Nowadays, many companies are insuring plant and machinery or stocks looking at the lowest premiums without considering coverages or clauses included in the Factory Insurance Policy. This can be a big mistake. There are many add-on covers which are useful for specific industries and the inclusion of such covers is of paramount importance.
It is said that a Factory Insurance Policy is only as good as the detailed coverages it has. While you are rest assured that you have insured your assets, any oversight in terms of clauses and absence of add-on covers can cost you dearly when a claim arises.
Thus, purchasing a comprehensive Plant and Machinery Insurance Policy with specific add-on covers is very important and might save you from huge losses when a your factory insurance claim arises.
This article will give comprehensive overview of the various add-on covers that can be opted for under a Factory and Warehouse Insurance Policy and a Fire Insurance Policy.
Removal of Debris Cover (in excess of 1% of Claim amount)
Removal of Debris Cover provides cover for expenses incurred on removal of debris from the Insured Premises which has been damaged due to an insured peril such as fire.
A Standard Fire Insurance Policy has an in-built Removal of Debris Cover up to 1% of claim amount (not Policy Sum Insured) and if the Insured wishes to opt for Removal of Debris Expenses in excess of 1% of Claim amount, he can opt for the Removal of Debris Add-On Cover.
The maximum permissible Sum Insured for Removal of Debris cover can be upto 10% of the Policy Sum Insured.
Removal of Debris Extension pays the following expenses:
- Removal of Debris from the premises of the Insured
- Dismantling or Demolishing expenses
- Shoring up or Propping Up expenses
Debris Removal Expenses can be substantial and hence Removal of Debris Add-On COver is a very important add-on cover to include in factory and warehouse insurance policies.
Architects, Surveyors and Consultant’s Fees (in excess of 1% of Claim amount)
A Standard Fire and Special Perils Insurance Policy automatically covers Architects, Surveyors and Consultant’s fees up to 3% of the claim amount (not % of Sum Insured).
An Architects, Surveyors and Consultant’s Fees Extension will cover expenses in excess of 3% of Claim amount.
Impact Damage due to Insured’s own Rail/Road vehicles, Forklifts, Cranes
The add-on cover of Impact Damage due to Insured’s own Rail/Road vehicles, Forklifts, Cranes will pay for damage to the Insured Property on account of impact from Insured’s own Rail/Road Vehicles, Forklifts, Cranes, etc. Impact Damage by third party vehicles is covered by default in a fire insurance policy but if the damage has taken place on account of the Insured’s own vehicles, then the same will be covered under this extension
In majority of the cases, such damages take place at the work site when the overhead cranes are taking the load from one place to another and because of some accident the articles are dropped.
In such a situation, there is likely to be damage to the property on which the article falls. Now, if the Insured opts for the add-on cover of Impact Damage due to Insured’s own Rail/Road vehicles, Forklifts, Cranes, it will cover all such loss or damage to the property, which has taken place because of this use of insured’s own vehicles.
Pls note that Add-On Cover of Impact Damage due to Insured’s own Rail/Road vehicles, Forklifts, Cranes will not cover damage to the article which is dropped. It will only cover damage to the property which is damaged by the article which is dropped.
The Sum Insured for the add-on cover of Impact Damage due to Insured’s own Rail/Road vehicles, Forklifts, Cranes etc will be Policy Sum Insured.
Nowadays, Impact Damage due to Insured’s own Rail/Road vehicles, Forklifts, Cranes add-on cover is given free of cost upto a Sum Insured of Rs5 crores under a Fire Insurance Policy and additional premium is charged for a Sum Insured of over and about Rs5 crores at a rate of 5% of the Policy Rate.
Shutdown and Startup Expenses
The add-on cover pays for shutdown and the startup expenses that need to be incurred by the Insured Party following a loss due to an Insured Peril.
In many factories, once the loss is admitted and machinery is repaired, significant expenses need to be incurred in restarting the plant. These expenses are usually very high in case of chemical plants, petrochemical refineries, or thermal power plants if some critical machinery or boiler is damaged.
The Insured will need to incur some additional costs to restart which will be covered under the Startup and Shutdown Expenses Cover.
Shutdown expenses are incurred usually in case of petrochemical plants or chemical plants which use hydrocarbons or hazardous chemicals.
In case of a petrochemical plant, if there is a loss or damage to one unit, the entire plant will need to be shutdown. Shutting down entire plant will entail significant shutdown expenses such as burning the entire inflammable material which are there in vessels and in the pipeline at a significant cost before the Insured can undertake a safe shutdown of the plant.
This cost is again payable under the policy under the add-on cover of Start Up and Shutdown Expenses.
Omission to Insure, Additions, Alterations or Extensions
Omission to Insure, Additions, Alterations or Extensions is a very important extension for Factory Insurance Policy. This extension covers fixed assets such as building, machinery, plant or other contents which the insured may erect or acquire during the currency of policy. Inventory stock is not covered under this extension.
So, those fixed assets which have come up during the policy period and which have not been added to the Policy, get automatically insured under the omission to insure, addition, alteration, or extensions add-on cover, provided the Insured has paid additional premium to include this add-on cover.
If a loss takes place during the policy period, the damage to these newly constructed assets will be covered under the add-on cover of omission to insure, addition, alteration, or extensions.
In order to opt for this extension, the insured has to pay a deposit premium of 5% at the policy rate.
There are 3 important conditions under the omission to insure, addition, alteration, or extensions
- The condition states that the insured shall pay a deposit premium of 5% at the policy rate which shall be refundable if there is no addition. This means that the additional premium paid for omission to insure, addition, alteration, or extensions add-on cover can be refunded if the insured declares that he has not made any additions during the entire policy period. So, this deposit premium can be refunded.
- Another condition is that any new additions to fixed assets, ie. building machinery, not specifically included during the currency of the policy should be declared at the end of the Policy Period and suitable additional premium on pro rata basis has to be paid.
This condition says that the insured is supposed to declare whatever additions he has made during the policy period at the end of the Policy Period.
And, if the additions to fixed assets are found to be more than 5% of Policy Sum Insured, the Insured will have to pay additional premium to the Insurance Company.
This provision works vice versa also. If the Insured has added only 2% of Policy Sum Insured to fixed assets during the Policy Period, then remaining 3% premium shall be a refunded to the client at the end of the Policy Period.
- The final condition under the omission to insure, addition, alteration, or extensions add-on cover states that if the insured fails to declare additions to fixed assets within 30 days of Policy Expiry, then no refund is to be given to the Insured by the Insurance Company.
Deterioration of Stocks in Cold Storage Premises due to Accidental Power Failure at the Premises of Power Supply Station
Consider an example where some potato stocks are stored at a specific temperature in an Insured Warehouse and there is an accidental power failure at the premises of the power supply station because of an Insured Peril such as fire, flood, earthquake etc. As a result, the refrigeration plant at the Insured Premises stops working leading to a rise in temperature in cold storage block damaging the potato stocks.
Such loss due to stock damage will be payable if the Insured opts for the add on cover of Deterioration of Stocks in Cold Storage Premises due to Accidental Power Failure at the Premises of Power Supply Station
Note, that this add-on cover will only pay for the loss if the Insured has opted for the peril under the base fire insurance policy.
For eg: If the Insured does not opt for the Earthquake cover under the fire policy, and there is a damage to supply station due to earthquake resulting in interruption of power supply, the loss is not payable even if the Insured has opted for the add-on cover of Deterioration of Stocks in Cold Storage Premises due to Accidental Power Failure at the Premises of Power Supply Station.
Another important point Cover is that we have to declare the entire sum insured of the stock to opt for this add-on cover. There is no choice to cover partial sum insured for the add-on cover.
Deterioration of Stock Add-On Cover is a very important cover for factory and warehouse insurance Policy where the stocks have to be stored in a temperature-controlled environment.
Deterioration of Stock in Cold Storage Premises due to Change in Temperature by Damage To Cold Storage Machinery
This is another scenario where the cold storage machinery is damaged due to operation of an insured peril. Here also, there is a possibility of change in the temperature because cold storage machinery is itself damaged due to operation of an insured peril.
So, an Insured Peril has to operate for this add-on cover to trigger.
For example, if the refrigeration plant and machinery is damaged because of floods resulting into damage to stocks, it will be payable under this add-on cover.
Spoilage Material Damage Cover
Spoilage Material Damage Cover is a very important Add-On Cover.
It covers.
- Spoilage Material Damage Cover gives indemnity to the Insured in respect of loss of the stocks in process AND
- it also covers damage to machinery, container and equipment in which this process is going on, including the cost of removal of debris and cleaning of machinery and/or container.
This add-on cover is thus a comprehensive package cover because it pays for the stocks are damaged and it also pays for damage to machinery and equipment.
Spoilage Material Damage Add-On Cover pays for loss or damage by spoilage from retardation or interruption of cessation of any production process due to operation of an insured peril.
This means that if the production process is stopped due to operation of an insured peril, the loss or damage to Stocks-In-Process along with the damage to damage to machinery, container and equipment in which this process is going on, including the cost of removal of debris and cleaning of machinery and/or container will be payable under the Spoilage Material Damage add-on cover.
So, this add-on cover is very comprehensive because it covers loss not only due to failure of electricity but it will also cover losses due to operation of any insured peril because of which the production process is stopped.
Consider an example of a chemical plant where some process is going on and there is a failure of electricity because of earthquake or flooding or because of any insured peril resulting in plant shutdown.
Now, since the batch process was going on and the plant had to be suddenly shut down, the production process also must be stopped which will result in deterioration of stocks in process. In addition to damage to stocks in process, sometimes the equipment is also damaged because of sudden stoppage of the machinery. The Spoilage Material Damage Cover will pay for the loss or damage to Stocks in Process, machinery, equipment containers etc. The add on cover will also pay for debris removal expenses and expenses for cleaning of machinery.
What is the Sum Insured under Spoilage Material Damage Add-On Cover in a Fire Insurance Policy?
Note, that it is compulsory to declare the value for both: the stock in process as well as production machinery for the purpose of calculating the Sum Insured under the Spoilage Material Damage Add-On Cover as per the fire insurance policy conditions.
We cannot declare the sum insured only for the stock in process but we have to cover the machinery also while declaring the sum insured for Spoilage Material Damage Add-On cover, otherwise it will attract underinsurance at the time of claim.
Leakage and Contamination Cover
Leakage and Contamination Cover is another important add-on cover in a factory insurance policy in India.
This add-on cover is applicable only for Oil and Chemicals stored in Tanks at the Insured Premises. The Insured cannot take leakage and contamination cover for plant and machinery or buildings.
Leakage and Contamination Extension pays for the Loss of Oil OR Chemical due to Accidental Leakage or Contamination. Under leakage and contamination cover, the Insured has an option to choose to cover accidental leakage OR to cover accidental leakage and contamination both together
Consider an example where there is a leakage in the storage tank. The Oil or Chemicals will spill over and there’s a physical loss of oil or chemicals. This can result in heavy losses as the chemicals are very costly.
This loss will be paid by the Insurance Company if the Insured has opted for Leakage and Contamination Cover.
Note that the leakage and contamination cover will cover leakage and contamination losses by accidental means only.
Consider an example, where there are two tanks which are interconnected with a pipeline. Now, there is accidental damage to the interconnecting pipeline and the pipeline starts leaking.
The entire material will leak in just 3-4 hours and it will be a loss to the insured, which can be covered only under the Leakage and Contamination add-on cover.
Similarly, this extension also pays for loss or damage due to accidental contamination in addition to loss or damage due to accidental leakage.
If 2 chemicals mix by accidental means, it will result in contamination of the entire stock of oil or chemicals resulting in heavy losses for the Insured as the stock cannot be used and has to be disposed.
In such case, the Insurance Company will pay for the Contamination losses if the Insured has opted for Leakage and Contamination Extension covering losses by Accidental Leakage and Contamination.
Note that in order to make a contamination claim under Leakage and Contamination Cover, Contamination has to happen due to an unintentional error by a third-party contractor. If contamination is done intentionally, claim is not payable, but if contamination occurs due to an unintentional error by a third-party contractor’s employee, claim will be payable. If the contamination happens by an Insured’s Employee, the claim is not payable even if it is an unintentional error on part of the employee.
Loss of Rent Cover
Loss of Rent is a very important Add-on Cover in a Fire Insurance which indemnifies the insured against loss of actual monthly rent.
Consider a case where the insured premises is given on rent and there is a fire loss or loss due to any insured peril covered under the fire insurance policy because of which the insured premises becomes unfit for occupation. As a result, the tenant will move to some other premises and the insured will lose the rental income till the time the insured property is repaired.
If the repairing of the insured building takes 6 months, the insured will lose rental income for 6 months. In such a situation, the Loss of Rent Add-On Cover will pay the actual amount of rent which is lost till the time the Insured Property is repaired.
The maximum duration limit under the Loss of Rent Add-On Cover is 36 months or 3 years. Loss of Rent Add-On Cover is very important for insuring properties such as big buildings, office premises where offices are given on rent.
The Insured is supposed to define 2 things for the Loss of Rent Cover,
- The sum insured for this add-on cover
- Duration for the Loss of Rent Add- On Cover
Now another important point is that the sum insured under the Loss of Rent Cover is not on first loss basis.
Consider an example. If loss of rent is covered for 12 months for a sum insured of Rs40 lakhs, and if the property remains unfit for 4 months, then the insurance company shall be liable to pay ACTUAL loss of rent subject to maximum of 40* 4/12 = Rs13.33 lakhs.
However, if the ACTUAL monthly rent is Rs4 lakhs, and the property remains unfit for occupation for 4 months, the Insured party loses Rs4 lakhs*4 = Rs16 lakhs in rental income. The Insured Party actually loses Rs16 lakhs.
Since the monthly rent Is Rs4 lakhs, the Sum Insured for the Loss of Rent Add-On Cover for an indemnity period of 12 months should be Rs4 lakhs * 12 = Rs48 lakhs.
But since the Insured has just declared Rs40 lakhs as Sum Insured which is not adequate, the Insured will be compensated only for Rs13.33 lakhs instead of Rs16 lakhs.
Also, note that this extension does not provide indemnity in case Reinstatement of the Property is delayed/ prevented due to government regulations or due to insured’s own financial limitations. If the reinstatement of the property is delayed due to these reasons, then loss of rent will not be paid for the period for which the reinstatement of property was delayed either due to government regulations or due to insured’s own financial limitations.
Additional Rent for Alternate Accommodation.
Additional Rent for Alternate Accommodation is also a very important add-on cover applicable for non-manufacturing industries only.
So, what does the add-on cover of Additional Rent for Alternate Accommodation pay?
Consider a case where there is a property loss due to an insured peril and the premises becomes unfit for occupation.
In such a situation, the occupant will look for another premises to continue his non-industrial business activity. For eg, If there is an architect’s office or lawyer’s office and there’s a fire loss in the office premises, the occupants will look for office premises in nearby areas and shift the business activity to the nearby premises.
Now, in that case, there is a possibility that the occupant may not get the new premises at the same rent, which they were paying for the old premises.
So, in that case, if there is a difference in rent, for eg: if the occupant was paying Rs20,000 for the old premises and he got the new premises at Rs40,000, the add-on cover of Additional Rent for Alternate Accommodation will pay the difference of Rs20,000 a month.
Indemnity period under the add-on cover of Additional Rent for Alternate Accommodation is also very important and it is limited to 3 years. It cannot be given for more than 3 years.
Now another scenario is that if the premises is owned (and not rented) by the insured, what will be the additional rent payable under the Additional Rent for Alternate Accommodation add-on cover and the insured is not paying any rent?
In such a situation, the surveyor will calculate notional rent of the owned premises, which is the insured’s owned building. The insured is not paying any rent, but notional rent shall be calculated and the insured will be get only the additional amount or the difference amount as rent for alternative accommodation.
If the notional rent is Rs40,000/month and if the insured shifts to another premises where he’s paying Rs50,000/month, the Insured will only get the difference of Rs10,000 and not entire Rs60,000.
Molten Metal Spillage Cover
Molten Metal Spillage Add-On Cover is applicable mainly to steel plants or glass manufacturing industries which deal with molten metal.
So, Molten Metal Spillage Extension covers Loss or Damage to Insured Property due to spillage of Molten Metal.
What will happen if the molten metal is a spilled over? In such a situation there is every possibility of damage to nearby property due to spillage.
But note that Molten Metal Spillage Cover does not pay for the loss of molten metal itself. Loss of Molten metal is unrecoverable.
Molten Metal Spillage Cover will pay for any damage to nearby property, which will get burnt or damaged due to spillage of molten metal, that will be paid.
In a steel industry, there have been multiple losses where the nearby expensive machines, buildings or electricals are damaged due to spillage of molten metal or because of falling of ladle which carries molten metal.
Note that Business Interruption (BI) Policy will not pay the loss due to spillage of molten metal even if the base fire insurance policy has the Molten Metal Spillage Cover.
In order to include loss due to spillage of molten metal under the Business Interruption Policy, the Insured will have to take a separate Business Interruption loss limit including molten metal spillage cover.
So, there are many nuances to a constructing a comprehensive fire insurance policy. There is no one size fits all approach to factory insurance or fire insurance policies and it is extremely important to take the assistance of an experienced insurance broker while purchasing your fire insurance for factory. If you are looking to purchase a fire insurance policy, you can contact us at support@qian.co.in or 022-22044989 or fill this Contact Form.
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