter L & T Construction

Volume 4, Issue 4 Page 7

Answers to Issue 3 - Quiz

2) If the Project works under an EAR Policy is not completed within the policy period, the EAR policy has to
be extended before expiry of the policy

3) Consequential Losses are not payable under EAR / SCE / MCE Policies = Yes / No

4) For increase in the sum insured under an EAR Policy, prem. has to be paid on the increase in value from
the Commencement date of the Policy.

Winners of Quiz -
Winners of Quiz - Vol-
Vol-4 Issue-
4 Issue-3

Mr. M. Prabu - Indirect Taxes

Mr. B Kishore Kumar - TI Mr. S. Satya Narayana - B&F

Readers are requested to send their answers to insurance@lntecc.com /pkandiban@lntecc.com along with their PS Number on
or before 31st May 2014. Correct answers for the quiz and details of the winner will be published in next issue .
An Insurance Department Newsletter L & T Construction

Page 8 Premium

Ballast

Material carried in vessel to ensure stability when the vessel is without any
cargo.

Barges

Smaller size Vessels for carriage of cargo from port to port-most of them
used for carrying bulk cargo-some used for carriage from shore to ship.
They are either dumb or power driven. They have the risk of capsizing
during inclement weather.

B/L

Bill of Lading. A bill of lading is a receipt signed on behalf of the ocean


carrier, indicating in what apparent order and condition the goods have
been received on board. It is not necessarily the complete contract of
carriage of goods but is usually the best evidence of the contract. It is also a
document of title and thus a document of transfer.

Cartoon Corner

Readers feedback/suggestions can be send to insurance@lntecc.com/ pkandiban@lntecc.com


Disclaimer: This Newsletter is a forum to share information/experience by the Insurance Dept. within the L&T Group. The
views expressed in this Newsletter are not necessarily those of the Company.