IC 74 Liability Insurance

IC 74 LIABILITY INSURANCE
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CHAPTER 1
INTRODUCTION TO LIABILITY INSURANCE
Chapter Introduction
This chapter provides explanation on what is liability and how it is covered

under insurance. It also will give you an insight into the historical background of
liability insurance and also discusses the basic principles of liability insurance,
its scope and how it is different from other forms of insurances
Learning Outcomes
A. Liability insurance and its historical background

B. Basic principles of insurance and their applicability for liability insurance
C. Scope and special features of liability insurance
2 IC-74 LIABILITY INSURANCE

LIABILITY INSURANCE AND ITS HISTORICAL BACKGROUND CHAPTER 1
Look at this Scenario
In the increasingly complex conditions of modern life, accidents resulting in

bodily injuries or damage to property have become almost inevitable in each
area of life. Even in a business where everything is perfect, there is always a
chance of accident which can happen to a visitor in the company premises or to
any employee of the business. Furthermore, the growing consciousness among
the members of the public of their legal rights and remedies has led to recourse
to litigation to fix the liability on the negligent person and claim damages.
Court decisions, too, from time to time, have identified new areas of legal
liabilities. All these developments have influenced the growth of public
liability insurance in a variety of ways to provide for the necessary
protection.
With the liability insurance cover, an insured can be relaxed knowing that if any
untoward incident happens, resulting third party damages can be compensated
under the insurance.
A. Liability insurance and its historical background
1. Legal liability
Definition
Dictionary meaning of the term ‘liability’ is ‘responsibility’. The term ‘legal

liability’ connotes specific responsibilities and obligations which can be
enforced by law.
In simple terms, legal liability is the legal responsibility of a person to pay

compensation for any damages incurred. Legal liabilities are usually determined
by the court even if they are settled mutually among the parties outside the
court.
2. Classification of legal liability
Legal liability may be classified into two categories.
a) Criminal liability: It is enforced by the State, resulting into punishment

in the form of fine or imprisonment or both, and
b) Civil liability: Here action is brought by one party against another and
dealt with according to law, resulting in payment of damages or
compensation to the aggrieved party.
Insurance coverage is provided only for civil liability claims. Any liability arising
out of criminal act cannot be covered under insurance.
IC-74 LIABILITY INSURANCE 3

CHAPTER 1 LIABILITY INSURANCE AND ITS HISTORICAL BACKGROUND
3. Civil liability
a) It may arise under common law which may be defined as a body of law
Consisting of past court decisions, customs and usages recognized by
courts.
Example
A person may be liable to pay damages to another person under common law for
negligently causing bodily injuries and/or property damage.
b) Civil liability may also arise under statutory law, i.e. under an Act of
Parliament.
Example
Under Workmen’s Compensation Act 1923, the employer, irrespective of his

negligence, may be liable to his employee who meets with an accident
whilst at work.
Example
Under Public Liability Insurance Act 1991, insured owner handling hazardous
substances has a ‘no fault’ liability (liability irrespective of negligence) for
accidents occurring during such handling.
c) Thirdly, civil liability may also arise under a contract between two
parties.
Example
A builder has made a contract with the owner to complete his building within a
stipulated period. If the contractor fails to complete the building on time, then
he has a civil liability to the owner.
4. Liability insurance
It can be classified into two types based on the category of liability covered:
a) Insurance covering Statutory liability i.e. liability defined by a specific

law e.g. Workmen’s Compensation Act, Motor Vehicle Act, Indian
Steamships Act, Public Liability Act etc. and

b) Insurance covering Tort liability i.e. common law judgments e.g. public
liability, professional liability, product liability etc.
Liability insurance is more commonly classified as:
i. Property and casualty liability i.e. acts of negligence resulting in loss or

damage to property or death or injury of third party, or
ii. Financial liability i.e. negligence resulting in financial losses to third

parties e.g. professional liabilities, directors and officers liabilities etc.
The purpose of liability insurance is to provide indemnity to the insured in

respect of the financial consequence of legal liabilities. The damages or
compensation may become payable whenever any such liability arises under the
law.
Example
Rajat , while driving his father’s car, hit Jyoti who was crossing the road at that
time. Rajat has a public liability for injuries caused to Jyoti under common law.
It was Rajat’s duty of to take care of the public while driving. He breached that
duty and hit Jyoti, who can file a lawsuit against him for damages.
Moreover, as the car was owned by Rajat’s father, he also has a statutory
liability to Jyoti under the Motor Vehicles Act. According to this Act, the owner
of the vehicle is responsible for any damages caused by his vehicle.
Therefore, through this example, it is clear that Rajat was liable to Jyoti under
common law due to not following his public duty properly and at the same time,
his father was also liable for this act under statutory law even when he was not
personally involved in this act.
5. Historical background of liability insurance
Public liability insurance first originated in the UK in 1875, when the first policy
was issued to cover liability to third parties arising out of the use of horse
driven vehicles. By the year 1876, Boiler policies issued by the engineering
offices had begun to include an indemnity for damage to surrounding property.
This was followed by third party (lift) policies which were issued in 1888.
Thereafter, builders and contractors began to demand this kind of insurance
protection.
Employers’ liability insurance originated as a direct result of the Employer’s

Liability Act, 1880, and the Workmen’s Compensation Act, 1897. Both these
statutes imposed a liability on employers in respect of accidents to their
employees whilst at work.

CHAPTER 1 LIABILITY INSURANCE AND ITS HISTORICAL BACKGROUND
The Employers’ Liability Assurance Corporation Ltd founded in 1880 was the
first company to transact this business. With the passing of the Workmen’s
Compensation Act, 1906, many of the fire insurance companies entered the
field of employer’s liability insurance. The Accident Offices Association also
played an important part in the development of the business, particularly in the
matter of rating.
The passing of the Employers’ Liability Act, 1880 indirectly created a demand
for public liability (general) policies also the act highlighted the fact that
employers had potential liabilities towards third parties as well. As a result,
general public liability policies came into effect. Various legal decisions led to
the development of property owners’ indemnities, school authorities’
indemnities , sportsmen’s indemnities for public liability risks etc.
Professional indemnities began to be offered in the early period of the 20th

century. The origin of products liability insurance may be traced to the same
period when general public liability insurance policies were extended to cover
food and beverage risks for hotels and dermatitis claims in respect of furs and
woollen clothing.
The National Insurance (Industrial injuries) Act, 1946, was passed following the
Beveridge report in 1942. Beveridge report recommended the inclusion of
provision for industrial accident or disease within a unified social insurance
scheme by replacing the scheme of the Workmen’s Compensation Act. This new
Act repealed the earlier statutes like the Employer’s Liability Act, 1880 and the
Workmen’s Compensation Act, 1906, with the result the workmen’s
compensation business could no longer be transacted by commercial insurers.
Employers, however, still remained liable in damages under common law for
employment accidents and the necessary cover was provided by insurers under
employers’ liability policies.
In course of time there was a steady increase in common law claims against the
employers and a need was felt for compulsory insurance. The Employers’
Liability (Compulsory Insurance) Act, 1969 became operative from 1st January,
1972. This Act requires every employer carrying on business in Great Britain to
take insurance coverage from an authorised insurer against liability for bodily
injury or disease sustained by his employees and arising out of in the course of
their employment. The Act further provides that a fixed amount of insurance
coverage can be taken for claims relating to any one or more of the employees
arising out of any one occurrence.

6. Liability insurance in India
In India, the passing of Workmen’s Compensation Act, 1923, and the Motor
Vehicles Act, 1939, had a significant effect on the origin and growth of
employer’s liability insurance and public liability insurance respectively - The
Motor Vehicles Act 1939 introduced motor third party insurance on a compulsory
basis and helped to emphasise the need for protection of public liability risks in
other areas of economic activities.
The Bhopal tragedy in 1984 brought into focus new hazards to life and property
and generated an increasing demand for public liability insurance. Other
contributory factors for the demand were increasing public awareness of legal
rights and remedies, public interest litigation and judicial activism.
Another factor responsible for the growth of public liability insurance is

the enactment of several laws e.g. The Environment Protection Act, 1986,
Public Liability Insurance Act, 1991 etc. The Consumer Protection Act, 1986,
which includes medical services in its scope, has influenced the growth of
professional indemnities for doctors and medical establishments.
Example
A person died during his hernia operation due to the medical practitioner’s fault
when performing his surgery. The deceased person’s family sued the doctor in
court. The doctor became legally liable to pay damages to the deceased
person’s family in respect of his error / omission. He had also incurred legal
costs and expenses to defend his case. This resulted in major financial loss for
the doctor.
This was a case of civil liability, and the insurance company provides coverage
for such claims. If the doctor would have taken a professional liability insurance
to cover claims resulting from any errors or omissions while rendering
professional services, then he would have been saved from the above financial
losses.
The development of the Workmen’s Compensation Act was partially affected by

the passing of the Employers’ State Insurance Act, 1948. The Act set up the
Employers’ State Insurance Corporation to provide benefits to industrial
employees for employment injury, sickness, maternity etc. The Workmen’s
Compensation Act does not apply to the areas where the E.S.I. Act applies.
Nevertheless, there is need for employer’s liability policy to cover
common law liability towards employees, for work-related injuries,
irrespective of whether they fall within the E.S.I. Act or not.

CHAPTER 1 BASIC PRINCIPLES OF INSURANCE AND THEIR APPLICABILITY TO LIABILITY INSURANCE
Test Yourself 1
Legal liability is a specific which can be enforced by law.
I. Act
II. Clause
III. Responsibility
IV. Amount
B. Basic principles of insurance and their applicability to liability

insurance
Liability insurance contracts, like other insurance contracts, are subject to the
provisions of The Indian Contract Act, 1872. These contracts are also subject to
the special principles developed under common law such as insurable interest,
indemnity, subrogation, contribution and utmost good faith. In this Learning
Outcome, we will discuss all these basic principles with particular reference to
their application to liability insurance.
1. Insurable interest
Insurable interest is the legal right to insure. The three essentials of insurable
interest are:
a) The existence of a potential legal liability which is capable of being

insured.
b) Such potential liability must be the subject matter of insurance, and
c) The insured must bear a legal relationship to the subject matter

whereby he will benefit on freedom from liability and will lose
financially on creation of liability.
Thus, the insured has an insurable interest in the financial loss that may be
caused to him due to legal liability. Legal liability may arise when a person has
to pay damages and incur legal costs and expenses, as a result of accidental
damage to third parties’ property or accidental bodily injuries to third
parties.
Likewise, the employer has a potential legal liability towards his employees in
respect of work-related personal injuries. The law gives him a right to insure
that liability.
In addition to the insured, there may be some other parties who have insurable
interest in the legal liability.

BASIC PRINCIPLES OF INSURANCE AND THEIR APPLICABILITY TO LIABILITY INSURANCE CHAPTER 1
Example
If the insured has a technical collaboration agreement, the collaborator may

also be exposed to the legal liability to the public risk and hence has insurable
interest. The public liability policy may be extended in such case to cover the
collaborator’s liability.
Similarly, products’ liability policies covering exports may be extended to cover

the liability of vendors with respect to the distribution or sale of the named
insured’s products as the vendors also have an insurable interest in it.
Insurable interest must be capable of measurement in terms of money. In case

of liability insurance, damages awarded against the insured and the costs and
the expenses incurred by him in the defence of third party claims are
measurable in monetary terms. The application of Principle of insurable
interest to liability insurance does not involve any special problems.
Example
A construction company may incur a liability due to collapsing of their new

building structure. It is very difficult to predetermine the extent of loss that can
be incurred due to such accident. But as these losses and the amount of legal
expenses that will be incurred in defence of such claims are measurable in
monetary terms, they are insurable. The construction company thus has an
insurable interest to the extent of any potential legal liability they may incur by
way of damages and other costs due to such accident.
2. Indemnity
The principle of insurable interest leads to the principle of indemnity. The

former principle states that a policy of insurance is designed to protect the
financial interest of the insured. The principle of indemnity provides that an
insured can recover his financial loss only to the extent of his insurable interest.
The object of this principle is to ensure that the insured’s loss is made good
in such a way that financially the insured is neither better off nor worse off as
the result of the loss. In effect, insured is prevented from making a profit or
deriving any undue benefit out of the insurance contracts.
The principle of indemnity can be strictly observed in liability insurances.

These insurances are designed to provide the insured, protection against the
financial consequences of legal liability. If the insured is legally liable to pay
damages to others, the policy will indemnify him subject to the terms,
conditions and limitations of the contract. Indemnity is also available in
respect of legal costs awarded against the insured as well as legal costs and
expenses incurred by the insured themselves. This can be done with the written
consent of the insurers in the defence or settlement of claims.

Example
A drug manufacturing company introduces a new drug in the market. The

company had taken a liability insurance policy for a limit of Rs.1,000,000 to
cover the liability from sale of this product.
Unfortunately, the use of this drug resulted in ill health of many people. Those
people filed lawsuits against the company due to which the company had to
incur legal expenses with the consent of the insurer to defend their case. The
company lost the case and was required to pay compensation to all the people
who suffered.
The total amount of claims along with all the legal costs were Rs.1,210,000. As
the indemnity limit was Rs.1,000,000 only, the insurer paid up to that amount
and the rest of the amount of Rs.210,000 was paid by the company.
On the other hand, if the total amount of claims along with the legal costs
would have been Rs.850,000, then the insurance company would have paid only
Rs.850,000 and not Rs.1,000,000 as the insured (the drug manufacturing
company) cannot make profit out of the liability insurance contract.
The maximum limit of liability or the amount of the sum insured under the
policy is stated as limit of indemnity. Generally, the liability policies have two
types of limits:
i. Any One accident limit (AOA) which is the maximum liability of the
insurer for all claims arising out of a single accident and
ii. Any one period (AOP) limit (also known as Any one Year (AOY) limit)
which is the maximum liability of the Insurer for all claims arising out of
all accidents during the policy period.
The AOA and AOY limits are generally offered in the ratio of 1:1, 1:2, 1:3 or 1:4.
These ratios are provided in terms of amounts and not in terms of number of
claims in a year.
It is very important to choose the limits properly while proposing for insurance.
The selection of the limits of indemnity is the choice of the Insured. Some of
the factors that may be considered while deciding on the limits are:
It is important to note that the selection of the limits of indemnity is the choice
of the insured.

The decision on the indemnity limits should take into account the following
factors:
a) Organisation’s business
b) Organisation’s risk exposure, asset size or magnitude of operations and
shareholding pattern of proposer
c) The public perception
d) The income levels of the population in surrounding areas
e) Organisation’s customers, and
f) Its ability to pay the premium.
g) Whether the limit is inclusive of defense cost or exclusive
h) Number of persons/locations provided protection
i) Territory and jurisdiction covered
Under liability insurance, the payment is made on behalf of and through the
insured to the persons other than the insured i.e. third parties or employees, as
the case may be. Insured has, as such, no direct financial interest in the claim
settlement. Therefore, the application of the principle of indemnity in liability
insurance is simple and straightforward, without any complications.
In employer’s liability policies, no limit of indemnity is specified. These policies

provide indemnity in respect of the insured’s liability under common law or
under the Workmen’s Compensation Act. If the insured is held liable under
common law for negligence, the policy will indemnify him in respect of the
amount of damages awarded against him. As there is no monetary limit to the
amount of damages which can be awarded under common law, it may be
stated that the employer’s liability policies provide indemnity up to an
unlimited amount. In actual practice, however, claims against employers under
common law are very rare of the employer’s liability arises under the
Workmen’s Compensation Act, the damages awarded will be according to the
scale prescribed in the Act and the employer will be indemnified accordingly.
As regard to the legal costs and expenses incurred by the insured, currently the
insurers are including these expenses in the limit of indemnity provided in the
policy. This indemnity is indeed very useful nowadays, due to high costs of
litigation. It is particularly useful in cases where a third party may resort to
litigation to claim damages from the insured, even though the latter may
eventually be absolved from any legal liability. In such cases, the insured may
not be able to recover costs and expenses from the third party. The insurers in
that case would conduct the defence of such claims and bear these costs and
expenses. In Workmen’s Compensation Insurance, legal costs of defence are
paid in addition to the compensation.

3. Subrogation
Definition
Subrogation may be defined as the transfer of rights and remedies of the

insured to the insurer who has indemnified the insured in respect of the loss.
The principle of subrogation is corollary of the principle of indemnity. The

latter principle does not allow the insured to make a profit out of his loss (i.e.
from insurance contracts). It follows, therefore, that if the insured has any
rights of recovery against any third party, who is primarily responsible for the
loss, such rights are transferable to the insurer who, having paid the loss, is
entitled to exercise these rights and recover the loss from the third party.
Subrogation arises under common law, and is implied in all contracts of
indemnity.
Example
A retailer of beauty products has taken a product liability policy to cover the
sums which he may become legally liable to pay as damages. The insurance
company has paid a claim to a customer on behalf of the retailer for a defective
product.
The retailer also has the right to recover these damages from the wholesaler or
manufacturer who supplied the defective products. However, according to the
principle of subrogation, the retailer’s rights of recovery against the wholesaler
or manufacturer for delivery of such products will be transferred to the insurer.
The insurer is entitled to recover the loss from the wholesaler or manufacturer
by exercising these rights as they have already paid the loss of the retailer.
4. Contribution
This principle applies when more than one policy exists covering the same loss.
Contribution is the right of an insurer who has paid a loss under a policy to
recover a proportionate amount of the loss from other insurers who are also
liable for the loss. The right of contribution flows from and supports the
principle of indemnity. Therefore if the same subject matter is insured with
more than one insurer under common law, the insured can recover his entire
loss (subject to policy limits) from any one insurer, who can later recover
proportionate shares of the loss from the other interested insurers. This
common law position is modified in liability insurance policies as a clause to
ensure that each insurer pays their own rateable share of loss.

5. Utmost good faith
The commercial contracts are mostly governed by the legal principle of ‘let the
buyer beware’. However, the insurance contracts, as they are essentially of a
fiduciary nature, i.e. based on mutual trust, are subject to the common law
principle of ‘utmost good faith’. According to this principle, the proposer who
knows or, ought to know, all material information about the risk proposed
for insurance is legally obliged to disclose all such information to the insurers.
Material information consists of all the facts that can influence the decision of a
prudent insurer in deciding whether or not to accept the risk proposed for
insurance and also to decide the premium rates and terms of acceptance.
This duty of disclosure of material facts which arises under common law is
considerably extended in liability insurance where, invariably, the proposer is
required to answer questions in a proposal form. This form incorporates a
declaration to the effect that the answers are warranted to be true and
complete and shall form the basis of the contract and that all the statutory
provisions are complied with.
The legal effect of this declaration is to render the contract voidable at the
option of the insurer if any answer is inaccurate or incorrect, irrespective of the
fact, whether the answer is material to the risk or not. Thus, the implied duty
of utmost good faith under common law is converted into a contractual duty
of utmost good faith in liability insurance.
Example
A engineering goods manufacturing company planned to take a public liability

policy to cover the amount which it may become legally liable to pay as
damages to third party as a result of accidental death, bodily injury or damage
to the property belonging to a third party due to any accident in their premises
The insurer provided them with a proposal form, which requires answering
questions in detail about their premises and business. There was a section in the
proposal form asking if there is any welding, gas cutting or hot work being
undertaken and if so, what are the precautions taken. . The company declared
in the form that they do not have any such activities. The insurer on the basis
of the information provided in the proposal form provided a liability insurance
policy.
The company placed a claim on the insurer for the damages paid on death of a
visitor in their premises due to gas cutting activity. The insurer after examining
all the facts denied the claim as there was a material misstatement of
information by the insured.

Whereas majority of risks are insured on the basis of the proposal form, some of
the large or complicated risks or risks with extra- hazardous features are also
subject to survey and a risk inspection report by the official of the insurers. In
such cases, the insurers are deemed to have obtained all the material
information during the inspection of the premises to the extent, the insured has
facilitated proper inspection and has not withheld any information from or given
wrong information to the survey official during risk inspection.
The principle of utmost good faith is reiterated in a liability insurance policy

clause which provides that there shall be no liability for any claim if there has
been material misstatement or non-disclosure of any material information.
Further, this duty of disclosure also continues during the currency of the policy.
Example
A condition in the industrial risks public liability insurance policy provides that
"the insured shall give notice as soon as reasonably practicable of any fact,
event or circumstance which materially changes the information supplied to the
company at the time when this policy was effected and the company may
amend the terms of this policy according to the materiality of such change."
In addition to the duty of disclosure, the insured, under common law, is

required to act in good faith throughout the duration of the contract and act as
if he is uninsured. Apart from this common law position, there is specific
condition in this respect, for example, condition 3 of the Workmen’s
Compensation Policy provides that the insured shall take all the reasonable
precautions to prevent accidents and disease and shall comply with all the
statutory obligations.
Test Yourself 2
The insured has in the financial loss that may be caused to

him due to legal liability.
I. A contribution
II. An insurable interest
III. A responsibility
IV. An indemnity limit

SCOPE AND SPECIAL FEATURES OF LIABILITY INSURANCE CHAPTER 1
C. Scope and special features of liability insurance
1. Scope of liability insurance
Liability insurance comprises mainly of the following policies:
a) Act policy under ‘Public Liability Insurance Act’ (hazardous substances)

b) Public liability policy for industrial and non-industrial risks
c) Products liability policy
d) Combined general liability policy
e) Professional indemnity liability policy
f) Employers’ liability (Workmen’s Compensation )policy
g) Directors’ and Officers’ liability policy
h) Other liabilities
It should be noted that the liability policies are also issued in Motor, Marine Hull
and Aviation insurance. Liability coverage is available in Householders’ and
Shopkeepers’ Comprehensive Policies too.
Extensions of liability cover are also available under material damage policies.
Some examples are as follows:
 Contractors’ Risks
 Erection Risks
 Boiler explosion
Example
There are various types of liability insurance products available in the market,
each of them providing different scope of coverage.
For example, products liability insurance provides coverage mainly to the

manufacturers for the sums which they become legally liable to pay as damages
arising out of defective products manufactured by them. Similarly, professional
indemnity insurance provides coverage to professionals such as doctors,
lawyers, tax practitioners etc. for legal liability arising as a result of errors and
omissions committed by them while providing professional services.
Public liability insurance policy is also available in the market to cover the legal
liability risk of paying damages to third parties as a result of accidental death,
bodily injury or damage to property belonging to a third party.

CHAPTER 1 SCOPE AND SPECIAL FEATURES OF LIABILITY INSURANCE
2. Special features of liability insurance
Liability insurances may be distinguished from insurances of property, based on

the following special features noticeable in this class of business.
a) Claims are paid to persons other than the insured i.e. member of the
public or the insured’s employees, as the case may be, but on behalf of
the insured.
Example
Under liability insurance, coverage is provided for claims of the third party who
is usually not known at the time of entering into an insurance contract.
For example, if a person hits and injures someone while driving his car, he
becomes legally liable to pay damages to the injured. If he had a liability
insurance coverage for such risk, then in that case the insurer will not pay the
insured, but will pay directly to the injured on behalf of the insured. The third
party here, i.e. the injured was not a party and known at the time of the
insurance contract.
b) The insurance provides indemnity to the insured in respect of his

potential legal liability i.e. liability arising under common law or
statutory law.
c) Claims are negotiated and settled with the consent of insurers by the
insured who is required, by policy conditions, to co-operate with the
insurers in this respect.
d) Legal costs of the insured incurred with the written consent of the
insurers are reimbursed under the policy.
e) Instead of ‘sum insured’ a limit of indemnity is stated in general liability

policies. However in employer’s liability policies, no limit of indemnity is
incorporated.
f) Jurisdiction clause is important in liability insurance. Cause of action

may arise anywhere in the world but insurers restrict their liability to
courts within specific jurisdictions.
Example
Foreign tourists may be injured at tourist locations but may choose to file for
compensation in their respective country. The jurisdiction clause ensures that
the case is filed locally or as agreed between insured and insurer.

SCOPE AND SPECIAL FEATURES OF LIABILITY INSURANCE CHAPTER 1
Test Yourself 3
Which of the following is not covered under the scope of liability insurance?
I. Directors’ and Officers’ liability

II. Contractual liability
III. Employer’s liability
IV. Professional indemnity

CHAPTER 1 PRACTICE QUESTIONS AND ANSWERS
Summary
a) Legal liability is the legal responsibility of a person to pay compensation for

any damages incurred.
b) Legal liability is classified into criminal liability and civil liability. Civil
liability is insurable, but criminal liability is not.
c) Civil liability may arise under common law or statutory law.
d) The Public Liability Insurance Act, 1991 provides for immediate relief to the
victims affected by accidents involving hazardous substances or as a result
of handling hazardous substance.
e) Liability insurance is classified into statutory liability and tort liability.
f) Public liability insurance first originated in the UK in 1875 to cover third

party damages arising out of the use of horse driven vehicles.
g) Employers’ liability insurance to provide coverage for legal liability in

respect of accidents of employees whilst at work originated due to the
Employer’s Liability Act, 1880 and the Workmen’s Compensation Act, 1897.
h) The basic principles of liability insurance are the same as other insurance
contracts such as insurable interest, indemnity, subrogation, contribution
and utmost good faith.
a) Under liability insurance, claims are paid to persons other than the insured,
i.e. member of the public or the insured’s employees, as the case may be,
but on behalf of the insured.
i) Claims are settled and negotiated under liability insurance by the insured
with the consent of insurers. Legal costs incurred by the insured are also
reimbursed under the policy with the written consent of the insurers.

SUMMARY CHAPTER 1
Answers to Test Yourself
Answer 1
The correct option is III.
Legal liability is a specific responsibility which can be enforced by law.
Answer 2
The correct option is II.
The insured has an insurable interest in the financial loss that may be caused to
him due to legal liability.
Answer 3
Contractual liability is not covered under the scope of liability insurance.
Self-Examination Questions
Question 1
The Public Liability Insurance Act, 1991 provides for immediate relief to the
victims affected by .
I. Road accidents
II. Accidents involving hazardous substances
III. Errors or omissions committed by medical practitioners
IV. Natural calamites
Question 2
Liability insurance is classified into which of the following two categories?
I. Civil liability and criminal liability

II. Civil liability and statutory liability
III. Statutory liability and financial liability
IV. Statutory liability and tort liability

Question 3
is the transfer of rights and remedies of the insured to the insurer

who has indemnified the insured in respect of the loss.
I. Surrender
II. Subrogation
III. Utmost good faith
IV. Liability insurance
Question 4
The principle of indemnity provides that an insured can recover his financial loss
only to the extent of .
I. The specified indemnity limit

II. The actual loss
III. The insurable interest
IV. The sum insured
Question 5
Liability insurance provides indemnity to the insured in respect of his potential

.
I. Legal liability
II. Financial liability
III. Creditors’ liability
IV. Business loss
Answers to Self-Examination Questions
Answer 1
The Public Liability Insurance Act, 1991 provides for immediate relief to the
victims affected by accidents involving hazardous substances or as a result of
handling hazardous substances.
Answer 2
The correct option is IV.
Liability insurance is classified into statutory liability and tort liability.

PRACTICE QUESTIONS AND ANSWERS CHAPTER 1
Answer 3
Subrogation is the transfer of rights and remedies of the insured to the insurer
who has indemnified the insured in respect of the loss.
Answer 4
The principle of indemnity provides that an insured can recover his financial loss
only to the extent of his insurable interest.
Answer 5
The correct option is I.
Liability insurance provides indemnity to the insured in respect of his potential

legal liability i.e. liability arising under common law or statutory law.

CHAPTER 2
LEGAL BACKGROUND
This chapter will discuss the legal aspects related to liability insurance. It will
provide you knowledge about the law of torts and the type of torts like
negligence and nuisance. It will also discuss the types of damages and their
settlement methods, types of defences to resist negligence allegations and
various laws and statutes applicable to liability.
Learning Outcomes
A. Law of torts and its elements

B. Negligence and nuisance
C. Damages and defences
D. Various laws and statutes relevant to liability

CHAPTER 2 LAW OF TORTS AND ITS ELEMENTS
Devendra Kumar Patni was the proprietor of a cinema Hall. The step provided
at the exit door of the theatre was around one foot above the ground. Further,
the exit path was blocked by a car which was parked negligently. Due to this,
Nirmaladevi fell and broke her leg while leaving the cinema.
She filed a case against the proprietor. The motor car owner was held liable for
the damages. However, he made an out-of-court settlement by paying some
amount of money. It was held by the court that the accident was caused by the
defendant’s negligence in not providing proper step and the danger of accident
was further aggravated by wrong parking of the car, which the proprietor could
have prevented. Accordingly, the cinema proprietor was held liable to pay
damages.
In the above case of Devendrakumar Patni v. Nirmalabai (1945), negligence was

the cause of the liability. In this chapter, we will discuss the meaning and types
of negligence and damages that can be caused due to it through various court
cases. We will also discuss how negligence is different from nuisance and
various laws and statutes applicable for public liability.
A. Law of torts and its elements
The common law applied by the Indian Courts is largely based on the English
Common Law, which is a body of law consisting of past legal decisions, and
customs, usages and conventions recognised by law. In the absence of any
statutory law or customary law in India, Indian courts, mostly, apply English
common law depending on the circumstances of the case.
Public liability insurance is concerned with the legal liabilities of the insured,
arising mainly under the law of torts which forms part of the common law.
1. Tort
Definition
‘Tort’ means a civil wrong arising out of a breach of some duty which leads to a
civil cause of action and for which damages or compensation are recoverable.
The law of ‘tort’ imposes a duty on each person to regulate his actions and
behaviour in such a manner so as not to cause injury to other persons or damage
to their property.

LAW OF TORTS AND ITS ELEMENTS CHAPTER 2
Tort can take numerous forms. Some examples are:
a) Libel
It is publication, writing or broadcast of false statement in a permanent

form designed to damage the reputation of another person
b) Slander
It is also communication of false information similar to libel but in a verbal

form
c) Assault
It is unlawfully touching or perpetrating bodily harm to a person by another

person.
Example
Ajay was running a company manufacturing milk products. There was strong
competition in his region from one company, which was owned by David.
Ajay got a story published in the local newspaper that the milk products sold by
David’s company are not fresh and are sold even after they are past their expiry
date.
This has resulted in big losses for David’s company.
This is an example of tort in the form of libel. David can sue Ajay for this act.
2. Difference between tort and crime
The distinction between ‘tort’ and ‘crime’ must be noted. A tort is a breach of
private rights of individuals which affect only the victims.
A crime is a breach of public rights which affect the entire society.
Secondly, in ‘tort’ the action is brought by the injured party who is paid
compensation by the wrong doer, as awarded by a civil court whereas in ‘crime’
the prosecution is conducted by the state and the wrong doer is punished by
fine and/or imprisonment.

CHAPTER 2 LAW OF TORTS AND ITS ELEMENTS
Table 2.1
Tort Crime
Grounds Civil wrongdoing Criminal wrongdoing
Victim Individuals Society
Examples Assault, defamation, battery Murder, rape, burglary
Initiating party Victim The State
Action taken Suits in court Prosecution by State
Purpose Compensation to injured Punishment to criminal
Law Common law The Penal Code
Standard of proof Balance of probabilities Beyond all reasonable doubt
3. Difference between tort and breach of contract
A ‘tort’ is also to be distinguished from a breach of ‘contract’. Contract is an

agreement enforceable at law based upon the consent of the parties. In other
words, contract requires privity (connection or bond between the parties to a
particular transaction) between the parties, whereas in ‘tort’ no such privity is
needed.
In ‘tort’ the duty that is broken is imposed by the law and is applicable to all
members of the society, whereas in a contract this duty arises out of agreement
between the parties concerned and applies to definite person or persons.
Example
Sudesh sold a table to Ketan under a contract for Rs. 20,000. He told Ketan that
it is an antique table, but it was actually a normal wooden table worth
Rs.5,000. So, it was a breach of contract through misrepresentation as Sudesh
had entered into a contract with Ketan.
Ketan was entitled to goods worth Rs.20,000, therefore his damages were
Rs.15,000. Ketan can sue Sudesh in the court for breach of contract and is
entitled to damages incurred by him of Rs.15,000.

LAW OF TORTS AND ITS ELEMENTS CHAPTER 2
Table 2.2
Tort Breach of contract

Arises from agreement of
Duty Arises from law
parties
All members of the
Application of duty Definite person or persons
society
Connection between
No Yes
parties required
Law for determination Reasonable contemplation
Reasonable foreseeability
of damages of the parties
4. Statutory law
Liabilities may also arise under statutory law. Statutory law is the law as
enacted by the legislature e.g., The Public Liability Insurance Act, 1991, The
Motor Vehicles Act, 1988, The Workmen’s Compensation Act, 1923 etc.
Civil liability therefore can arise under:
i. Law of torts
ii. Statutes and
iii. Law of contracts
5. Types of torts
Liability insurance is mainly concerned with two types of‘torts’ viz. negligence
and nuisance. These torts are defined and discussed in detail in the Learning
Outcomes.
Test Yourself 1
Which of the following act is not an example of tort?
I. Assault
II. Battery
III. Burglary
IV. Slander

CHAPTER 2 NEGLIGENCE AND NUISANCE UNDER LAW OF TORTS
B. Negligence and nuisance under law of torts
1. Negligence
Definition
Negligence is defined as the breach of a duty caused by the omission to do
something which a reasonable man, guided upon those considerations which
ordinarily regulate the conduct of human affairs, would do, or the doing
something which a prudent and reasonable man would not do.
(English case, Blyth v. Birmingham Waterworks Company,1856)
In simple words, negligence means ‘absence of care’.
A civil action for negligence can be taken when the following conditions are
satisfied:
i. Existence of duty of care towards the injured party
ii. Breach of that duty
iii. Injury or damage as a consequence of the breach of the duty
iv. Causal connection between the breach of duty and the injury or
damage.
Example
If a person is driving a car, it is his duty to follow the rules. If he violates any of
these rules, such as jumping the red signal, and hits someone, then it will be
considered negligence on behalf of that driver.
In this case, the driver has a duty of care towards the pedestrians while driving
a car. He breached that duty and as a consequence, injured someone.
There was a clear causal connection between his breach of duty, i.e. jumping
the red signal, and the injuries of the pedestrian.
As all the conditions are satisfied, a civil action can be taken against him for
negligence.

NEGLIGENCE AND NUISANCE UNDER LAW OF TORTS CHAPTER 2
a) Duty of care
The issues such as when does the duty of care arise and to whom is the duty
of care owed were considered in Donoghue v. Stevenson (1932). It was the
earliest and the most important English case on negligence. The facts of the
case were:
Case study
A bottle of ginger beer was sold by a restaurant owner to a consumer who

discovered a snail in the bottle after consuming half of the contents. As the
bottle was opaque, neither the restaurant owner nor the consumer could see
the contents. The consumer, who became ill, was a friend of the one who had
purchased the bottle.
The manufacturer of goods sold the goods to the distributor in the

circumstances (i.e. in an opaque bottle) which prevented the distributor or the
ultimate purchaser or consumer from discovering a defect by inspection.
Therefore, the question to be determined was, whether the manufacturer of
goods is under a legal duty to that ultimate purchaser or consumer, to take
reasonable care that the article is free from defect which is likely to cause
harm.
The House of Lords decided that a general duty of care is owed by people not to
injure their legal neighbour who could reasonably be foreseen as likely to be
affected by their acts or omissions. Legal neighbours are those who can be
closely and directly affected by an act or omission and they ought reasonably to
be in contemplation to be affected at the time that the tort (act or omission) is
committed. Therefore, this decision has come to be known as Lord Atkin’s
‘neighbour principle.’
b) Breach of duty of care
An action for negligence can proceed only if there is a breach of that

duty of care which will be determined by courts with reference to the
standard of care expected by law. The test is the standard of care expected
from a reasonable man. Undoubtedly, this will be subjective and will depend
upon what the court decides in a particular case. But the courts always
consider precedents, i.e. past legal decisions.
The degree of care or skill may vary according to particular circumstances.

There is no single standard of care applicable for all circumstances and
situations.

Example
The owners of a property have a duty to use their own property in such a way
as not to cause injury to the persons or property of another. However,
persons who use dangerous things such as explosive materials, fire-works
or gas are bound to exercise more than ordinary care in their control over
such properties. Moreover, a higher degree of care and skill is expected from
members of the learned profession such as doctors, solicitors, etc. in their
professional work. Therefore, if a doctor, while operating a patient, mistakenly
removes the wrong kidney, then it is a breach of duty caused by negligence.
An important consideration affecting the standard of care is the likelihood

of injury or damage occurring. An English Court observed “people must
guard against reasonable probabilities but they are not bound to guard
against fantastic possibilities."
Case study
In the case of Breton v. Stone (1951) a cricket ball travelled 100 yards
over a fence 17 feet high and hit the plaintiff walking on the road nearby.
The House of Lords held that there was no negligence on the part of the
defendants. The court observed "It seems to me that a reasonable man, taking
account of the chances against an accident happening, would not have felt
himself called on either to abandon the use of the ground for cricket or to
increase the height of his surrounding fences. He would have done what the
appellants did. In other words, he would have done nothing.
The degree of care required from owners or occupiers of real property (i.e.
land, building, etc.) varies according to the different classes of
persons in regard to whom it is to be exercised.
i. Trespassers
A person who enters a property without any right or permission, according

to law, the rule is that a man trespassed at his own risk. The duty of the
occupier is not to do a wilful act in reckless disregard of ordinary humanity.
ii. Licensee
A person who enters another’s property with permission, expressed or

implied but without any invitation. Salesman soliciting orders are regarded
as licensees. The duty of the occupier is to warn the licensee of any hidden
or concealed danger of which he is aware.

iii. Invitees
Is a person who enters a property of another for reasons of common

interest. A customer entering a shop is an invitee. The duty of an occupier
towards such persons is to prevent damage to them from any unusual
danger, which he knows to exist or ought to know. The duty of the occupier
is greater towards invitees who enter the premises on payment, e.g. ticket-
holders in a cinema theatre, circus, etc.
iv. Passers-by
The occupier’s duty towards them is to keep the property in a good state of
repair. This duty also extends to take care against what may happen beyond
the property limits where a person may be lawfully passing.
v. Children
Under common law, the duty of care towards children is required to

be of a higher degree. It was held in Veeran v. Krishnamurthy (1966) that
in the case of a child, having regard to its age, its mental development and
other attendant circumstances, the duty of care owed to it must be of a
higher standard than that in the case of an adult person. This duty, for
example, arises in respect of schools.
c) Injury or damage
The third pre-requisite to take a civil action against negligence is that the
plaintiff must prove that he has suffered injury or damage as a consequence
of the breach of duty of care. Injury could be death or bodily injury and
associated pain and suffering, economic losses such as loss of actual
earnings or earning capacity etc. Damage could be damage to property also
d) Causal connection between breach and injury
The fourth pre-requisite is that the injury or damage should be a

consequence of the negligent act. There has to be a close causal
relationship between the breach of duty and the injury or damage.
Before 1961, under English Law, a person was responsible for all the direct
and natural consequences flowing from his negligence, whether they were
reasonably foreseeable or not. The plaintiff could recover if there was
unbroken sequence of events between the original act of negligence and the
consequent loss. This position changed in 1961 with the decision of the
Judicial Committee of the Privy Council in Overseas Tank-ship (U.K.) Ltd. v.
Morts Dock & Engineering Co. Ltd. commonly known as the Wagon Mound
Case.

Case study
The appellants were the charters of the vessel "Wagon Mound". Due to their
negligence some bunkering oil spilled into the waters of the Sydney harbour and
spread on to a wharf where the respondents were repairing a ship
“S.S Corrimal” by oxy-acetylene welding. A spark from the welding process
accidentally set fire to the oil floating on the water which damaged the wharf
and the “S.S Corrimal”.
The damage was held not to be foreseeable as seafaring and other expert
opinion then prevailing was that the oil was not inflammable on water. The
Judicial Committee held that the appellants were not aware nor could they
reasonably have been aware that the oil could have ignited on water. This
decision introduced the test of reasonable foreseeability in place of the ‘direct
consequence’ test applied by courts earlier. Prior to 1961, it did not matter
that damage was unlikely or out of proportion to the degree of negligence so
long as a direct causal connection existed.
The test of foreseeability which was referred to in the House of Lords in the
Heron II, 1967 is as follows:
"The defendant will be liable for any type of damage which is reasonably
foreseeable as liable to happen in even the most unusual case, unless the
risk is so small that a reasonable man would in the whole circumstances feel
justified in neglecting it."
e) Onus of proof of negligence

Under common law, the burden of proving negligence rests with the person
who has suffered injury or damage. In other words, the injured has to
establish that the defendant owed him a duty of care, which was breached
and that the breach was the proximate cause of the injury or damage.
However, there could be some circumstances surrounding the accident

which may lead to a presumption of negligence on the part of the wrong
doer.
Example
Ravi was walking down a street, when suddenly a flower pot from the balcony of
Mukesh’s residence fell on him, which injured him.
Generally, it is the duty of the injured to prove the negligence. However, in this
case, the circumstances of the accident itself prove the negligence on the part
of the owner of the residence, i.e. Mukesh. Therefore, it is not necessary for
Ravi to prove negligence on the part of Mukesh so long as he proves the
occurrence of the accident itself. Thus, the burden will be shifted to Mukesh to
prove that he was not negligent.

This is according to the common law rule of ‘res ipsa loquitur’ (the thing speaks
for itself). According to this rule, the mere fact of the accident constitutes
prima facie evidence of negligence. The rule applies where the accident is more
probably due to the negligence than to any other cause and the circumstances
leading to the accident are within the control and management of the
defendant. The following case illustrates the application of this principle.
Case study
In Mulchand Nemichand v. Basdeo Ramsarup (1926) where a large quantity of

cotton bales was stored in the plaintiff’s house for a number of months without
any attention and when fire took place destroying the bales and the plaintiff’s
house, defendants were held liable without proof of negligence.
f) Employer’s liability for negligence of employee
According to the legal doctrine ‘respondent superior’ an employer is

liable for the negligence of his employee. The employer’s liability arises
when the following essentials are present.
i. The relationship of master and servant is established. This may be

determined by considering:
 Who appoints the employee, and

 Who pays the wages
ii. The act is committed in the course of and within the scope of
employment.
Thus, the employer is definitely held liable if negligence is involved when an

employee performs an authorised act in an authorised way.
However, the employer is usually held liable for the consequences of the
acts even if:
 The authorized act is performed in an unauthorized manner or

 The act was prohibited within the scope of employment or
 The act is performed in breach of instructions
This is based on the principle that the employer is financially stronger than
the employee and is better able to bear the damages. The employee, of
course, is personally liable for his own negligence.

Example
In order to increase sales, a pizza company introduced a scheme for their

customers wherein they promised delivery in 30 minutes or else the pizza is
free. They hired new people as delivery staff.
One of the delivery persons hit another vehicle while driving recklessly to
deliver the pizza on time. In this case, the pizza company will be held liable for
the negligence of its employee’s act and will have to pay compensation for the
damages suffered by the injured.
However, if the same employee hits a pedestrian while driving the company’s
vehicle on a holiday, then the employer will not be held liable as the employee
was not performing his duty at the time of accident.
g) Principal’s liability for negligence of contractors
A principal or an employer is not liable for the negligence of an independent

contractor and his employees arising in connection with the performance of
the contract. But it does not indicate that the principal can pass on to the
contractor any duty of care that attaches to him under common law.
The principal’s liability for contractors’ negligence may arise in the

following circumstances:
i. Where he retains some control over the contractor or provides labour

and/or machinery.
ii. Where the contractor’s work involves extra hazardous acts, etc.
The liability may be joint or several, depending upon the circumstances. In

practice, the principal provides in the contract that he should be
indemnified by the contractor if principal is held liable for contractor’s
negligence.
Example
Vinay hired an independent contractor to dig a sewer line near his house. The
contractor started working but did not take proper precautionary measures for
the passers-by against the danger of falling into an open ditch.
Maya fell into that ditch and sustained severe injuries. In this case, Vinay is
liable as it was his duty to take care of the passers-by. Thus, he is liable to pay
compensation for damages to Maya although he will be indemnified by the
contractor.

2. Nuisance
Definition
Nuisance means acts or omissions which unlawfully interfere with another

person’s use or enjoyment of land or of some right in connection with it.
Nuisance is mainly of two types:
a) Public nuisance
This has been defined by Section 268 of the Indian Penal Code as follows:
Definition
A person is guilty of a public nuisance who does any act or is guilty of illegal
omission, which causes any common injury, danger or annoyance to the public
or to the people in general who dwell or occupy property in the vicinity or
which must necessarily cause injury, obstruction, danger or annoyance to
persons who may have occasions to use any public right.
Public nuisance cannot be the basis of a civil cause of action and is dealt
with by the State as a crime.
b) Private nuisance
It arises out of the use of one’s own property in such a way as to cause
physical injury to the property of another or interfere with his health or
comfort.
Examples of private nuisances are wrongful escape of smoke, smell, fumes,

gas, noise etc. Private nuisance leads to a civil cause of action for damages
as it is an act affecting a particular individual.
Difference between nuisance and negligence
A nuisance may be the result of negligence, and in fact in some circumstances

the same act or omission may be the basis of an action for both nuisance and
negligence. However, nuisance does not form part of the law of negligence.
The distinction between nuisance and negligence must be noted. Liability for
nuisance may arise in spite of the fact that the person had taken all possible
care. In fact, generally speaking, the duty on the part of the wrong doer is
absolute and liability arises if damage is proved. Whereas in the case of
negligence, liability arises only if a person fails to exercise that degree of care
which was demanded for a particular situation.

Action for nuisance is sustainable only when there is actual damage which may
be physical damage to premises or property of another or interference with the
enjoyment of the premises.
The important point to be noted is that the tort of nuisance is relevant

particularly to pollution liability.
Diagram 1: Types of torts
Test Yourself 2
Which of the following cases laid down the fundamental principle for deciding
the duty of care?
I. Donoghue v. Stevenson
II. Breton v. Stone
III. Wagon Mound Case
IV. Rylands v. Fletcher
Test Yourself 3
A person is responsible for all the consequences from his negligence.
I. Direct and indirect

II. Reasonably foreseeable
III. Civil and criminal
IV. Injury and damages

DAMAGES AND DEFENCES CHAPTER 2
C. Damages and defences
1. Damages
The term ‘damages’ means the pecuniary compensation awarded by the court in
a civil action to the victim, for loss or injury suffered due to breach of contract
or tort.
Damages for personal injury (fatal or non-fatal) claims fall into two categories:
a) Special damages
These comprises of:
i. Actual loss of earnings, suffered as a result of injury

ii. Medical, nursing or other expenses necessarily incurred as a result of
the injury, and
iii. Funeral expenses
The above expenses are computed up to the date of settlement of

judgement.
b) General damages
These comprise damages for
i. Pain, suffering and distress

ii. Loss of enjoyment of life and loss of amenities
iii. Loss of recreational ability; and/or
iv. Loss of reduced expectation of life
The elements which may be taken under general damages may expand
depending upon the court’s perception of the losses suffered by the victim.
Thus damages may also be awarded for:
i. The on-going net loss of earnings (prospective loss of income)

ii. The on-going medical nursing or other expenses likely to be incurred in
the future as a result of the injury suffered (future medical expenses)
iii. Loss of opportunity in the job market (A disabled man may not be able to
find another job.)
iv. Loss of matrimonial prospects. (A young unmarried woman suffering
severe facial disfigurement may lose her matrimonial prospects.)

CHAPTER 2 DAMAGES AND DEFENCES
The value of future losses is suitably adjusted by the courts, upwards or

downwards, to reflect;
i. Immediate receipt of money that can be used for earning investment

income.
ii. Other benefits received by the legal heirs through succession to
properties or moneys of the deceased.
iii. The changing circumstances of life. For example, the widow remarrying
or the risk of early death due to other causes.
iv. Inflation or the falling value of money.
The distinction between special damages and general damages is that the
former can be calculated accurately from records of actual expenses
incurred or financial losses (e.g. loss of salary etc.) suffered whereas the
latter are estimated by the courts taking into account a number of factors
relevant to individual cases.
The general approach adopted by courts may be appreciated from the

judgement of the High Court of Gujarat in Hirji Veerji Transport and
others v. Smt. Saroja Narayan Shetty (1971)
Diagram 2: Types of damages

Case study
In Hirjee Veerji and Co. V. Smt. Saroja Narayan Shetty case, the husband of the
plaintiff, Narayan Shetty, died after his car was hit by the appellant’s lorry. The
plaintiffs, which included the deceased’s wife, one minor son, two daughters
and mother of the deceased claimed Rs. 230,000 as pecuniary loss to the estate
of the deceased and Rs. 20,000 as compensation for the pain and suffering of
the deceased prior to death and also for shortening the expected life.
The court decided that the appellant has to pay Rs.149,400 as compensation to
the plaintiffs under various heads of general damages. The court calculated the
amount as follows:
Narayan died at the age of 45 years, and considering that he would have earned
income for his family till the age of 60 years had he been alive, the court
calculated that the net gain to the family due to the deceased’s income was
Rs.1,000 per month for the next 15 years. Thus, the total financial loss
estimated was Rs.180,000. The court decided that the plaintiffs are also
entitled to the amount of Rs.1,000 as damages for the pain and suffering of the
deceased before he died and Rs.9,000 for loss of expectancy of life. The total
compensation was calculated as Rs.190,000.
The court further found that the company for which the deceased was working
would pay a sum of Rs.1,000 per month for 2 years after his death as award for
his meritorious services. As this award was received due to the death of the
deceased, the court deducted this amount from the total compensation of
Rs.190,000, making the amount payable as Rs.166,000.
The court made a further deduction of 10% as the plaintiffs were getting the
total compensation in lump sum. Hence, the plaintiffs finally received
Rs.149,400 for the pecuniary loss caused to them due to Narayan Shetty’s
death.
2. Methods for calculation of compensation for general damages
a) Multiplier method
It is also known as Lord Wright’s formula and is mostly used. Under this
method, firstly the loss of annual dependency amount from the deceased’s
income is ascertained, out of which the amount the victim would have spent
on him is deducted. Lump sum compensation is awarded to the dependants
to cover the damage for this loss of income. The lump sum amount is
calculated by applying a proper multiplier to the amount of one year’s
dependency. This multiplier is known as year’s purchase factor.

Even though Lord Wright contemplated the conversion of this annual

dependency figure into a lump sum by taking a number of years’ purchase,
he also provided for a subsequent reduction to allow for all the various
uncertainties and matters of speculation and doubt. The courts usually
adopt such a multiplier which would take into account all the doubts and
uncertainties that would go to reduce the sum to be awarded. In considering
the multiplier, one has to take into account:
i. The probable duration of the life of the deceased,

ii. Duration of the life of the widow and their dependants who might
prematurely die,
iii. The possibility of widow’s remarriage,
iv. Acceleration of interest in the estate, and
v. Possibilities of increased earning on the one hand as well as disablement
or unemployment on the other.
b) Nance’s method
This method was evolved by Viscount Simon K. C. and it also starts with the
basic dependency amount. Even though this amount is required to be
multiplied by the figure of expected useful life of the deceased, Viscount
Simon had rightly added that there should be a proper discounting of this
amount on two grounds:
i. That the sum was spread over a period of years and so equivalent
amount in the form of lump sum should be worked out, and
ii. Further allowance must be made because of uncertainties due to
premature death, remarriage of widow, acceleration, etc.
Therefore, even though Viscount Simon in Nance’s case contemplates

multiplication of the amount of dependency by the figure of expectation
of life, one arrives at the same result, if proper discounting is done to
arrive at the lump sum equivalent of this dependency benefit which is
spread over the expected period of life.
3. Property damage
In respect of damage to property (e.g. goods) the measure of damages is the

cost of replacing or repairing the property so that the property damaged is
restored to its original condition. In addition, the measure of damage may
include the depreciation in the value or loss of use or loss of profit or the cost
of hiring another property during the repair. In other words, if the property is
totally destroyed, the measure of damages is the value of the property. But if it
is only damaged, the measure is the depreciation in its value supplemented by
the amount representing the loss of use of the property when it is being
repaired or replaced.

The general principle adopted by courts is restoration to the original position.

However in practice, its application may vary according to circumstances of
each case.
4. Punitive damages
Special and general damages are known as ‘compensatory’ damages. Some

states in the U.S. also award punitive damages as an additional amount.
This is awarded by way of punishment and warning to others, where the conduct
has shown wilful or wanton disregard of safety considerations. These are also
called exemplary damages. The Juries in these States may multiply the basic
amount of general damages by five, ten or even 20. Hence, these damages
are also known as multiplicatory damages.
The point to be noted is that the punitive damages are specifically excluded
from the scope of cover under liability insurance policies.
Example
A drug manufacturer produced defective drugs and placed them in the market
without sufficient clinical trials. A physician prescribed that medicine to his
patient, without attempting to try out alternative treatments.
The patient faced severe health problems due to the drug and sued the
company in the court for damages. The court decided that the drug
manufacturer acted recklessly and thus levied a heavy fine against the company
to be awarded to the individual who faced the damages. The physician was also
required to pay some compensation to that person for his negligence.
This case is an example of punitive damages.
5. Structured settlements
A structured settlement is a payment of compensation for damages in

instalments rather than in a lump sum, and has now become a common feature
of liability claims in the U.S.A. and the U.K.
A structured settlement is a process by which a defendant or his insurers pay

damages over a period of time, usually through arrangement of annuity
schemes. This method of payment is considered to be beneficial to all parties
concerned, especially the claimant.
Example
At the age of 32, David was seriously injured in a car accident when another car
hit his car. He acquired a severe spinal cord injury due to this accident which
made him permanently unable to work. The other driver was insured and thus
his insurance company defended the claim on his behalf.
The insurance company paid an immediate lump sum of Rs.50,000 for meeting
the medical expenses. The insurance company further purchased a personal
injury annuity, which will pay Rs.20,000 per month to David for as long as he
lives to meet his monthly expenses.
6. Defences
An allegation of negligence may be resisted by raising certain defences. The

common defences are:
a) Volenti Non fit Injuria
It means that “to him who is willing there can be no injury”. If a person
voluntarily consents to run a risk, he has no right of action against
anyone for injuries suffered as result of his actions.
Example
A spectator at a motor race, football match or similar sporting events

cannot complain of any injuries out of accidents which may be reasonably
expected to occur at such events. According to law, their presence at such
events is an implied consent to accept the risks involved.
b) Inevitable accident
It is an accident which occurs inspite of the exercise of ordinary care,

caution and skill. The defendant has to prove that the accident could not
have been avoided. For example, the accident may have been caused by a
hidden defect in machinery which could not have been discovered on a
reasonable inspection.
Example
Uday was driving his car, when his car brake fails and he hits a pedestrian
crossing the road. The servicing of his car was done just a week ago, so this
event was unforeseen for Uday. He was not negligent and the accident which
happened was inevitable.
c) Act of God or Vis Major
This has been defined as an event due to natural causes directly and
exclusively without human intervention. Examples of acts of God are storms,
earthquake, lightening etc.

d) Emergency
If a person in a moment of imminent danger acts in a way which causes

injury to another, he will not be held liable in negligence if his act was
not unreasonable in the difficult situation in which he was placed.
e) Contributory negligence
If the plaintiff suffers injury or damages partly due to his own fault and
partly due to the fault of the defendant, the damages will be reduced
according to the blame attaching to the plaintiff.
Example
An employee failed to wear safety equipment required by his job while

performing his duty and met with an accident. Even though the reason for the
accident was different, wearing the safety equipment might have saved some of
the injuries caused. The court therefore decided to reduce the compensation
amount by 20% due to the fault of the employee.
f) Contracting out
Persons may relieve themselves of or restrict their liability by

incorporating conditions in the agreements entered into with other
parties. So long as these conditions are not contrary to common law, they
can be raised as a defence. It is necessary that the condition must be
effectively brought to the attention of the other party, whose consent,
expressed or implied, is essential.
Example
Disclaimer notices in the lift: "Passengers should travel at their own risk and
responsibility."
Disclaimer notices in trains: “All baggage remains under the sole responsibility
of passengers. The authority shall not be responsible for any loss or damage to
such luggage. Passengers shall be liable for any injury, damage or loss caused
due to failing to take reasonable care of luggage”.
g) Limitation
An action can be time-barred under the provisions of the Statute of

Limitation.

CHAPTER 2 VARIOUS LAWS AND STATUTES RELEVANT TO LIABILITY
h) Accord and satisfaction
If a claim has been settled by agreement and a binding discharge obtained,

it cannot be reopened. Similarly, the law does not allow successive actions.
Example
If damages are awarded to an injured person for bodily injuries on the basis of
medical evidence, a fresh action cannot be brought on the basis of subsequent
medical opinion establishing that injuries suffered were more serious than
originally agreed.
Test Yourself 4
Which of the following does not fall into the category of pecuniary damages?
I. Actual loss of earnings

II. Medical expenses incurred as a result of injury
III. Funeral expenses
IV. Pain and suffering
D. Various laws and statutes relevant to liability
1. Fatal accidents act,1855
This Act provides that, if the death of a person is caused by wrongful act,
neglect or default, an action for damages is maintainable by the legal heirs of
the deceased against the party causing injury. Damages are awarded by the
court in proportion to the financial loss resulting from such death to the
survivors.
The Act abolished the long standing rule of common law according to which a
civil action for damages ends with the death of any of the person, on whom or
by whom the tort was committed.
2. The Law of strict liability
The principle of strict liability was laid down in the English case Rylands v.
Fletcher (1868). This principle made an important departure from the law of
negligence prevailing at that time.

VARIOUS LAWS AND STATUTES RELEVANT TO LIABILITY CHAPTER 2
The facts of the case were:
Case study
A reservoir was constructed on the land of Rylands by independent contractors.

When the reservoir was filled with water, it burst through weak points and
through the underground shafts and passages, flowed into Fletcher’s land
flooding the mines.
According to principles of common law then prevailing, there was no personal

negligence on Ryland’s part nor was he vicariously liable for the acts of his
independent contractor.
The judge then introduced a new principle of law, which was subsequently
confirmed by the House of Lords, and held Rylands liable. The judge observed:
"We think that the true rule of law is that the person who for his own purposes
brings on his land, and collects and keeps there anything likely to do mischief if
it escapes, must keep it in at his peril, and, if he does not do so, he is prima
facie answerable for all the damage which is the natural consequence of its
escape. The neighbour who has brought something on to his own property
(which was not naturally there) harmless to others so long as it is confined to his
own property, but which he knows will be mischievous if it gets on to his
neighbour’s, should be obliged to make good the damage which ensues if he
does not succeed in confining it to his own property."
To apply Rylands v. Fletcher rule, two conditions are necessary:
i. There must be an escape from the land, something likely to cause harm.
ii. A non-natural use of that land. This means that something must be
brought on to the land "which was not naturally there."
In the above case, water was brought on to the land but the rule would not have
applied if escape of water was from a natural lake on the land.
An interesting Indian case applying the Rule in Rylands v. Fletcher is that of

Mukesh Textile Mills (P) Ltd. v. H.R. Subramanya Sastry (1987).
Case study
In Mukesh Textile Mills (P) Ltd. v. H.R. Subramanya Sastry (1987) case, the
plaintiff owned large tracts of land adjacent to the defendant’s sugar factory.
The land was cultivated by a water channel which ran between the sugar
factory and the plaintiff’s land.

Rats had burrowed holes into the earthen embankment of the tank used for
storage of molasses, a by-product of sugar manufacture. As a result, the tank
collapsed and released a large quantity of molasses into the land of the plaintiff
through the water channel, causing damage to the standing crops of paddy and
sugarcane.
In the appeal, the Karnataka High Court observed:
"The liability of the appellant rests at least on two principles. One is that the
appellant, who had stored large quantities of molasses in a mud tank, had the
duty to take reasonable care in the matter of maintaining state of good repair
of the embankments of the tank. The duty, no doubt, is not simply to act
carefully but not to cause injury carelessly.
Both from the foreseeability test and of initial causation, it must be held that
the appellant is liable. Appellant could reasonably have foreseen that damage
was likely to be caused if there was a breach of the tank. There was clearly a
duty-situation and appellant had omitted to do what a reasonable man, in those
circumstances, would have done or would not have omitted to do.
The second ground of liability is that; appellant by storing a large quantity of

molasses on the land had put the land to a non-natural use. Furthermore, if a
person collects on his premises things which are intrinsically dangerous, or
might become dangerous and if they escape, he has liability, if things so stored
escape and cause damage". This was the second rule in Rylands v. Fletcer case.
On either of the two principles, a duty-situation emerges and the appellant

must be held liable for the escape of the fluid from its tank.
It may be observed that there appears to be some similarity between civil

actions based on strict liability and private nuisance and secondly a civil
action can be based both on negligence and the rule in Rylands v. Fletcher.
3. The Law of absolute liability
The Supreme Court delivered a landmark judgement in the case of Shriram

Foods and Fertiliser Industries where escape of Oleum gas from one of the units
had resulted in personal injuries to a number of persons (M.C. Mehta V. Union of
India, 1986)
The Supreme Court considered the following questions in this case:
i. What is the measure of liability of an enterprise engaged in a

hazardous or inherently dangerous industry, if by reason of an accident
occurring in such an industry, persons die or are injured?
ii. Does the rule in Rylands v. Fletcher apply or is there any other principle
on which the liability can be established?

Case study
The Court held in the case of Shri Ram Foods and Fertilisers Industries that:
"The rule in Rylands v. Fletcher evolved in the 19th Century at a time when all
these developments of science and technology had not taken place. Thus, it
cannot afford any guidance in evolving any standard of liability consistent with
the constitutional norms and the needs of the present day economy and social
structure. We have to evolve new principles and lay down new norms which
would adequately deal with the new problems which arise in a highly
industrialised economy. We cannot allow judicial thinking to be constricted by
reference to the law as it prevails in England or for the matter of that in any
other foreign country. We have to build up our own jurisprudence".
The Court, therefore, evolved a new principle of liability which English Courts
have not done.
"We are of the view that an enterprise which is engaged in hazardous or

inherently dangerous industry which poses a potential threat to the health and
safety of the persons working in the factory and residing in the surrounding
areas owes an absolute and non-delegable duty to the community to ensure that
no harm results to anyone on account of hazardous or inherently dangerous
nature of the activity which it has undertaken. The enterprise must be
absolutely liable to compensate for such harm and there should be no escape
for the enterprise by stating that it had taken all reasonable care and that the
harm occurred without any negligence on its part".
The Court further mentioned: “We would also like to point out that the
measure of compensation in the kind of cases referred to in the preceding
paragraph must be co-related to the magnitude and capacity of the enterprise
because such compensation must have a deterrent effect. The larger and more
prosperous the enterprise, the greater must be the amount of compensation
payable by it for the harm caused on account of the accident in the carrying on
of the hazardous or inherently dangerous activity by the enterprise".
4. Law of limitation
All legal liability case has a timeline for filing a claim. Unless otherwise
specifically provided the limits are as per the statute of limitation, which is
presently three years for India. The European Union has a limit of six years.
So claimants filing for compensation must do so within this period from the date
of loss. Thereafter the case becomes time-barred.
It is to be noted that courts take a sympathetic view of such delays in filing and
very often courts permit applications for condoning delay.

5. Directors’ and officers’ personal liability
In another order (relating to the same case of Shriram Food and Fertilisers Ltd.)
dated February 17, 1986, the Supreme Court permitted Shriram to reopen their
caustic chlorine plant, laying down certain conditions required to be strictly and
scrupulously followed by them.
Case study
Condition (5) in the case of Shriram Food and Fertilisers Ltd. reads as follows:
"The Management of Shriram will obtain an undertaking from the Chairman and
Managing Director of the Delhi Cloth Mills Ltd., which is the owner of the
various units of Shriram, as also from the officer or officers who are in
actual management of the caustic chlorine plant, that in case there is any
escape of chlorine gas resulting in death or injury to the workmen or to the
people living in the vicinity, they will be personally responsible for payment of
compensation for such death or injury and such undertaking shall be filed in
court within one week from today."
Subsequently, the Supreme Court modified the above order as follows:
We would therefore, modify the condition prescribed by us by providing that

undertaking shall be obtained from the officer who is ‘occupier’ of the caustic
chlorine plant under the Factories Act, 1948, and/or the officer who is
responsible to the management for the actual operation of the caustic chlorine
plant as its head. Such undertaking shall stipulate that in case there is any
escape of chlorine gas resulting in death or injury to the workmen or to the
people living in the vicinity the officer concerned will be personally responsible,
to the extent of his annual salary with allowances, for payment of
compensation for such death or injury but if he shows that such escape of gas
took place as a result of Act of God or is major or sabotage or that he had
exercised all due diligence to prevent such escape of gas, he shall be entitled
to be indemnified by Shriram.
We may however make it clear that the undertaking to be given by the

Chairman and/or Managing Director may provide that no liability shall attach to
the Chairman and/or Managing Director if he can show that the escape of
chlorine gas was due to an Act of God or vis major or sabotage. But in all other
cases, the Chairman or Managing Director must hold himself liable to pay
compensation. That alone in our opinion would ensure proper and adequate
maintenance of safety devices and instruments and operation of the caustic
chlorine plant in a manner which would considerably reduce if not eliminate,
risk or hazard to the workmen and to the people living in the vicinity.
Thus, the civil liability of corporation for torts also attached to directors and
other officers of the Corporation, who are thus subject to personal civil liability
for corporate torts. This has resulted in the need for Directors and Officers
liability policy.
6. Statutory Liability
The Public Liability Insurance Act, 1991 imposes ‘no-fault’ liability in respect
of handling of hazardous substances as specified in the Act. (This Act is
dealt in detail with in a subsequent chapter).
7. The Consumer Protection Act, 1986
This Act was passed to:
i. Provide for better protection of the interests of consumers, and

ii. Make provision for the establishment of consumer council and other
authorities for the settlement of consumer’s disputes.
Definition
Some of the important definitions provided in the Act are:
1. ‘Goods’ means goods as defined in the Sale of Goods Act, 1930.
2. ‘Consumer’ means an individual who purchases;
a) Any goods for a consideration and includes any user of such goods, but
does not include a person who obtains such goods for resale or for any
commercial purpose such as retailer, or
b) Hires or avails of any services for a consideration and includes
beneficiary of such services.
3. ‘Defect’ means any fault, imperfection or shortcoming in the quality,

quantity, potency, purity or standard which is required to be maintained
by any law or under any contract express or implied as is claimed by the
trader in any manner whatsoever in relation to any goods.
4. ‘Deficiency’ means any fault, imperfection, shortcoming or inadequacy in

the quality, nature and manner of performance which is required to be
maintained by or under any law or has been undertaken to be performed by
a person in pursuance of a contract or otherwise in relation to any service.
5. ‘Complaint’ means any allegation in writing made by a complainant

that the;
a) Goods bought by him suffer from one or more defects

b) Services hired or availed of by him suffer from deficiency in any respect
c) Goods which will be hazardous to life and safety when used are being
offered for sale to the public in contravention of the provisions of any
law requiring traders to display information in regard to the contents,
manner and effect of use of such goods.

6. ‘Consumer dispute’ means a dispute where the person against whom a

complaint has been made denies or disputes the allegations contained in the
complaint.
7. ‘Manufacturer’ means a person who ;
a) Makes or manufactures any goods or parts thereof, or

b) Does not make or manufacture any goods but assembles parts thereof
made or manufactured by others and claims the end product to be goods
manufactured by himself; or
c) Places or causes to be place his own mark on any goods made or
manufactured by any other manufacturer and claims such goods to be
goods made or manufactured by himself.
8. ‘Trader’ in relation to any goods means a person who sells or distributes any
goods for sale and includes the manufacturer thereof, and when such goods
are sold or distributed in package form, includes the packer thereof.
9. ‘Service’ means service of any description which is made available to

potential users and includes the provision of facilities in connection with
banking, financing, insurance, transport, processing, supply of electrical or
other energy, boarding or lodging or both, housing construction,
entertainment, amusement or the purveying of news or other information
but does not include the rendering of any service free of charge or under a
contract of personal service.
a) Redressal agencies
For the purposes of the Act, consumer disputes redressal agencies are
established as follows:
i. District forum
This forum has jurisdiction to entertain complaints where value of

the goods or services and the compensation claimed is less than Rs.20
lakhs. The order of the District forum shall be final unless an appeal is
filed there from within 30 days from the date of the award. The District
forum is empowered to send its order/decree for execution to appropriate
civil court.
ii. State commission
This redressal authority has original, appellate and supervisory jurisdiction.

It would entertain appeals from the district forum. It has original
jurisdiction to entertain complaints, where the value of goods/services and
compensation claimed exceeds Rs.20 lakhs but does not exceed Rs.100
lakhs.

iii. National commission
The final authority established under the Act is the National Commission. It
also has original appellate as well as supervisory jurisdiction. It would hear
the appeals from the order passed by the State commission and in its
original jurisdiction it will entertain disputes, where goods/services and
the compensation claimed exceeds Rs.100 lakhs. An appeal shall lie within
30 days from the order of the National Commission to Supreme Court.
All the three redressal agencies have the powers of a Civil Court.
Diagram 3: Redressal agencies
b) Procedure and time limit for filing the complaint
The procedure for filing a complaint is very simple in all the above three
redressal agencies. There is no fee for filing a complaint or filing an appeal
whether it is before the State Commission or the National Commission. The
complaint can be filed by the complainant himself or by his authorised
agent. It can be filed personally or can even be sent by post. It may be
noted that no advocate is necessary for the purpose of filing a complaint.
The time limit for filing a complaint is two years from the date of incident
causing loss.

c) Consumer forum orders
If the forum is satisfied that the goods complained against suffer from any
of the defects specified in the complaint or if any of the allegations
contained in the complaint about the services are proved, the forum can
issue an order directing the opposite party to do one or more of the
following things namely,
i. To remove the defect pointed out by the appropriate laboratory

from the goods in question,
ii. To replace the goods with new goods of similar description which shall
be free from any defect,
iii. To return to the complainant the price, or, as the case may be, the
charges paid by the complainant ,
iv. To pay such amount as may be awarded by it as compensation to the
consumers for any loss or injury suffered by the consumer due to the
negligence of the opposite party,
v. To remove the defects or deficiencies in the services in question,
vi. To discontinue the unfair trade practice or the restrictive trade practice
or not to repeat them,
vii. Not to offer the hazardous goods for sale,
viii. To withdraw the hazardous goods from being offered for sale, or
ix. To provide for adequate costs to parties.
This Act applies to insurance services also as they are included in the
definition of ‘service’ under the Act. The Consumer Protection Act also has
relevance to products liability insurances and professional indemnities.
Cases may be filed in the consumer forum for injuries etc. caused by
defective products, medical negligence etc.
8. Other statutes
The other statutes which have a bearing on public liability insurance are as
follows:
a) Water (Prevention and Control of Pollution) Act, 1974
The Central and State Pollution Control Boards are established under this
Act. The function of the Board, inter alia, is to control sewage and industrial
effluent discharge. The consent of the Board is required to establish any
industry which is likely to discharge sewage or trade effluent.
b) Air (Prevention and Control of Pollution) Act, 1981
This Act is structured along the lines of the Water Act but in relation to air
pollution.

c) The Environment (Protection) Act, 1986
It is a comprehensive legislation for enforcement of measures for protection

of the environment and for co-ordination of the activities of Pollution
Control Boards constituted under the Water and Air Acts.
d) The Factories Act, 1948
The 1987 amendment to the Act has introduced special provisions relating to
hazardous activities. For example, the ‘Occupier’ of a factory involving
a hazardous process shall disclose in the prescribed manner all
information regarding the hazards and the measures to overcome such
hazards to the workers, the Chief Inspector of Factories, the local
authority and the general public in the vicinity.
e) The Central Motor Vehicles Rules, 1989 and 1993
Have fixed certain responsibilities on the consignor, the transporter and also
the driver for the safe carriage of hazardous goods.
The laws relating to liability of manufacturers of products, of professional

persons such as doctors, solicitors etc. and of employers towards employees
for work injuries are dealt with in the later chapters.
Test Yourself 5
Which of the following cases resulted in the need for Directors and Officers
liability policy?
I. Rylands v. Fletcher
II. M.C. Mehta V. Union of India
III. Mukesh Textile Mills (P) Ltd. v. H.R. Subramanya Sastry
IV. Mulchand Nemichand v. Basdeo Ramsarup

CHAPTER 2 SUMMARY
Summary
a) Tort is a civil wrong arising out of a breach of some duty leading to civil
cause of action and for which damages are recoverable. It can take the form
of libel, slander or assault.
b) Tort is different from crime as it is a breach of private rights of individuals

whereas crime is a breach of public rights affecting the entire society.
c) Tort also varies from breach of contract because in tort, there is no privity
or connection between the parties as there is in a contract.
d) In context of liability insurance, tort is of two types: negligence and

nuisance.
e) Negligence means absence of care. A civil action can be taken for

negligence if there is an existence of duty of care towards the injured party,
and there is a breach of that duty due to which an injury or damage has
caused. Moreover, there should be a causal connection between the breach
of duty and the injury or damage.
f) The Donoghue v. Stevenson case introduced an important principle for ‘duty

of care’ known as Lord Atkin’s neighbour principle to decide when the duty
of care arises and to whom is the duty of care owned.
g) The Wagon mound case introduces the test of foreseeability according to

which the defendant will be liable for any type of damage which is
reasonably foreseeable as liable to happen in even the most unusual case.
h) An employer is liable for the negligence of his employee according to the

legal doctrine ‘respondent superior’.
i) Nuisance means acts or omissions which unlawfully interfere with another

person’s use or enjoyment of land or of some right in connection with it and
are of two types: public nuisance and private nuisance.
j) Damages are the pecuniary compensation awarded by the court in a civil

action to the victim, for injury suffered due to breach of contract or tort.
They fall into two categories: special damages and general damages.
k) An allegation of negligence may be resisted by raising certain defences such

as Volenti Non fit Injuria, inevitable accident, emergency, Act of God etc.
l) The principle of strict liability was laid down in Rylands v. Fletcher case
where a new principle of negligence was introduced. According to it, a
person will be liable to pay damages if there is an escape from his land,
something which is likely to cause harm and there is a non-natural use of
that land.

SUMMARY CHAPTER 2
m) The law of absolute liability and directors’ and officers’ personal liability
principles were introduced in the case of Shriram Food and Fertilisers Ltd.
n) The Consumer Protection Act, 1986 was passed to provide for better
protection of the interest of consumers and for the settlement of
consumer’s disputes.
o) There are many other statutes introduced by the Government which have an
impact on public liability insurance such as The Environment (Protection)
Act, 1986 and The Central Motor Vehicles Rules, 1989 and 1993.

Answer 1
Burglary is an act of crime and not a tort.
Answer 2
The Donoghue v. Stevenson case laid down the basic principle for deciding duty
of care such as when does the duty of care arise and to whom is the duty of
care owned.
Answer 3
A person is responsible for all the reasonable foreseeable consequences from his
negligence.
Answer 4
Pain and suffering does not fall into the category of pecuniary damages because
it is difficult to measure it.
Answer 5
The M.C. Mehta V. Union of India case in 1986 had laid down the principle of
attaching the civil liability of corporation for torts to directors and other
officers of the Corporation, which has resulted in the need for Directors and
Officers liability policy.

Question 1
How is the law of contract different from the law of tort?
I. It is actionable in both the civil and criminal courts.

II. It usually involves a connection between two parties only.
III. Contracts are always written.
IV. The action is brought by the injured party in the tort.
Question 2
What is the primary function of the law of tort?
I. To punish the wrongdoer by fine and/or imprisonment

II. To take an action for civil cause
III. To regulate actions and behavior of society
IV. To compensate the injured
Question 3
Which of the following conditions is not required to take a civil action for
negligence?
I. Existence of duty of care

II. Breach of duty
III. Inconsiderate intention
IV. Injury due to breach of duty
Question 4
The act or omission which unlawfully interferes with another person’s use or
enjoyment of land or of some right in connection with it is .
I. Negligence
II. Nuisance
III. Crime
IV. Breach of duty
Question 5
Contributory negligence occurs if the has been a cause of the

damages.
I. Claimant
II. Appellant
III. Civil action
IV. Breach of contract

Question 6
Complaints can be filed to the State Commission if the value of goods/services

and compensation claimed is:
I. Less than 10 lakhs

II. More than 10 lakhs but less than 20 lakhs
III. More than 20 lakhs but less than 1 crore
IV. More than 1 crore
Question 7
Which of the following damages are not covered under the scope of a liability
insurance policy?
I. Compensatory damages
II. Structured settlement
III. Punitive damages
IV. Property damages
Answer 1
A contract usually involves a connection between the two parties only, whereas
in tort, no such connection is required.
Answer 2
The primary function of the law of tort is compensating the claimant.
Answer 3
Inconsiderate intention is not required to take a civil action for negligence.
Answer 4
Nuisance is the act or omission which unlawfully interferes with another

person’s use or enjoyment of land or of some right in connection with it.

Answer 5
Contributory negligence occurs if the claimant has been a cause of the

damages.
Answer 6
Complaints can be filed to the State Commission if the value of goods/services

and compensation claimed is more than 20 lakhs but less than 1 crore.
Answer 7
Punitive damages are specifically excluded from the scope of coverage under a
liability insurance policy.


CHAPTER 3
LIABILITY UNDERWRITING
This chapter aims to provide you with an understanding of the underwriting

process in liability insurance and the different types of risk evaluation (such as
physical and legal), operative clauses in liability insurance policies and various
types of liability insurance policies available in the market. It will also discuss
the general guidelines for the rating of the liability insurance policies and how
structuring of a liability program is done.
Learning Outcomes
A. Risk evaluation under liability underwriting process

B. Operative clauses and types of policies under liability insurance
C. Rating and structuring of a liability insurance policy

CHAPTER 3 RISK EVALUATION UNDER LIABILITY UNDERWRITING PROCESS
The underwriting of a liability insurance policy is a complex process. This is

because while underwriting a policy for a car, health, house and life, an
underwriter has an idea of the risks to which the insured is exposed, but in the
case of liability insurance, estimating the risks is a slightly complicated process.
There are various types of injuries/damages which are associated with different
types of businesses covered under these policies. Each business operates in a
different manner; therefore assessing each of the risks needs special
knowledge.
To assess the risk properly, underwriters must be aware of the specific liability
risks that are associated with the industries, professionals or individuals. They
should also have knowledge about the various liability laws which are applicable
for their clients. They are required to evaluate past judgments and settlements
for risk management by evaluating frequency and severity of the losses. They
should also update themselves regularly about the current development in the
court judgements for related liability cases. This will help them to price the risk
properly, especially for high risk applicants.
There are many more factors which should be taken into consideration by
underwriters while accepting the risk and pricing it accordingly. We will discuss
all these in detail in this chapter.
A. Risk evaluation under liability underwriting process
Underwriting process involves:
i. Identification and critical evaluation of risks

ii. Deciding the cover to be offered
iii. Finalising the terms and conditions to be imposed and
iv. Fixing the premium to commensurate with the hazard/exposure
1. Physical risk evaluation
The first stage of risk evaluation for the liability underwriter is assessing the
physical hazard. Underwriter normally assesses the physical risk on the basis of
information furnished by the insured in the signed proposal form and by way of
risk survey.
a) Proposal form
In order to evaluate the physical risk/hazard, it is ideal that the underwriter

should visit each location and obtain first hand information. This is however
impractical and hence they often rely upon the information supplied to them
through the proposal forms. A proposer for liability insurance must disclose all
material facts about the risk offered that they know or ought to know.

RISK EVALUATION UNDER LIABILITY UNDERWRITING PROCESS CHAPTER 3
The duty of disclosure continues throughout the policy period and it is

mandatory for the insured to advise insurers about any changes which are
material to the risk.
Specific services/trade calls for specialist information. However following are

the some of the basic information that are relevant to all cases.
i. Name and address of the proposer
This information is required for identification and policy drafting.
In case the proposal applies to various premises, it is necessary to seek more

information about all the premises that are proposed for coverage. In case
cover is offered on the basis of survey reports, it is essential to obtain reports
of the proposer’s various premises.
ii. Business of the proposer
Full description of operations and activities of the proposer should be

obtained so that the risk is properly rated and appropriate policy
endorsements are applied.
This should include all the operations of the insured within India and also
outside India. Specific information about the activities in USA and Canada
must also be obtained. It should be noted that the claims arising out of the
business described in the proposal form shall only be the subject of
indemnity.
iii. Claims history
The claims and/or loss experience details shall include:
 Number of claims reported earlier

 Amount paid and outstanding
 Applicable excess
 Description about the loss incident
These are vital information in the assessment of every risk. A comparison

with similar risks will bring out the risk management philosophy of the
proposer. Frequency and severity analysis of the claims data will enable the
underwriter in imposing appropriate deductible. Further appropriate policy
conditions can be drafted to take care of mitigating losses which are quite
frequent in nature.

iv. Insurance history
The questionnaire in this regard often seeks the information regarding:
 Insurances declined or cancelled

 Renewal refused
 Special condition imposed
 Increased excess imposed
 Claims denied
Necessary clarification from the proposer must be obtained if there had been
any such instances. Where explanation given by the proposer is inadequate,
it is necessary to obtain information directly from the previous insurers.
v. Estimated annual turnover
Annual turnover is an indication of the size of the manufacturing activity

and/or the services provided by the proposer. A comparison of the turnover
with the previous years will elucidate whether the business is static or it is
increasing. A rapid increase may often be taken as adverse feature as it can
result in inadequate management control.
Turnover is an important factor in rating of liability proposals.
vi. Period of insurance
In respect of claims made policies in addition to the period of insurance, the

proposal should clearly state the retroactive period.
vii. Limit of liability
The proposal should specifically provide for limit of liability for:
 Any one occurrence

 In aggregate for the period of insurance
Example
A liability underwriter, while providing professional liability insurance to a law

firm, may ask for some additional information about the profession in the
proposal form. For example, they can ask about the number of cases handled by
them in a year. If a law firm handling accident cases takes more than 1000 cases
in a year, then it can be an important factor for the underwriter as then they
will have to check the value of each case. If the value is high, then they will
have to check their efficiency and time availability in handling the case.
However, if the average value of each case is lower, then it may be permissible.

Secondly, they may also check whether a law firm is involved mainly in routine
cases or in complex cases. Higher chances of dispute and resulting claims arise
in the case of a law firm handling complex cases than a firm handling routine
cases. Hence, all this information can provide a better estimate of the physical
risk involved.
b) Risk inspection
Although underwriters will be able to collate general information from

proposal form, this may not be sufficient in respect of large risks.
Therefore, for large industrial units, risk inspection/ loss control surveys are
desirable.
Surveys shall be undertaken by industry specialists, engineers who have

been trained in this field. Appendix 3 and 5 gives details of the range of
information that need to be collected to deal with proposals for public
liability and product liability policies respectively.
The importance of risk inspection/survey reports is as follows:
i. Enables an underwriter to understand the risk and incorporate

appropriate terms in the policy.
ii. Assist an insured in managing the risk.
iii. Suggest risk improvement measures including risk transfer
Example
Risk engineers, while performing surveys for a business under liability insurance,
are required to mainly look into third party issues which may result in claims.
For example, in a construction business, the risk engineers will be mainly asked
to consider those risks in a project that could create third party liabilities, and
thus claims. Hence, they will mainly pay attention towards safety of the third
parties and their property, and measures taken by the business for their safety
while preparing their inspection reports.
2. Legal risk evaluation
Liability underwriter is required to be quite familiar with the legal risk

associated with any proposal in addition to the evaluation of physical risk. This
involves risks domiciled in India/overseas and risks domiciled in one territory
but sued in another.

The process of estimating the legal risk involves evaluation of:
i. The probability of the services rendered by the insured causing an event

ii. The chances of such an event leading to a third party liability under any
of the statutory laws/ civil law
iii. The likelihood of being sued
iv. Likely costs for defending such cases and awards
a) Jurisdiction
The most important factor in the assessment of legal risk is that of

jurisdiction of the court. Normally, the proposer is sued only in the courts of
the territory in which they reside. However, if the proposer has assets or
presence in foreign countries, they can be forced to accept the jurisdiction
of a foreign court. A claimant will generally prefer a territory that requires
minimal evidences/proof for their case and which offers highest level of
damages.
This could result in payment of higher levels of damages than that is

perceived by the underwriter at the time of accepting the risk. Products
liability and professional indemnity policies are subject to this risk.
Example
The jurisdiction issue is more common in organisations running export

businesses. Legal proceedings are generally subject to the jurisdiction of the
country in which the product is purchased. Therefore, if there is a defect in any
of the products sold by an export company, then it will be sued by that
customer in the country in which the product was purchased and not in the
country from where the product was exported.
Hence an insurance company, while providing legal liability insurance to such

companies, can add all those countries in the jurisdiction clause in which their
product is exported, by charging additional price for it, i.e. at higher premium.
b) Litigious societies
A society is said to litigious when the members of the society are well
informed about their legal rights and the courts are very sympathetic to the
claimant.
Further there are jurisdictions which allow ‘no-win-no-fee’ arrangement

with lawyers, where the lawyers do not take a fee if they lose the case.
Alternatively if they win the case, certain percentages of the damages
awarded will be charged as the legal fee. In such litigious society, awards
are inflated as the claimant is receiving only part of the award.

Example
In today’s litigious societies, people are well aware about their legal rights
which have resulted in large lawsuits even for small mishaps. For example,
earlier parents were not much bothered about how their kids were treated in
the school and had full faith in the teachers and the education system.
However, nowadays the scenario has changed. If a teacher takes some students
on a field trip and a student is injured there, parents of that student can sue
that teacher for negligence and the teacher might have to pay for the damages.
Therefore, insurance companies have to consider these risks as this has given
rise to claims.
c) Class actions
In class action suits, all potential claimants with the same interest and cause
band together to sue in the court. Representative cases are selected and used
to establish the principle of liability. Once this is done, the remaining claimants
do not have to prove causation or liability.
Example
A mobile company had set up many towers illegally in a residential area for
increasing their network coverage. The illegal setup resulted in harm to the
environment and people living there in the form of cancer and other health
ailments. Therefore, all the people who suffered in that area sued together
against the mobile company in the court as a class action.
Test Yourself 1
Which of the following activities is not part of an underwriting process?
I. Identification and critical evaluation of risks

II. Deciding the cover to be offered
III. Finalising the terms and conditions to be imposed
IV. Collecting the premium from the proposer

CHAPTER 3 OPERATIVE CLAUSES AND TYPES OF POLICIES UNDER LIABILITY INSURANCE
B. Operative clauses and types of policies under liability insurance
1. Operative clause under liability policies
Liability policies are normally termed as ‘long tail’ policies. This means there is
time gap between the creation of liability, to the discovery of the liability, and
up to the settlement or discharge of the liability.
If the liability has been ‘incurred but not reported’ (IBNR) between its creation
and discovery, then it indicates that the liability has been latent in this period.
Risks with high level of latency are difficult to evaluate. To minimise the known
latency exposure, the underwriter would choose a ‘trigger’ in the operative
clause, which in turn acts as the basis on which the policy will operate.
i. Causation: Causation trigger means that the policy responds to an event

in the period of insurance. It is used exclusively for employers’ liability
insurance in many countries.
ii. Occurrence: This means that a loss incurred during policy period are
covered by the insurance contract, no matter when the claim is actually
reported. It is commonly used in public and product liability insurance.
iii. Manifestation: The manifestation trigger means that the policy will
respond to an event that becomes manifest to the insured during the
period of insurance. This trigger is seldom used by insurers.
iv. Losses discovered: Under this trigger losses that are discovered during
period of insurance are covered. Although not used by direct insurers,
this is common form in the reinsurance market.
v. Claims made: With this trigger, the policy indemnifies the insured
against claims that are made against them during the period of insurance
provided that the injury or damage must have also occurred during that
period. Insurers normally use this trigger in most of the policies cases.
This enables the insurer to limit their exposure to latency losses because
at the end of the policy period insurer is certain that no further claim
can be made against that policy.
Claims made policy can also be extended to cover losses which occurred before
the inception of the policy. This is termed as ‘Retroactive cover’ and the period
since the policy will respond is known as ‘Retroactive date’. In that case, the
injury/damage occurred after the retroactive date provided in the policy but
before the end of the policy period are considered.
The major difference between the claims made and occurrence is thus that
occurrence contracts are forward looking whereas claims made contract are
retrospective.

OPERATIVE CLAUSES AND TYPES OF POLICIES UNDER LIABILITY INSURANCE CHAPTER 3
Example
Bell & Co., which is in the business of manufacturing electricity goods, had
purchased a product liability insurance policy on July 1, 2012 for one year which
was based on the claims made. The retroactive date of the policy was January 1,
2012.
A customer made a claim against the company on December 15, 2012 for the
injuries occurred on May 10, 2012 due to the goods that were purchased by the
company. The occurrence of the injury is after the retroactive active, i.e.
January 1, 2012 but before the end of the policy period and the claim was also
made during the policy period, so the insurance company will cover the
damages.
On the other hand, if the claim was made by the customer on the same date,
i.e. December 15, 2012 but for the injuries occurred on November 30, 2012,
then the insurance company would not cover the losses as the damages
occurred before the retroactive date.
The difference between claims made and losses occurring policies
Claims made Losses occurring
Loss must occur and be Loss must occur while the

Limits of
reported while the policy is policy is in force but it may be
coverage
in force. If retroactive reported at any further time.
period is incorporated, the
loss should occur within
that period.
Purchasing of extended No extended reporting
Extended
reporting coverage will coverage is needed as
Reporting or
ensure that future claims injury/damage that occurred
Tail coverage
from the period the policy during the policy period are
was in effect will continue covered no matter how much
to be covered (some late they are reported.
companies offer a free tail
at retirement).
The initial premium and Cost may be high at the
Cost
subsequent year’s premium beginning because insured is
are substantially lower than paying in advance for any
an occurrence policy. injury/damage during the
policy period that may one day
turn into claims.

a) Losses occurring policies
i. Advantages
 Occurrence basis policies allow the insured to go back to old policies,

years after they have expired and put a claim against them for loss
that happened while they were in force.
 The insured does not have to worry about cancelling policy and
moving to a different insurer. Coverage remains in force for loss
occurring while the policy was in force, so long as the insurer is in
business.
ii. Disadvantages
 Insurance companies who accepted the risk many years ago may no
longer be in business.
 The limits on occurrence policies are likely to be inadequate if a
claim is made many years after a policy has expired.
Example
Krishna owns a farmhouse in Kerala that has a number of coconut trees. He had
taken a public liability insurance policy to cover injury or damages caused to the
public by the trees. The policy was occurrence-based and the policy period was
from July 1, 2012 to June 30, 2012.
On March 1, 2013, Chaitanya claims that as a result of Krishna’s negligence, a

coconut hit him on the head, causing injuries. The injury occurred on June 12,
2012. The insurance company will cover the losses as even though the claim
was reported after the policy expired, the event occurring damage has
happened during the policy period.
b) Claims made policies
i. Advantages
 Limits can be more accurately predicted, thus there is less chance of

being underinsured.
 With claims made policies, the insurer who wrote the policy is much
more likely to be in business when a claim become payable.
ii. Disadvantages
 Once a claims made policy is cancelled, it is possible that purchasing

insurance for past events will become difficult, expensive or perhaps
not possible.
 Coverage is triggered by an actual claim for damage, not a notice of
an occurrence or incident.

2. Defence costs and expenses

It is common under all liability policies for insurers to provide cover against
legal expenses. Depending on the frequency of claims and the legal expenses in
the given jurisdiction, underwriter offers two different bases for coverage;
 Costs in addition to the limit of liability

 Cost included in the limit of liability
In the first case claimant’s costs awarded against the defendant and the cost
incurred in the defending the action by the insured are payable over and above
the limits of liability in case the award of damages exhaust the limit of liability.
However if a payment exceeding the limit of liability has to be made to dispose

of a claim, insurers liability to pay any legal expenses in connection therewith
shall be limited to such proportion of the law costs and expenses as the limit of
liability bears to the amount paid to dispose of the claim.
Example
Ram & Sons Ltd., engaged in manufacturing and selling of sports goods,
purchased a product liability insurance policy of Rs.500,000, which provides
coverage for defence costs within the insurance limit of liability.
One of the customers of Ram & Sons Ltd. Sued the company for the severe
injuries caused due to a defective skating product. The damages awarded were
Rs.450,000 and the costs incurred in defending the case by Ram & Sons were
150,000. Thus, the total damages were Rs.600,000.
The insurance policy provided coverage for defence costs within limits of
liability, therefore defence cost will be covered only up to the balanced limit
available i.e. Rs.50,000 (Rs.500,000 – Rs.450,000) and the balance defence costs
of Rs.100,000 will have to be borne by Ram & Sons Ltd.
However, if Ram & Sons Ltd. would have taken a product liability insurance
policy covering defence costs in addition to the limit of liability, then the entire
costs of Rs.600,000 would have been covered by the insurance company.
3. Admitted and non-admitted policies
An admitted policy is the one which will respond to and defend claims in a given
territory or group of territories. A non-admitted policy is the one issued in the
insured’s territory and will not respond to or defend claims in another territory.
The globalisation of various sectors has resulted in opening of operations by

insurance companies in various territories including the one which has regulated
insurance regime.

Admitted policies provide limited coverage as their rating structure is approved

under state regulations whereas non-admitted policies are more flexible as their
policy form and rating structure are not required to be approved by state
regulations. However, both are required to obtain license in the state they are
providing insurance.
In case the financial positions and solvency of insurance industries on those

regulated territories are sound, the insured will opt to insure locally. Or else
they would prefer a non-admitted policy in their home territory.
All the claims under non-admitted policies would be dealt by the insured locally
and the insurer’s involvement in the claims handling will be at arm’s length.
The legal liability will also be determined in accordance with local laws. These
facts should be known to the insured at the policy inception stage.
4. Difference in conditions (DIC) / Difference in limits (DIL) policies
In some of the regulated markets the terms of coverage and/or the indemnity
provided is restrictive. This coverage may not be sufficient to the insured’s
needs. In such situation, the insured arranges additional cover normally in their
home territory to top up the local policies. These policies are known as DIC/DIL
policies. DIC/DIL policies can be issued on either an admitted basis or non-
admitted basis.
DIC/DIL policies can be issued separately. It is however often preferred as an

extension to the master policy that covers insured’s domestic operations.
DIC/DIL policies do not follow the conditions of the local policy and hence said
to be offered on a ‘standalone’ basis.
It is pertinent to note that that at times the local policies has cover that is
wider than the master policy. In such situation either ‘reverse DIC’ or ‘follow-
form’ is used. In the first case, the master policy is endorsed to extend the
wider cover for that specific territory. In the second case, the difference in
conditions is deleted from the master policy i.e. the master policy follows the
form of the local policy.
Example
Jayesh has a limestone mineral factory in the Bhuj region of Gujarat which is
very prone to earthquakes. He has taken a standard liability insurance policy for
covering damages. But, the event of an earthquake was specifically excluded
from it. Hence, for covering the damages to his business in the event of an
earthquake, he has taken a DIC insurance coverage, which helps to fill the gap
in the master policy.

5. Umbrella policies
Umbrella policies are akin to DIC/DIL policies with the difference that it covers
more than one class of business. It has its origin in USA and was designed to
provide uniform standard of cover amongst various states having different
regulations.
The umbrella policy operates in two parts. The first part is follow-form DIL
cover over the schedule of underlying policies. The second part of an umbrella
policy is a broad-form general liability cover that stands alone and operates on
DIC basis around the first part of the umbrella policy.
Example
Jennifer had a car insurance policy with an indemnity limit up to Rs.200,000. In

addition to that, she had also taken an umbrella policy to provide coverage to
fill any gaps which are not covered by her primary policy.
One day, she hits another car on the highway due to which a woman and her
child were severely injured. The other party sued Jennifer in the court for the
damages and after a few months of litigation, the suit was settled for
Rs.500,000. The legal expenses incurred by Jennifer in defending the case were
about Rs.75,000. Her primary insurance policy paid up to the indemnity limit of
Rs.200,000.
Luckily, Jennifer had an umbrella policy which paid the additional damages of
Rs.375,000, otherwise she would have been in a bad position financially.
Test Yourself 2
Which of the following triggers is used to cover the loss by the insurance
contract in the same year in which it is incurred irrespective of when the claim
is actually reported?
I. Causation trigger
II. Occurrence trigger
III. Claims made trigger
IV. Losses discovered trigger

CHAPTER 3 RATING AND STRUCTURING OF A LIABILITY INSURANCE POLICY
C. Rating and structuring of a liability insurance policy
1. Rating – General guidelines
One of the most important functions of an underwriter is to develop an

appropriate pricing strategy for the company which will ensure profitability of
each and every portfolio. A portfolio is said to be profitable if the
‘net combined operating ratio’ is within 100%.
The three important factors for determining the combined operating ratios are:
i. Expense ratio: includes all overhead costs such as salaries, premises, IT

costs etc.
ii. Commission ratio: it will include the brokerage/commission paid to the
intermediaries for procuring the business less commission earned from
reinsurance.
iii. Incurred claims ratio: incurred claims shall include the claims paid and
loss reserves including IBNR (incurred but not reported) and IBNER
(incurred but not enough reported.
The first two ratios are easy to be ascertained. But, the determination of claims
cost and IBNR poses a lot of challenges to the underwriter.
Provision for IBNR is determined on a portfolios basis with the input from
actuaries and would form part of the rating. The following factors are generally
taken into account:
 Development in the technology

 Changes in the trade practices
 Legal awareness and changes in legislations
 Changes in the social environment
 Inflation
 Occupational diseases/unknown diseases etc.
The past claims statistics for a particular portfolio from a groups of related risks
can be used in analysing the claims cost. Claims cost need to be analysed with
specific reference to different types of losses such as:
 Frequency losses
 Severity losses
 Latency losses, and
 Catastrophe losses
Whilst dealing with an individual proposal, the underwriter needs to compare

the general-based claims data with the claims record of the proposer.
Appropriate additional underwriting measures is called for if the latter is higher
than the former.

RATING AND STRUCTURING OF A LIABILITY INSURANCE POLICY CHAPTER 3
In liability lines the rating media is fixed on the level of business activity which
is appropriate for the portfolio. By using the economic measures, underwriters
try to ensure that over a period of time the variables with which the
underwriter is dealing remain pari passu with each other. Nevertheless, the
rates need to be reviewed regularly to align the same with the social economic
changes.
Example
A liability underwriter will take into account the annual wages for rating and
pricing the premium for the employer’s liability policies. Similarly, for the
public and products liability policies, turnover will be considered and for
professional indemnity policies (e.g. lawyers, architects etc.) fees/revenues will
be taken into account.
Often the underwriter is also faced with the problem due to the volatility of
these economic measures. In such circumstances, underwriter resort to physical
measures such as number of beds in a hospital, the number of seats in a cinema
hall, the number of rooms in a hotel etc.
The pricing of liability proposals also depends upon the indemnity limits.
Underwriters often limit their exposure by applying a limit to any occurrence,
aggregate limit of all occurrences during the period of insurance or by a
combination of the both. These limits vary with the class of risks and the
geographical location of the insured. For risks where standard limits are
inadequate, underwriters offer higher limits at additional premium. Such
additional premium would vary depending on the jurisdiction e.g. jurisdiction of
USA/ Canada attracts higher loading.
2. Structuring of liability program
Wherever the indemnity/limit of liability required by a large client exceeds the

capacity of a single insurer, different mechanisms are adopted to provide the
required cover. The most common methods are discussed below.
a) Co-insurance
In liability business, coinsurance (where two or more insurers share the risk)
method or risk sharing is not common on the primary layer. The complexity
in dealing with the claims and the possible differences of opinion makes this
method of risk sharing less attractive. However this method is often
preferred in layered program.

CHAPTER 3 RATING AND STRUCTURING OF A LIABILITY INSURANCE POLICY
b) Facultative reinsurance
Proposals where additional indemnity required is relatively small and

layering of the program is cumbersome, facultative method is used. It is also
used to provide coverage for certain part of the risk/extensions which the
primary insurer is not comfortable with.
Example
An insurance company, ABC Ltd., has provided a fire insurance coverage of

Rs.10,000,000 at an annual premium of Rs.40,000 to Sunshine Industries, which
is one of the biggest enterprise in their territory. However, to calculate the loss
severity accurately was not possible in this case, as the insurance company
decided to take extra protection by opting for facultative reinsurance.
They made an arrangement with another insurance company, XYZ Ltd., to

provide for losses on pro-rata basis at the ratio of 80:20. Hence, the reinsurer
receives the 20% premium, i.e. Rs.8,000 out of the total premium of Rs.20,000.
Now, if a fire breaks out resulting in loss of say Rs.8,000,000, then the primary
insurance company will pay 80% of the damages, i.e. 6,400,000 and reinsurance
will share the remaining 20% damages of Rs.1,600,000.
c) Layered program
In layered programs, one insurer takes the primary layer and balance
indemnity is provided in layers ‘in excess of’ or ‘over’ the primary
insurance. The indemnity under various layers can be covered by individual
insurer or co-shared by a group of insurers. An insurer participating in a
layer would assume liability in excess of the primary layer or the primary
plus underlying excess of loss layer. The monetary value at the bottom of
the layer that this insurer is writing is referred as the ‘attachment point’.
The excess of loss layers normally uses the follow-form of primary layer.
Test Yourself 3
An underwriter, while developing the pricing strategy for the company, has to
ensure that the is within 100% of profitability of each
and every portfolio.
I. Net incurred claims ratio

II. Net operating income ratio
III. Net combined operating ratio
IV. Net operating expenses ratio

SUMMARY CHAPTER 3
Summary
a) The first stage of risk evaluation under liability underwriting process is

assessing the physical hazard which is done on the basis of information
furnished by the insured in the proposal form and by way of risk survey.
b) The proposal form includes information such as name and address of the
proposer, business of the proposer, claims history, insurance history,
estimated annual turnover, period of insurance and limit of liability.
c) The legal risk is assessed on the basis of factors such as jurisdiction,

litigious societies and class actions.
d) The underwriter chooses a ‘trigger’ in the operative clause, to act as the

basis on which the policy will operate. He will choose from triggers such as
causation, occurrence, manifestation, losses discovered or claims made.
e) Claims made policy covers all the losses occurred during the policy period,
provided the claims are also reported during the policy period whereas
occurrence policy covers all the losses occurred during the period
irrespective of when the claim is actually reported.
f) Difference in Conditions (DIC) / Difference in Limits (DIL) policies are used

to provide additional cover when the available coverage may not be
sufficient to meet the insured’s needs.
g) Umbrella policies are akin to DIC/DIL policies with the difference that it
covers more than one class of business.
h) An underwriter has to develop an appropriate pricing strategy for the

company to ensure profitability of each and every portfolio. A portfolio is
said to be profitable if the ‘net combined operating ratio’ is within 100%.
i) The three important factors to calculate combined operating ratio are

expense ratio, commission ratio and incurred claims ratio.
j) Whenever the limit of liability required by a large client exceeds the

capacity of a single insurer, the structuring of the liability program is done
through methods such as co-insurance, facultative reinsurance and layered
program to provide the required cover.

Answer 1
The underwriting process does not involve collecting the premium. However, it
involves fixing the premium to commensurate with the hazard/exposure.
Answer 2
Occurrence trigger is used to cover the loss by the insurance contract in the
same year in which it is incurred irrespective of when the claim is actually
reported.
Answer 3
An underwriter, while developing the pricing strategy for the company, has to
ensure that the net combined operating ratio is within 100% of profitability of
each and every portfolio.
Question 1
1) Legal liabilities arising out of operations and activities of the proposer in
India only are insurable; therefore the proposer is required to fill in details
about those activities only in the proposal form.
2) A rapid increase in an annual turnover of a company is considered a
favourable feature while assessing the physical risk as it increases
profitability.
Read the above statements and choose the correct option:
I. Statement 1 is true and statement 2 is false

II. Statement 2 is true and statement 1 is false
III. Statement 1 and statement 2 are false
IV. Statement 1 and statement 2 are true
Question 2
A is a form of lawsuit where a large group of people
collectively file a claim to the court for the same interest.
I. Class action
II. Litigious action
III. Jurisdiction action
IV. Society action
Question 3
The policies which provide additional coverage and cover more than one class of
business are known as .
I. Difference in limits (DIL) policies

II. Excess insurance policies
III. Admitted policies
IV. Umbrella policies
Question 4
Which of the following is a major difference between claims made and

occurrence policy?
I. Limits can be more accurately predicted in claims made contracts than in

occurrence contracts.
II. Claims made contracts are retrospective whereas occurrence is forward
looking.
III. The initial premium and subsequent year’s premium are substantially lower
in claims made policy than in an occurrence policy.
IV. To purchase extended reporting coverage is better in claims made policy but
no such extended reporting coverage is needed in an occurrence policy.
Question 5
Which of the following methods is used as a mean of risk management and risk
sharing where the indemnity/limit of liability required by a large client exceeds
the capacity of a single insurer?
I. Admitted method
II. Defence method
III. Facultative method
IV. Claims paid method
Question 6
Which of the following ratios is not used to calculate the net combined
operating ratio for determining the profitability of an insurance portfolio?
I. Expense ratio
II. Premium received ratio
III. Commission ratio
IV. Incurred claims ratio

Answer 1
A full description of all the operations and activities of the proposer within India
and also outside India is required to be filled in the proposal form.
A rapid increase in the annual turnover may often be considered an adverse

feature as it can result in inadequate management control.
Answer 2
A class action is a form of lawsuit where a large group of people collectively file
a claim to the court for the same interest.
Answer 3
The policies which provide additional coverage and cover more than one class of
business are known as umbrella policies.
Answer 4
The major difference between claims made and occurrence policy is that claims
made contracts are retrospective whereas occurrence is forward looking.
Answer 5
Facultative reinsurance method is used as a mean of risk management and risk

sharing where the indemnity/limit of liability required by a large client exceeds
the capacity of a single insurer.
Answer 6
Premium received ratio is not considered in calculating the net combined

operating ratio for determining the profitability of an insurance portfolio.

CHAPTER 4
STATUTORY LIABILITY
In this chapter, we will look at the various laws creating compulsory liability on
organisations and businesses. The law lays down the nature of the liability and
where the responsibility will lie. The law also lays down the procedure for
claiming and the extent of the liability.
You will learn about:
1. The various provisions of Public Liability Insurance Act, 1991 and the
features of Compulsory Public Liability Insurance Policy, and National
Environment Tribunal Act 1995
2. The various provisions of Workmen’s Compensation Act, 1923 and the
features of Employers’ Liability Insurance Policy and
3. The features of Carriers Legal Liability Insurance Policy
4. The features of Multimodal Transport Operator Liability Insurance Policy
Learning Outcomes
A. Public Liability Insurance Act, 1991

B. Compulsory Public Liability Insurance Policy
C. National Environment Tribunal Act 1995
D. Workmen’s Compensation Act, 1923
E. Employers’ Liability Insurance Policy
F. Carriers Legal Liability Insurance Policy
G. Multimodal Transport Operator Liability Insurance Policy

CHAPTER 4 PUBLIC LIABILITY INSURANCE ACT, 1991
A. Public Liability Insurance Act, 1991
Characteristics of statutory liability
Statutory liability has certain characteristics which are:
a) The liability arises by a specific legislation like say for example Public
Liability Act, Workmens’ Compensation Act etc.
b) The compensation payable is fixed by amount or by a structured
formula. It is thus limited and can be quantified.
c) The claim for compensation is on an “occurrence basis”. This means that
the cause for the claim and the liability limit arises on the date of event
causing loss.
Example
A workman is exposed to chemicals which over a period of time results in his
illness and subsequent permanent disablement. The disablement may be
certified after he has left his employment but its cause has been the exposure
at his workplace. Thus he can claim from his employer for disability under the
workmens’ compensation act during the years of his employment, even though
he is no longer in employment.
d) The authority for hearing such cases and the procedures for claiming are
specified in the legislation. They can be termed as fast-track courts. This
results in speedier settlements.
Public Liability Insurance Act, 1991

The relevant provisions of the Public Liability Insurance Act, 1991 and the Rules
framed under it are examined first and against this background, the insurance
policy is explained.
1. Preamble
The Preamble states that it is, "An Act to provide for public liability insurance
for the purpose of providing immediate relief to the persons affected by
accident occurring while handling any hazardous substance and for matters
connected therewith or incidental thereto".
2. Statement of objects and reasons
The Statement of Objects and Reasons says: "The growth of hazardous

industries, processes and operations in India has been accompanied by the
growing risks from accidents.... to the innocent victims. Very often, the
majority of the people affected are from the economically weaker sections....
It is felt essential, therefore, to provide for mandatory public liability insurance
for installations handling hazardous substances to provide minimum relief....
which should be on the principle of "no fault’ liability.

PUBLIC LIABILITY INSURANCE ACT, 1991 CHAPTER 4
Note: The purpose of this law is for providing immediate relief to persons
affected by use of hazardous materials. It does not apply to employees of the
organisation handling hazardous materials.
The Act commences with various definitions. Some of these definitions are
incorporated in the insurance policy and are dealt with later.
3. No fault liability
Section 3 provides that where death or injury to any person (other than a
workman) or damage to any property has resulted from an accident, the owner
shall be liable to give such relief as is specified in the Schedule of the Act.
In any claim for relief, the claimant shall not be required to establish that the
death, injury or damage was due to any wrongful act, neglect or default of any
person (This is known as ‘No-fault’ liability).
For the purpose of this section:
a) ‘Workman’ has the meaning assigned to it in the Workmen’s

Compensation Act, 1923; (as amended)
b) ‘Injury’ includes permanent total or permanent partial disability or

sickness resulting out of an accident.
4. Amount of relief payable
The amount of relief payable under Section 3 is as per the Schedule

incorporated in the Act as follows:
Table 4.1
1 Fatal Accident Rs. 25,000/- per person

2 Permanent Total Disability Rs.25,000/- per person
3 Permanent Partial Disability The amount of relief on the basis of
percentage of disablement as certified by
an authorised physician i.e., a registered
medical practitioner
4 Temporary partial Fixed monthly relief not exceeding
disablement which reduces Rs.1,000/- per month upto a maximum of 3
the earning capacity of the months (provided the victim has been
victim hospitalised for a period exceeding 3 days
and is above 16 years of age.)
5 Actual Medical Expenses Upto Maximum of Rs.12,500/- in each case
under (i) to (iv) above
6 Actual Damage to property Upto Rs.6,000/-

5. Right to claim relief
Section 8 provides as follows:
a) The right to claim relief under Section 3 in respect of death of, or

injury to, any person or damage to any property shall be in addition to
any other right to claim compensation in respect thereof under any
other law for the time being in force (e.g. under Common Laws).
b) However, if the owner, liable to give claim for relief, is also liable to pay
compensation under any other law, the amount of such compensation
shall be reduced by the amount of relief paid under this Act.
Note: The amount of compensation under this law is very negligible, but the
claimant is not debarred from claiming under other forums. In case a suit is
filed under common law, the court award in the suit will deduct the amount
paid under the Public Liability Act.
6. Compulsory insurance
According to Section (4) the liability has to be compulsorily insured under a

contract of insurance. The insurance policies have to be renewed from time to
time, so that policies are in force throughout the period during which
hazardous substances are handled.
The insurance policy has to be taken for an amount not less than the amount of
the paid-up capital of the undertaking handling any hazardous substance and
owned or controlled by the owner.
If the owner is not a company, paid-up capital means the market value of all
assets and stocks of the undertaking on the date of contract of insurance.
The liability of the insurer shall not exceed the limit of indemnity specified in
the Policy.
7. Maximum aggregate liability of the insurer
Rule 10 framed under the Act provides that the maximum aggregate liability of
the insurer to pay relief under an award to the several claimants arising out of
an accident shall not exceed rupees five crore and in case of more than one
accident during the currency of the policy or one year, whichever is less, shall
not exceed rupees fifteen crores in the aggregate.
Every owner, in addition to premium, has to pay to the insurer an equivalent

amount to be credited to the Environment Relief Fund (ERF) established under
the Act. The contribution received by the insurer shall be remitted as per
the Scheme made by the Government.

PUBLIC LIABILITY INSURANCE ACT, 1991 CHAPTER 4
Rule 10 provides that any award for relief which exceeds the amount payable
under the insurance policy shall be met from the relief fund and in case the
award exceeds the total of the amount of insurance and the Relief Fund, the
amount which falls short of such sum payable shall be met by the owner.
Note: Insurance for this liability is compulsory and is to the extent of the paid-
up capital of a limited Company. However the extent of the insurer’s liability is
a maximum of Rs. 5 crores for Any One Accident (AOA) and Rs. 15 crores for Any
One Year (AOY). It is important to note that the Act lays down an AOY limit of
Rs. 50 crores whereas the Rules framed for the Act lays down the insurer’s limit
as a maximum Rs. 15 crores AOY.
In addition an equivalent amount of premium is to be collected by the insurers

and remitted to Environment Relief Fund (ERF) created by the Government to
take care of catastrophic losses, when the AOA limit may be exceeded. If the
ERF is also exceeded the balance will fall on the organisation (insured).
8. Exemptions
The Central Government may, by notification, exempt from compulsory

insurance any owner, namely:
a) The Central Government

b) Any State Government
c) Any Corporation owned or controlled by the Central Government or a
State Government or
d) Any local authority
Provided a fund has been established and is maintained by that owner in

accordance with the rules made in this behalf, for an amount of Rs. 5 crores or
equal to the paid-up capital of the undertaking, whichever less, in any
nationalised bank for meeting liability under the Act. This fund is known as
Public Liability Insurance Fund.
9. Claims procedure
The Collector, having jurisdiction over the area in which the accident occurs,
is empowered to hold an enquiry into any claim under the Act and to make an
award of relief which appears to him to be just and to specify the person to
whom the amount of relief shall be paid.
a) Who can make the claim
An application for claim for relief may be made in prescribed form (within 5
years of the occurrence of the accident) by:
i. The person who has sustained the injury

ii. By the legal representatives of the deceased, in the event of death

iii. By the owner of the property damaged in the accident

iv. By any agent duly authorised by the persons claiming relief
b) Documents required for the claim
Application has to be supported by relevant documents such as:
i. Medical Certificate from an authorised physician regarding injury,

disability or illness
ii. Death Certificate/Post Mortem Report in the case of fatal accident
iii. Medical Bills and receipts
iv. Employer’s certificate regarding loss of wages due to temporary or
partial disability, with proof of hospitalisation for a period exceeding 3
days and certificate regarding the date of birth or age of victim
v. Certificate of cost of repairs or replacement of property damaged by the
Accident
10. Award of relief
The Collector shall verify the occurrence of any accident in his jurisdiction
when it comes to his notice and cause publicity in order to invite application for
claim for relief.
On receipt of an application, the Collector who has the powers of a Civil Court
shall, after giving notice of the application to the Owner and after giving the
parties an opportunity of being heard, hold an inquiry into the claim and may
make an award determining the amount of relief which appears to him to be
just and specifying the person to whom such amount of relief shall be paid.
The Collector shall arrange to deliver copies of the award to the parties
concerned expeditiously and in any case within a period of fifteen days from the
date of the award.
When an award is made under this section:
a) The insurer, who is required to pay any amount in terms of such award shall,
within a period of thirty days of the date of announcement of the award
deposit that amount in such manner as the Collector may direct.
b) The Collector shall arrange to pay from the Relief Fund, in terms of such
award and in accordance with the scheme made under the Act, to the
claimants such amount in such manner as may be specified in that scheme.
Note: The authority to hear the claims and to decide the compensations is the
Collector/revenue official of the district where the incident occurred.

COMPULSORY PUBLIC LIABILITY INSURANCE POLICY CHAPTER 4
Test Yourself 1
As per provisions of Section 3 of the Public Liability Insurance Act, 1991, if a

person suffers a fatal accident, then how much is the maximum amount of relief
payable?
I. Rs. 25,000
II. Rs. 50,000
III. Rs. 75,000
IV. Rs. 1,00,000
B. Compulsory Public Liability Insurance Policy
Now that we have understood the relevant provisions of the Public Liability
Insurance Act, 1991 and the rules framed under it, let us now learn about
compulsory public liability insurance policy.
Policy coverage: The policy form consists of operative clause definitions,

exclusions, conditions and the schedule. The policy covers all locations within
India under the control of the insured where hazardous materials are handled.
1. Definitions
The definitions are dealt with first for a better understanding of the Operative
Clause. Definitions (b) to (e) are as per the Act.
Definitions
a) “Act" unless otherwise specifically mentioned shall mean the Public Liability
Insurance Act, 1991 as amended from time to time.
b) “Accident” is defined as "an accident involving a fortuitous, sudden or

unintentional occurrence while handling any hazardous substance resulting
in continuous, intermittent or repeated exposure to death of, or injury to
person or damage to any property but does not include an accident by
reason only of war or radio-activity".
c) "Handling" in relation to any hazardous substance means the manufacture,

processing, treatment, package, storage, transportation by vehicle, use,
collection, destruction, conversion, offering for sale, transfer or the like of
such hazardous substance
d) "Hazardous substance" and group means the items listed out and grouped
under Public Liability Insurance Act, 1991 and the Rules framed thereunder.

CHAPTER 4 COMPULSORY PUBLIC LIABILITY INSURANCE POLICY
e) "Owner" means a person who owns, or has control over handling any
hazardous substance at the time of accident and includes:
i. In the case of a firm, any of its partners;
ii. In the case of an association, any of its members, and,
iii. In the case of a company, any of its directors, managers, secretaries or
other officers who is directly in charge of, and is responsible to the
company for the conduct of the business of the company
f) "Turnover" shall mean

i. Manufacturing Units: Entire annual gross sales turnover including all
levies and taxes of manufacturing units handling hazardous substances as
defined in the Public Liability Insurance Act, 1991. For the purpose of
this insurance, the term "Units" shall mean all operations being carried
out in the manufacturing complex in one location.
ii. Godowns / Warehouse owners: Total annual rental receipts of premises

handling hazardous substance as defined in the Public Liability Insurance
Act, 1991.
iii. Transport operators: Total annual freight receipts
iv. Others: Total annual gross receipts
Note: The turnover is one of the factors of premium rating.
2. Operative clause
a) First part
The first part of the clause makes reference to:

i. The parties to the contract;
ii. Business carried on by the insured owner and specified in the schedule
iii. Written proposal and declaration which is made the basis of the contract
and deemed to be incorporated in the policy
iv. Payment of premium; and
v. Payment of statutory contribution to the Environment Relief Fund (ERF)
as per the provisions of the Public Liability Insurance Act and the Rules
framed thereunder.
b) Second part
The second part of the clause provides that the insurance company will
indemnify the insured owner against the statutory liability arising out of
accidents occurring during the currency of the policy due to handling
hazardous substances as provided for in the Public Liability Insurance Act
and the Rules framed thereunder; and subject to the terms, exceptions and
conditions of the policy.
3. Exclusions
Some of the policy exclusiona and the reasons for such exclusions are given
below:
a) Arising out of wilful or intentional non-compliance of any Statutory

Provisions.
The words ‘wilful’ or ‘intentional’ are important and to pay claims in such
cases would be against public policy.
The insured has to declare in the proposal form that all statutory provisions
are complied with. Non-compliance would mean breach of utmost good
faith.
b) In respect of fines, penalties, punitive and/or exemplary damages.
Payment of claims for fines, etc. would be contrary to public policy; so also,
claims for punitive damages which are awarded by a court as punishment.
In other words, the policy pays only in respect of Statutory Liability under
the Act.
c) "Arising under any other legislation except in so far as provided for in

Section 8, Sub-Section (1) and (2) of the Act".
Sub-Section (1) provides that the right to claim relief under the Act shall be
in addition to any other right to claim compensation under any other law
(e.g. common law).
Sub-Section (2) provides that, where the owner liable to give claim for relief
under the Act, is also liable to pay compensation under any other law, the
amount of such compensation shall be reduced by the amount of relief paid
under the Act.
Example
Where the third party is able to sustain a claim against the owner on the basis
of negligence and is awarded by a court of law; damages higher than the
amount of relief provided under the Act, the Act policy will indemnify the
owner to the extent provided in the Act. The excess liability will have to be
borne by the owner himself. The owner can avail of a separate Public Liability
Policy.

CHAPTER 4 COMPULSORY PUBLIC LIABILITY INSURANCE POLICY
d) In respect of damage to property owned leased etc. by the insured or in

his custody.
This is not deemed to be third party property for the purpose of

indemnity under the policy. The Insured can avail of a separate Material
Damage Policy.
e) Risks related to war and nuclear risks are excluded.
4. Conditions
a) Notification condition
The insured owner has to give written notice to the insurance company of
any claim made against him or of any event which may give rise to a claim in
the future.
In addition, the insured owner has to give to the insurance company the
copies of notice of applications forwarded by the Collector and provide any
other information required by the insurance company.
b) Consent of the insurance company
The insured owner cannot, on his own admit liability to the third party for
the claim without the consent of the insurance company.
c) Time barred liability
This condition provides that there shall be no liability under the policy for a
claim made after 5 years from the date of accident. This is as per the
provisions of the Act.
d) Turnover of the insured
The insured owner has to keep record of annual turnover and declare it at
renewal of the policy. The insurance company has a right to call for such
record. Turnover is one of the factors on which premium is charged.
e) Contribution
This is the usual contribution condition, specifying that if there is any other
public liability Insurance policy covering same liability, the Insurance
company shall not be liable to pay more than its rateable proportion of such
liability

f) Cancellation of policy by insured
This condition provides for cancellation of the policy by the insured owner
by 30 days written notice. Refund of premium is made according to short
period scale subject to there being no claim under the policy.
g) Cancellation of policy by insurance company
The policy may be cancelled by the insurance company by 30 days written

notice. Refund of premium is made on a proportionate basis.
h) Disclaimer by insurance company
If liability for the claim is disclaimed by the insurance company, the insured
owner has to file a civil suit in a court of law within 12 months from the
date of such disclaimer; otherwise the claim becomes ‘time-barred’ and
cannot be recovered or made the subject matter of any suit.
i) Fraudulent claims
According to this condition the company shall not pay any claim (a) if it is
fraudulent or (b) there has been non-disclosure of material facts.
j) Meaning of words / expressions
Any word or expression to which a specific meaning has been given in the
Act or the Rules or the Policy or the Schedule, shall have the same meaning
wherever the word or expression occurs in the policy.
k) Disputes resolution
This condition provides that any dispute regarding interpretation of the

policy shall be determined according to the law and practice of a court
within India.
5. Premium
The premium is based on the Limit of Indemnity ‘any one accident’ (AOA) and
the turnover. The premium rates were based on a market agreement entered
into by the four public sector insurers when the Law came into place. Currently
insurers are charging premium as per the rating guidelines filed by them with
Indian regulator.
6. Proposal Form
The submission of a duly completed proposal form is compulsory, as it is the

basis of the insurance contract. The form is designed to elicit material
information (see Appendix 4).

CHAPTER 4 THE NATIONAL ENVIRONMENT TRIBUNAL ACT, 1995
C. The National Environment Tribunal Act, 1995
The Act imposes ‘no - fault’ liability in respect of hazardous substance as in the
case of PLI Act. The compensation is payable under all or any of the heads
specified in the Schedule to the Act as follows:
a) Death
b) Permanent, temporary, total or partial disability or other injury or
sickness
c) Loss of wages due to total or partial disability or permanent or
temporary disability
d) Medical expenses incurred for treatment of injuries or sickness
e) Damages to private property
f) Expenses incurred by the Government or any local authority in providing
relief, aid and rehabilitation to the affected persons
g) Expenses incurred by Government for any administrative or legal action
or to cope with any harm or damage, including compensation for
environmental degradation and restoration of the quality of
environment
h) Loss to Government or Local authority arising out of, or connected with,
the activity causing damage
i) Claims on account of any harm, damage or destruction to the fauna
including milch and draught animals and aquatic fauna
j) Claims on account of any harm, damage or destruction to flora including
aquatic flora, crops, vegetables, trees and orchards
k) Claims including cost of restoration on account of any harm or damage
to environment including pollution of soil, air, water, land and eco-
systems
l) Loss and destruction of any property other than private property;
m) Loss of business or employment or both
n) any other claim arising out of or connected with, any activity of handling
of hazardous substance
It should be noted that damage to environment is included in damage to

property. Compensation can be claimed under fourteen heads as against six
under the PLI Act. Further, the limits of liability are not prescribed nor is there
any provision for compulsory insurance.
The Act provides for establishment of Tribunals to deal with claims for
compensation and to make award determining the amount of compensation and
specifying the person to whom it shall be paid.

WORKMEN’S COMPENSATION ACT, 1923 CHAPTER 4
Test Yourself 2
Which of the below statement is correct with regards to coverage provided

under the Compulsory Public Liability Insurance Policy?
I. Risks related to war and nuclear risks are covered at standard rates.
II. Risks related to war and nuclear risks are covered with extra premium.
III. Risks related to war and nuclear risks are covered under riders.
IV. Risks related to war and nuclear risks are excluded.
D. Workmen’s Compensation Act, 1923
After learning about compulsory public liability insurance policy now we will
learn about employers’ liability insurance policy. But before having a look at the
features of employers’ liability insurance policy, it is essential that we
understand the relevant provisions of Workmen’s Compensation Act, 1923.
1. Employer’s liability
An employer is liable under law towards the employees to pay compensation in

respect of injury or disease arising out of and in the course of employment.
The employers’ legal liability for èmployment’ accidents may arise as follows:
a) Personal negligence of the employer
b) The employers’ negligence in failure to use reasonable care and skill in

the provision and maintenance of suitable and safe plant, safe place to
work and safe system of work
c) Breach of statutory regulations in regard to the safety of employees (e.g.

Factory Acts etc.)
d) Personal negligence of fellow employees
e) Negligence of employees in the performance of their employment duties
2. Need for enactment of the Workmen’s Compensation Act
The employers’ liability towards the employees for employment accidents arises
out of his negligence; claims for compensation by the employees are sustainable
only if the injury or death is attributed to the negligence of the employer.
In other words, the injured employees have to establish negligence on the part
of the employer. This would mean long drawn out litigation which is a time
consuming and expensive process.

CHAPTER 4 WORKMEN’S COMPENSATION ACT, 1923
As against the employer, the employee is in a relatively weak position and it

would be most difficult if not impossible for him to successfully prove
negligence on the part of the employer and claim compensation. It was,
therefore, felt necessary and desirable to pass legislation which would give the
employees automatic right to claim compensation for èmployment accidents or
diseases’.
3. Object of the Workmen’s Compensation Act
The above discussed object was achieved by the Workmen’s Compensation Act,
1923, (as amended from time to time).
The object of this Act as stated in the Gazette of India 1922 - Part V is as
follows:
The growing complexity of industry in this country, with the increasing use of
machinery and consequent danger to workmen along with the comparative
poverty of the workmen themselves renders it advisable that they should be
protected, as far as possible, from hardship arising out of accidents. A
legislation of this kind helps to reduce the number of accidents in a manner
that cannot be achieved by official inspection, and to mitigate the effect of
accidents by provision for suitable medical treatment, thereby making industry
more attractive to labour and increasing its efficiency. The Act provides for
cheaper and quicker disposal of disputes relating to compensation through
special tribunals than was possible under the civil law.
The Act accepts the principle that when the employer on his own responsibility
and for his own profit sets in motion agencies which create risks for others, he
ought to be responsible for the consequence of his actions. “The Act has its
roots in charity, sympathy and the advancement of socialistic ideas”.
Important provisions of the Workmen’s Compensation Act, 1923 (as amended)

having a bearing on Employers Liability Insurance are now discussed. A thorough
knowledge of these provisions is necessary to understand the coverage under
the policy and process of settlement of claims thereunder.
4. Employers’ liability for compensation
a) Circumstances When the employer is liable to pay
According to section 3 of the Act, the employer is liable to pay

compensation laid down in the Act if personal injury is caused to workmen
by accident arising out of and in the course of his employment.
If the workman contracts any disease, specified in the Act as an

occupational disease, the illness is deemed to be injury by accident arising
out of and in the course of the employment.

b) Circumstances when the employer is not liable to pay
However, the employer is not liable in respect of any injury caused by an

accident which is directly attributable to:
i. The workman having been under influence of drink or drugs, or

ii. The willful disobedience of the workman to orders and rules expressly
given to secure the safety of the workman, or
iii. The willful removal or disregard by the workman of any safety device
provided for the safety of workman.
Note:It is important to note that the above three defences are not available
to the employer if the injury results in death.
c) Liability in case of natural death:
If the workman dies a natural death while on duty, no liability attaches to

the employer unless it is proved that the death was caused by strains and
stresses peculiar to the particular employment. When the death of the
workman is caused by aggravation of a pre-existing disease due to an
accident it has been held that the death is deemed to have resulted from
the accident.
5. Definitions and interpretations
a) The Act defines ‘Workman’ as a person (other than a person whose

employment is of a casual nature and who is employed otherwise than
for the purposes of the employer’s trade or business) who is employed in
any such capacity as is specified in Schedule II of the Act, whether the
contract of employment is expressed or implied, oral or in writing.
Note: Schedule II lists various trades and occupations for illustrative

purposes.
The term total disablement is defined as ‘disablement of a temporary or

permanent nature which incapacitates the workman for all work which he
was capable of performing at the time of the accident resulting in such
disablement”.
The term ‘partial disablement’ means where the disablement is of a

temporary nature, disablement which reduces the earning capacity of a
workmen in any employment in which he was engaged at the time of
accident resulting in the disablement and, where the disablement is of a
permanent nature disablement which reduces his earning capacity in every
employment of which he was capable of undertaking at that time.

The Act incorporates the list of injuries which are deemed to result in
permanent total disablement or permanent partial disablement, with
percentage of loss of earning capacity indicated against each.
b) The words ‘accident arising out of and in the course of employment’

have been the subject of interpretation in a large number of legal cases.
The term ‘accident’ is of course, given its popular meaning, viz. ‘an
event which is neither expected nor desired’. The words ‘in the course
of employment’ indicate the time when injury is caused, whereas the
words ‘out of employment’ establishes the causal connection between
the injury and the employment.
Case Law 1
In Laxmibai Atmaram v. Bombay Port Trust, 1954, the Bombay High Court held,
where a workman suffers from a heart aliment dies on account of excessive
strain associated with the work, the accident occurred out of employment.
Case Law 2
The following case law will explain the interpretation of courts on the phrase
‘arising out of and in the course of employment’. The facts of N. L. Malhari v.
Post Master General Bangalore in Karnataka High Court were as follows:
Malhari was one of the mazdoors employed by the Posts and Telegraphs
Department for the erection of telephone lines along the railway track. One day
while he was returning with a bucket of water which he had collected from a
stationary engine, he was knocked down by an incoming passenger train and was
killed. Compensation was claimed on his behalf on the ground that the accident
arose out of and in the course of employment.
1. Deputy Commissioner’s decision

The Deputy Commissioner held that “in the absence of evidence that one of the
duties of Malhari was to fetch water for cleaning the insulators it could not be
said that the accident arose out of and in the course of employment.” The
Commissioner gave his decision on the additional ground that there was
negligence on the part of Malhari.
2. High Court’s decision
On appeal the High Court of Judicature observed as follows:

“It was Malhari’s duty as a Mazdoor to obey all directions which had any
association with or were necessary for the work for the completion of which he
had been employed, and, one such is obviously a direction to bring water on
being asked to do for cleaning the insulators which had to be fixed on the
telephone lines. The Court took the view that Malhari was indeed asked to bring
water for cleaning the insulators.... the duty to bring water when asked to do
so, was one of the conditions of employment”.
“The Commissioner in depending upon the aspect of negligence overlooked the

clear provisions of proviso (b) to Section 3(1) of the Act which makes negligence
irrelevant in the case of death; and even otherwise, the categories of
negligence enumerated in proviso (b) are exhaustive and the negligence found
by the Commissioner is not one of them. The High Court held that the accident
has arisen in the course of and out of employment.
Case Law 3
In Divisional Personnel Officer, Southern Railway vs. Karthiayani (1987) the facts
were: Drinking water was provided by the Railway for the workmen. The drum
containing water was kept in the railway premises for that purpose. The
deceased workman was at the relevant time within the railway premises after
collecting the tools for proceeding to work spot. The death was caused by
gastro-enteritis which itself was caused by the contaminated water which the
deceased had drunk a few hours before his death. Contamination of the water
was thus the direct immediate and proximate cause of his death. Death arose
out of and in the course of employment. The High Court held that the
Commissioner rightly found that the Railway was liable in terms of Section 3 of
the Act to pay compensation.
Case Law 4
In Koduri Alchayamma v. Palangi Alchamma (High Court at Hyderabad) it was

held that the act which resulted in the injury should not be foreign to the
employment. The facts of the case were: the duty of the workmen was to load
the quarry material at the quarry site in the lorry and travel along with the lorry
and to unload it at the work site. After unloading they again travelled in the
lorry, reached the quarry site and again loaded the lorry.
In the course of one such trip the deceased who was in the lorry saw a wild
rabbit passing on the road and he attempted to hit it and in this attempt he fell
down from the lorry and met with a fatal accident.
The commissioner held that the injury to the workman arose by accident out of
and in the course of employment. On appeal, the High Court observed, it was
not part of the duties of a workman to hit a wild rabbit running across the road.
His act does not arise out of the employment. It is not even connected in a
causal manner with the work for which he is employed. The principle is that if
the workman was responsible for an act unconnected with his duties and
that resulted in the injury, the employer is not liable. One of the principles
upon which the right of workman to compensation is held to be justified is
whether the immediate act which led to or resulted in the accident had some
form of causal relation with the performance of these duties and such causal
connection would be held to exist if the immediate act which led to the
accident is not so remote from the sphere of his duties or the performance
thereof as to be regarded as something foreign to them.

There should be at least a causal relation between the accident and the
duties which he is required to perform by the employer. The act should not be
foreign to the employment. There should be nexus between the injury and the
work that the workman had to perform. The act of hitting a rabbit while the
truck was in motion was wholly unconnected with the duties of workman. The
injury caused by the accident to the respondent cannot be said to arise out of
and in the course of employment.
Case Law 5
On the question when does employment commence and terminate for the
purpose of the Act, the case A.C. Roy & Co. (P) Ltd. v. Taslim and another is
relevant. The facts of the case were as follows:
“Taslim worked as a Khamali and belonged to the reserve pool of the Calcutta
Dock Labour Board. He was booked by the board to work for the appellant A.C.
Roy and Co (P) Ltd., in the vessel S. S. KHAYBAR. He went on foot to attend to
the shift duty via the public road which leads to the gate of the Docks. While on
the public road and just at the gate he was knocked down by a taxi. Taslim
made an application for compensation before the Commissioner Workmen’s
Compensation against the Board and the appellant. Both the appellant and the
Board contested the application on the following grounds:
a) Was the applicant workman with the meaning of Workmen’s

Compensation Act?
b) Did the alleged accident arise out of and in the course of employment?
c) While considering the first point the High Court of Calcutta observed:
“Under Clause 37 (2) of the Calcutta Dock Workers (Regulations of

employment) Scheme 1956, a registered dock worker under the reserve
pool who is available for work is deemed to be in the employment of the
Board, but under clause 11(e)i, for the purposes of allocation of work, the
administrative body shall be deemed to act as an agent for the actual
employer”.
“The net result is that a registered dock worker is primarily in the

employment of the Board but when the administrative body of the
Board allocates a worker in the reserve pool to a registered employer then
for the time being and for the purposes of the work concerned the worker
becomes employed under the registered employer. We, therefore, think
that for the purposes of this application, the appellant must be taken to
have been employer of the workman concerned and the applicant before
the Commissioner was workman within the meaning of the Act, working
under him”.

d) Regarding the second point, the High Court observed:

“The question that we have to consider therefore is whether the proximity
of a place of accident to the place of employment makes the place of
accident a part of the employers’ premises. According to the finding of the
learned Commissioner the accident took place on a public road at a distance
of about 100 yards from the gate of the shed where the deceased used to
work. The deceased had, therefore, not reached his employers’ premises at
the time when the accident occurred and the place of accident was not also
the property of his employers. Can it then be said that the employment of
the deceased began at the time or place when he met with accident. It
seems to me that the answer to the question must be in the negative.”
The observation of Bachawat J. in the same case was as given below:
“An employee works for his master. There is a time and place for his work.
The employment has a spatiotemporal setting. It courses through the
working hours and places of work. The course of employment embraces
working hours and place of work and extends to such time and as may
reasonably be considered to be accessory thereto....... “The employment
commences at the end of his journey from house and stops at the
commencement of his return journey. A personal injury caused to the
employee by accident in a public street or in a public place does not arise
in the course of his employment unless the employee is then rendering
service to his employer or is then discharging some obligation imposed
upon him by the contract of employment”.
The High Court also quoted the observations of the Supreme Court in the
case Saurashtra Salt Mfg. Co. v. Bai Valu Raja and others:
“A workman is not in the course of his employment from the moment he

leaves his home and is on his way to his work. He certainly is in the course
of his employment if he reaches the place of work or a point or an area
which comes within the theory of notional extension outside of which the
employer is not liable to pay compensation for any accident happening to
him”.
Finally, the Court held “.... the notional extension of location of his
employment cannot be stretched to the gate of the docks. It might extend
to berth Number 27 in which the ship was docked. In any event the ‘gate
was abutting on a public road and that is where the workman met with the
accident. In our opinion, the doctrine which is now well established, that a
workman going to or coming from the place of employment on a public
street is not necessarily doing so in course of his employment, and the
principles as have been laid down in Supreme Court decision in Saurashtra
Salf Mfg. Co., case must be applied. It must be held, therefore, the
workman has not been able to prove that the accident arose out of or in
course of his employment.

6. When can a workman approach Civil Court
Section 3(5) of the Act provides that if the workman chooses to file a suit for
compensation for injury in a Civil Court, his remedy under the W.C. Act is lost
to him. On the other hand, he cannot file a suit in a Civil Court:
a) If he has instituted a claim for compensation before a W.C.

Commissioner or
b) If an agreement has been reached between the workman and his

employer providing for the payment of compensation in respect of the
injury in accordance with the provisions of the Act.
7. Amount of compensation
The amounts of compensation, specified in the Act vary for death, permanent
and temporary disablement (total or partial).
a) Death compensation
The amount of compensation payable for death is 50% of monthly wages

multiplied by the relevant factor (minimum Rs. 80,000/-)
b) Permanent total disablement
The amount of compensation payable for permanent total disablement is

60% of monthly wages multiplied by the relevant factor (minimum Rs.
90,000/-).
These amounts have been revised upwards by the Employees Compensation

Amendment Act 2009 with effect from 18.01.2010. The revised amounts are
Rs. 1,20,000/- for death and Rs. 1,40,000/- for permanent disablement.
c) Permanent partial disablement
For permanent partial disablement the amount of compensation depends

upon the nature of disablement and the percentage of loss of earning
capacity specified in the Act. This amount is to be computed after the
amount for permanent total disablement is ascertained as per formula in
paragraph 29.
The age is specified in the first column and the ‘relevant factor’ is specified
in the second column in Schedule IV of the Act. Age considered is completed
years of age of the workman on his last birthday immediately preceding the
date on which the compensation fell due.

Age not more than Factor Age not more than Factor
16 228.58 41 181.37
17 227.49 42 178.49
18 226.38 43 175.54
19 225.22 44 172.52
20 224.00 45 169.44
21 222.71 46 166.29
22 221.37 47 163.07
23 219.35 48 159.80
24 218.47 49 156.47
25 216.91 50 153.09
26 215.28 51 149.57
27 213.57 52 146.20
28 211.79 53 142.68
29 209.92 54 139.13
30 207.98 55 135.56
31 205.95 56 131.95
32 203.85 57 128.33
33 201.66 58 127.71
34 199.40 59 121.05
35 197.06 60 117.41
36 194.64 61 113.77
37 192.14 62 110.14
38 189.56 63 106.52
39 186.91 64 102.93
40 184.17 65 or more 99.37
Note: Where the monthly wages of a workman exceed Rs. 4000/-; his monthly
wages for computing compensation for death and permanent disablement is
deemed to be Rs. 4,000/- only). The limit of monthly wages for the purpose of
calculation of compensation has been revised to Rs. 8000/- with effect from
31/05/2010 vide notification Number 1047 dated 31st May 2010.
For temporary disablement, whether total or partial, the amount of

compensation is a half-monthly payment equal to 25% of monthly wages of the
workman. This is payable on the sixteenth day:
i. From the date of disablement where such disablement lasts for a period
of 28 days or more, or
ii. After the expiry of a waiting period of three days from the date of
disablement where such disablement lasts for a period of less than 28
days; and thereafter half-monthly during the disablement or during a
period of 5 years, whichever period is shorter.

The beneficiary according to the Act is the workman as defined to the Act and
in the case of death dependants who are defined in the Act.
8. Review of half-monthly payments
Half-monthly payments under the Act are subject to review by the

Commissioner, if desired by the employer or the workman, if there has been a
change in the medical condition of the workman as certified by a qualified
medical practitioner and after review, be continued, increased or ended.
If the accident has resulted in permanent disablement the payments can be

converted to a lumpsum less any amount already received by the workman
(Section 6).
The half-monthly payments may be commuted by the payment of a lumpsum by

agreement by the parties or if the parties cannot agree, by the Commissioner,
an application by either party (Section 7).
9. Deposit with commissioner
Payment of compensation for death has to be deposited by the employer with

the Commissioner whose receipt shall be a sufficient discharge. The
Commissioner is empowered under the Act to distribute the compensation
to the dependents of the deceased workman as defined in the Act. (Section 8)
10. Registration of agreement
Where the amount of any lumpsum as compensation has been agreed, whether
by way of redemption of a half-monthly payment or otherwise, a memorandum
has to be sent by the employer to the Commissioner who shall record, after
being satisfied as to its genuineness and that agreement was not obtained by
fraud or undue influence or other improper means (Section 28).
11. Interest and penalty
a) Timely payment
The Act provides by Section 4A that compensation shall be paid as soon as it

falls due.
b) Provisional payment
If the employer does not accept liability for compensation as claimed, he

shall make provisional payment based on the amount which he accepts, by
deposit with the Commissioner or payment to the workman as the case may
be.

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c) Interest and penalty
If payment is not made within one month the employer would be liable to
pay interest and in case the delay is unjustified, he has to pay further
amount by way of penalty subject to a maximum of 50% of the amount
payable as ordered by the Commissioner.
Case Law 6
In this context, the decision of the Supreme Court in Ved Prakash Gang vs.
Premi Devi and others is important. The Court held that the insurance
companies were liable to meet whatever liability was incurred by the insured
employer under the provisions of the W.C. Act in terms of the compensation
along with interest thereon as imposed by the Commissioner but not the amount
of penalty imposed on the insured employers.
12. Contractor’s workmen
Where the employer (referred to in the Section as Principal) contracts with any
other person (referred to as Contractor) for the execution of the whole or part
of any work which is ordinarily part of the business of the principal, the
principal shall be liable to pay compensation to workmen employed by the
Contractor.
However, the principal is entitled to be indemnified by the Contractor and all

questions as to the right to and the amount of such indemnity shall, in the
absence of agreement, be settled by the Commissioner.
The workman has a right to recover compensation from the Contractor instead
of the Principal (Section 17)
13. Insolvency of employer
If the insured employer becomes insolvent his rights under the insurance policy
against the insurers are transferred to and vest in the workman who can recover
the claim from the Company subject to the terms and conditions of the policy.
14. Other important provisions of the Act
a) Section 5: Method of calculating wages for the purpose of the Act

b) Section 10: Notice of the accident to the Commissioner within 2 years of
the occurrence of the accident or 2 years from the date of death, as the
case may be. The delay may be condoned by the Commissioner
c) Section 10: Civil court has no jurisdiction to deal with any question
under the Act which has to be decided by a Commissioner
d) Section 13: Commissioner has power of a civil court
e) Appeal to the High Court from the orders of the Commissioner involves
substantial questions of law and not on findings of facts
1
It is to be noted that the law holds employers liable for employment related
accidents and diseases. Insurance is not compulsory. As this is a legal liability
the cause of action is between employee and employer. In the normal course
the insurer cannot be impleaded in such cases. However judgements over the
years have allowed insurers, where insurance is in force; to be jointly
impleaded and to deposit the compensation in court.
15. Employee’s Compensation Act, 1923 (Amendment Act 2009-45 of 2009
The Workmen’s Compensation Act nomenclature has changed to the above with
effect from 18th January 2010. Various changes brought about through this
amendment are as under:
a) All reference to “Workmen” has been amended to “Employee”the Act is
renamed as Employee’s compensation Act
b) In the various definitions of Workmen the term “otherwise than in a

clerical capacity” has been deleted. In effect this change brings clerical
workers under the purview of the act.
c) Death compensation: The minimum compensation for death is enhanced

to Rs. 120,000/-
d) Permanent total disablement compensation: The minimum
compensation for Permanent Total Disablement is enhanced to Rs.
140,000/-
e) Funeral expenses: The reimbursement for funeral expenses is enhanced

from Rs. 2,500/- to Rs. 5,000/-.
f) Maximum monthly wages: The maximum monthly wages for calculation
of compensation is enhanced to Rs. 8,000/-. with effect from 31st May
2010
g) Reimbursement of medical expenses: Another major amendment under
the amended Act is with regard to medical expenses for employment
related injuries. The amended Act provides for reimbursement of
medical expenses incurred by the injured employee.
Test Yourself 3
Under the provisions of the Employee’s Compensation Act, 2009, how much is
the minimum amount payable on the death of an employee while performing his
duties?
I. Rs. 1,00,000
II. Rs. 1,20,000
III. Rs. 1,40,000
IV. Rs. 1,60,000

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EMPLOYERS’ LIABILITY INSURANCE POLICY CHAPTER 4
E. Employers’ Liability Insurance Policy
Now that we have understood the relevant provisions of the Workmen’s

Compensation Act, 1923 and the rules framed under it, let us now learn about
Employers’ Liability Insurance Policy.
1. Preamble
As is the practice in all classes of accident insurance the preamble makes

reference to the proposal and declaration which is made the basis of the
contract and is deemed to be incorporated in the policy. Reference is also made
to the premium which is the consideration for the insurance. Finally, the
insurance is restricted to the business specified in the schedule of the policy.
This is necessary to ensure that the policy will not apply if the insured were to
undertake business or trade of more hazardous nature.
2. Operative clause
This clause is worded as follows:
Now this policy witnesseth that if at any time during the period of insurance any
employee in the insured’s immediate service shall sustain personal injury by
accident or disease arising out of and in the course of his employment by the
insured in the business and if the insured shall be liable to pay compensation for
such injury either under:
a) The Law(s) set out in the schedule or

b) At Common Law
Then subject to the terms exceptions and conditions contained herein or

endorsed hereon, the insurance company will indemnify the insured against all
sums for which the insured shall be so liable and will in addition be responsible
for all costs & expenses incurred with its consent in defending any claim for
such compensation
Provided always that in the event of any change in Law(s) or the substitution of
other legislation. Therefore this policy shall remain in force but the liability of
the insurance company shall be limited to such sum as the insurance company
would have been liable to pay if the Law(s) had remained unaltered.

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CHAPTER 4 EMPLOYERS’ LIABILITY INSURANCE POLICY
3. Features
The following features of the clause must be noted:
a) The policy is contract of indemnity designed to pay all sums which the
insured is legally liable to pay the employees in his immediate service in
respect of personal injury (which includes death) by accident or disease
‘arising out of and in the course of the employment’.
b) The policy covers the insured’s liability arising under either common
law or the laws set out in the schedule viz. Workmen’s
Compensation Act - 1923, and the subsequent amendments of the said
Act prior to the date of the issue of the policy, and the Indian Fatal
Accidents Act - 1855.
c) Personal injury by accident or disease must be sustained by the

employee during the period of insurance.
d) Costs and expenses incurred by the insured with the consent of the
insurance company, to defend any claims from employees, are paid in
addition.
e) If any changes are introduced in the relevant laws imposing additional

liabilities on the insured the policy shall remain in force, but will not
provide any cover in respect of such additional liabilities.
4. Exceptions
The insurance company shall not be liable under this policy in respect of:
a) Any injury by accident or disease directly attributable to war and

nuclear risks.
b) The insured’s liability to employees of contractors to the insured.
c) Any liability of the insured which attaches by virtue of an agreement but

which would not have attached in the absence of such agreement.
d) Any sum which the insured would have been entitled to recover from any
party but for an agreement between the insured and such party.
e) Any compensation for diseases mentioned in Part C of the Schedule III of

the Workmen’s Compensation Act - 1923, which have been brought
within the scope of that Act by the Workmen’s Compensation
(Amendment) Act, 1959.
Note: b) and e) can be covered on payment of extra premium.

4
i. Exception a: Is the usual exclusion in respect of war and kindred perils.
ii. Exception b: The Workmen’s Compensation Act provides that where a

principal contracts with a contractor for the execution of any part or the
whole of the work which is ordinarily part of the Principal’s business the
latter is responsible for ‘employment’ accidents or disease sustained by
the contractor’s employees. This liability can be covered on payment of
additional premium.
iii. Exception c: Appears in all legal liability policies. This exception makes
it clear that the policy is concerned only with the insured’s liability
arising under specified laws and not with any liability assumed by him
under any agreement or arrangement.
iv. Exception d: The effect of this exception is to prevent the insured from
waiving his possible rights of recovery against any party by entering into
an agreement with such party.
v. Exception e: Excludes liability under the policy for certain diseases

brought within the scope of the Workmen’s Compensation Act by an
amendment in 1959. These diseases are Sillicosis, Coal Miner’s
Pneumoconiosos, Asbestosis, Bagassois. This liability can be covered at
extra premium.
5. Conditions under Workmen’s compensation insurance
The conditions which are specific to Workmen’s Compensation Insurance are

discussed below:
a) Condition 3: The insured shall take reasonable precautions to prevent

accidents and diseases and shall comply with all statutory obligations.
b) Condition 7: The policy is cancellable by the insurance company by

sending 7 days notice by registered letter to the insured at his last
known address, and premium adjusted in accordance with the condition.
c) Condition 6: The condition (6) deals with adjustment of premium and

reads as follows:
The first premium and all renewal premiums that may be accepted are
to be regulated by the amount of wages and salaries and other earnings
paid by the insured to employees during each period of insurance. The name
of every employee together with the amount of wages, salary and other
earnings shall be properly recorded and the insured shall at all times allow
the insurance company to inspect such records and shall supply the company
with a correct account of all such wages, salaries and other earnings paid
during any period of insurance within one month from the expiry date of
such period of insurance.

5
If the amount so paid shall differ from the amount on which premium has
been paid the difference in premium shall be met by a further proportionate
payment of the company or by a refund by the company as the case may be.
Premiums for this class of insurance are calculated on the amount of total
earnings of the employees. At the inception of the policy the premium is
calculated for obvious reasons on the estimated earnings of the employees
during the period of insurance.
The statement of actual earnings of the employees is required to be

submitted by the insured within one month from the expiry date of the
policy. Thereafter the premium is calculated on such actual earnings and
necessary and adjustment of the extra premium or refund, as the case may
be, is effected. It is the usual practice to send the Wages Adjustment
Statement form to the insured while inviting renewal of the policy. It is to
be noted that the condition provides for maintenance of proper wage book,
recording the names of the employees, and the amount of earnings. It is also
provided that these records shall be open to the insurer’s inspection at all
times.
The other conditions are those which usually appear in liability policies.
d) Condition 1: Says that the policy and the schedule shall be read
together and the words and expressions used will have the same meaning
wherever they occur.
e) Condition 2: Notice under the policy shall be delivered in writing.
f) Condition 4: Provides for notification of claims and of any impending

prosecution, inquest, summons etc. to be forwarded to the insurance
company immediately on receipt.
g) Condition 5: No admission of liability shall be made by the insured. The

insurance company shall have the right to conduct the defence or
settlement of claim. The Insured shall provide such assistance as
required by the Company.
h) Condition 8: Provides for settlement of difference under the policy

regarding amount of claim (liability being otherwise admitted) through
arbitration.
i) Condition 9: Compliance with the terms of the policy and the truth of
the answers in the proposal form are condition precedent to liability
under the policy.

6
6. Rating
This class of insurance was governed by the Tariff but now falls under the File &
Use guidelines of the IRDA. The policy wordings continue to apply. Most insurers
continue to use the occupation, classifications and rates of the erstwhile tariff
for determining premiums with minor modifications based on their individual
experience.
7. Forms
There are two forms of insurance policy:
a) Table - A: Indemnity against legal liability for accidents to employees

(whether or not coming within the definition of workmen) under:
i. The Workmen’s Compensation Act, 1923 and subsequent amendments of

the said Act prior to the date of issue of the policy
ii. The Fatal Accidents Act, 1855, and,
iii. At Common Law
b) Table - B: Indemnity against legal liability under:
i. The Fatal Accidents Act, 1855 and,

ii. At Common Law
Notes:
a) Where Table A Policy is issued all employees coming within the

provisions of the W.C. Act must be included.
b) Table B Policies cannot be issued to cover employees who fall within the
definition of ‘Workmen’ under the W.C. Act, 1923, as amended.
8. Premium calculation
The premium rates are in Rupees per mille and are to be calculated on the total
earnings of the employees. In certain cases, however, the rates are quoted per
capita (per head) e.g. domestic servants in private residences.
The terms earnings, wages, salaries are defined to mean the employees’ total
remuneration including overtime value of board and/or lodging, housing
accommodation, bonus and all other benefits which can be estimated in
money. Contribution paid by employees for pension, provident fund or
income tax deducted at source are not to be deducted from the total
earnings.

7
The rate of premium depends on the nature of work carried on by the insured.
These are determined on the basis of each trade or occupation. Within each
trade or occupation, if there are significant variations of hazards there may be
sub-divisions of risks, with differential rates.
The cover under Table B is on the basis of ‘negligence’ under Common Law,
whereas under Table A Policy the cover is in respect of liability under Common
Law (i.e. negligence) as well as under the W.C. Act (i.e. irrespective of
negligence). Hence Table A rates are higher than Table B cover.
Based on the nature of the risk, endorsements are incorporated in the policy.
These endorsements are closely linked with the rates that are charged for a
particular class of risk and they are designed to exclude liability in connection
with work for which a higher rate is applicable.
9. Extensions
Table ‘A’ policies may be extended to cover insured’s liability for contractor’s
workmen. It has been seen that Exception ‘B’ of the policy excludes from the
scope of the cover the insured’s liability to employees of contractors. However,
on payment of additional premium it is possible to extend the indemnity
granted under the policy to cover the legal liability of the insured to ‘Workmen’
employed by contractors. This Extension applies only in respect to work
performed by the contractors for the insured in the business and occupations
covered by the policy.
Secondly, the extension applies only with regard to claims under the Workmen’s
Compensation Act, 1923, with subsequent amendments prior to the date of the
issue of the policy. The premium for this extension is calculated at the
appropriate tariff rate upon the total amount of the contract, if the contract is
for labour only. Where the contract is for labour and material premium is
calculated upon the percentage of the full contract price to be determined
upon the merits of each case. However, where the insured is able to furnish the
returns of the actual wages paid to contractors employees, premium is
calculated upon the amount of such wages.
Compensation for occupational diseases (See exclusion (e) of the policy), may
be covered at an additional premium of 50% of the standard rate.
The policy may be extended to indemnify the insured in respect of the

reasonable medical surgical and hospital expenses (including cost of
conveyance to hospital) incurred by the insured in connection with any case
of injury to which the indemnity granted the policy applies or would have
applied had disablement exceeded three days.
The liability is limited to Rs. in respect of any one case of injury.
The percentage extra premium ranges, from 20% to 45% for a limit per case.

8
Note: W C Act of 1923, did not impose any obligation on employer regarding
reimbursement of medical expenses incurred by the worker. Coverage for
medical expenses for a limited extent ranging from Rs 80/- to Rs 2400/- per
case was being provided by the Insurers as an extension under W C policies.
However, as per the Workmen’s Compensation (Amendment) Act 2009, “the
employee shall be reimbursed the actual expenditure incurred by him for
treatment of injuries caused during course of employment”. This provision
mandates that employer shall be liable for the medical expenses incurred by the
employee without any ceiling on the expenses. Following this, some of the
Insurers are providing wider medical expenses cover under W C policies as
extension by suitable loading of premium. The cover could be for unlimited
amount or with a limit which varies from Insurer to Insurer.
10. Proposal forms
As is the practice in all classes of accident insurance, proposal form is

compulsorily used and is made the basis of the contract. Besides the declaration
to the effect that the statements and particulars submitted in the proposal form
are true, the proposer also declares that he has fairly estimated the total wages
and salaries expenditure and that he agrees to render at the end of each period
of insurance a statement of all wages actually paid and to pay premium on any
wages paid in excess of the amount, estimated in the proposal. The following
comments are made on the questions which appear in the proposal form:
a) The name and business address of the proposer are required for the
purpose of identification and incorporation in the policy.
b) Full particulars of proposer’s trade or occupation with precise

description of work are necessary so that the appropriate tariff
classification may be determined and the rate of premium applied.
c) The schedule of employees, showing the estimated number and the

estimated annual wages, salaries and other earnings separately for
employees drawing more than and less than Rs. 4,000/- per month is
required. This information is also elicited separately for:
i. Clerical
ii. Commercial Travellers
iii. Employees engaged with wood-working machinery including machinists
and machinists labours, and
iv. Other categories to be specified
d) If the proposer desires to insure his liability under the Workmen’s

Compensation Act, 1923, to the Workmen of sub-contractors
the following information is required:
i. Name of Contractors
ii. Nature of Work sublet
iii. Estimated amount of contract (a) labour only (b) labour and material
9
e) Information is elicited to ascertain if the premises are a ‘factory’ within

the meaning of the Factories Act, whether a recent inspection of the
factory was made by the inspector of factories, and if the boiler, if any,
is registered under the Indian Boiler Act, 1923.
f) The full particulars are required to be submitted of any circular saws or

other machinery driven by steam, gas, water, electricity or other
electrical power, and the use of acid, gases chemicals or explosives. This
information has not only an important bearing on rating and acceptance
but may also necessitate a survey of the risk.
g) The other questions relate to past insurance history, total wages paid
and accidents of employees during the past 3 years. Particulars of the
latter are subdivided into fatal, permanent disablement and temporary
disablement.
11. Claims
The Workmens’ Act requires the employer to deposit compensation for death
within a month of the event, delays invite interest and penalties. The onus is
therefore on the employer to arrange for all documents and make payment in
the court.
12. Employees State Insurance Scheme (ESIS)
This is a social legislation for all industrial workers where notified. All industries
and organisation coming within the ambit of the scheme are required to be
registered and all employees details with eligible family member details to be
provided. Establishments once enrolled will continue to be part of the scheme.
It is a contributory scheme and deductions towards membership are
compulsorily deducted from enrolled employee wages. The scheme overrides
the Workmen's Compensation Act. In effect persons covered under the ESIS are
not eligible for Workmen’s Compensation benefits.
a) Applicability
The scheme applies to:
i. All factories using power and having 10 or more employees on rolls;

ii. Non-powered factories employing 20 or more employees; and
iii. Shops, hotels, restaurants, cinemas and theatres, road motor transport
undertakings and newspaper establishments having 20 or more
employees on rolls
As per the amendment effective from 2010, all the factories employing 10 or
more employees are eligible for this scheme irrespective of whether it is
using power or not. The wage limit for eligibility is Rs. 15000/- per month

0
b) Benefits
The scheme provides for all hospitalisation treatment of the member and
dependents. In addition allowance for diseases and long term ailments are
also provided to members. The scheme extends to provide compensation for
employment related accidents and occupational diseases. In the event of
death from such ailments dependents are provided an allowance.
It is thus observed that the ESIS provides wider benefits than the WC Act for
the members covered. However the monthly wage eligibility limits the
beneficiaries. Persons over this wage limit would be eligible to Workmen’s
Compensation benefits.
13. Minimum Wages Act
The minimum wages act is a Central Government legislation laying down

minimum daily wages to be paid to labour employed in various occupations.
Each state has the authority to define the minimum wage for districts within
their territory. These limits have a bearing on the compensation calculations for
the purpose of the Workmen’s Compensation Act.
It is often observed that the Workmen’s Commissioner rules that compensation

is to be calculated on the minimum wage in cases where less than minimum
wage has been paid to workers. Further in the case of daily wage workers the
monthly wage is calculated on a 30 multiplier. The contention being that even
daily wages are eligible to a weekly off and hence off-day allowance should be
provided.
Test Yourself 4
Which of the below is correct with regards to the premium calculation under
the Employer’s Liability Insurance Policy?
I. The premium rates are to be calculated based on the age of the employees
II. The premium rates are to be calculated on the total number of employees
III. The premium rates are to be calculated on the total earnings of the
employees
IV. The premium rates are to be calculated based on the health status of the
employees

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CHAPTER 4 CARRIERS LEGAL LIABILITY INSURANCE POLICY
F. Carriers Legal Liability Insurance Policy
The Carriers Legal Liability Policy is offered to road transport companies

carrying on the business of common carriers. In terms of the Carriers Legal
Liability Act, road transporters were absolutely liable for losses to cargo in their
custody whilst in transit. .
1. Coverage
There are two types of covers available:
a) Basic
It provides for liability on the carrier arising out of fire, explosion or

accident caused by negligence by the insured or their employees or
representatives whilst in transport vehicles.
b) Wider
Coverage for liability arising out of:
i. Perils of fire, explosion or accident due to negligence as covered under

the basic policy
ii. In addition liability resulting in loss or damage due to the perils of fire,
riot and strike, malicious damage, burglary whilst goods are in carriers
custody
iii. Shortage due to theft and pilferage
iv. Flood / water damage, damage by other cargo, breakage, leakage,
damage due to improper handling
2. Exclusions
a) Riot and strike (available as add-on), war perils, nuclear and radiation
perils, contractual liabilities, liability to own, employees, agents and
sub-agents and their properties and belongings
b) Losses due to inherent defects, mechanical or electrical derangements
c) Consequential loses
d) Carriage of illegal, illicit or smuggled goods
3. Duration of cover
The cover is during transit, incidental storage, transshipments and upto seven
days after reaching final place.

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MULTIMODAL TRANSPORT OPERATOR (MTO) LIABILITY INSURANCE POLICY CHAPTER 4
4. Conditions
Some of the important conditions are:
a) The vehicle should be maintained in road-worthy condition

b) Vehicle should be insured for motor comprehensive risk at all times
during the currency of the policy. The insurer should not be changed
mid-term.
c) On payment of a loss the sum insured is to be reinstated.
It will be observed that the policy follows the coverage under road transit
marine insurance.
5. Rating
The premium is charged on the indemnity limit selected. In addition a premium

per vehicle is also charged, which is usually based on the Gross Vehicle Weight
of the vehicle and the nature of the cargo carried. Hazardous material invites a
loading on the premium.
G. Multimodal Transport Operator (MTO) Liability Insurance Policy
The Multimodal Transportation of Goods Act 1993 provides for legal liability for
loss or damage to cargo. It provides for the creation of a licensed operator
called the MTO who could be held responsible for the loss or damage to the
cargo entrusted to them for transportation. One of the requirements of the MTO
license is the insurance to cover the liability that arises on them. Arising out of
this need the MTO liability insurance policy has been devised.
Multimodal Transport Operators face a wide range of liability exposures because

they may:
a) Act for their Principal in arranging shipping and transport services; or

b) Contract with the cargo owner to transport goods; or
c) Provide expert advice, assistance and opinions
1. Insurance market in India
Although the MTO Act came into effect in 1993, Indian insurers were not
providing this cover till 2001. Currently few insurers are offering this cover in
the market. In the light of above Ministry of Finance had given special
dispensation allowing foreign insurers to directly underwrite this business.

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CHAPTER 4 MULTIMODAL TRANSPORT OPERATOR (MTO) LIABILITY INSURANCE POLICY
2. Coverage
Multimodal Transport Operator Liability Policy provides indemnity where the

insured is liable to:
i. A customer or third party for loss or damage to cargo in the insured's

care, custody or control;
ii. A third party for death, bodily injury or damage to property;
iii. A customer or third party for errors and omissions or professional
negligence;
iv. An Authority for fines and duty;
a) Cargo liability
Under this section indemnity is provided to the insured for its legal liability and
claims expenses in respect of claims which arise from:
i. Physical loss of or physical damage to cargo provided such legal liability

arises from:
 An international transport convention; or

 A national transport law which is compulsorily applicable to the
insured; or
 Any standard trading conditions approved by a national freight
forwarding, road haulage or warehousing association of which the
insured is a member; or
 FIATA or COMBICON Bill of Lading; or
 The insured’s house bill of lading or standard trading conditions
provided such conditions and limitations of carriage or trade accept
no greater liability or responsibility for the insured than those in the
FIATA standard bill of lading or national association standard
conditions respectively; or
 The Indian Multimodal Transport Act, 1993 and any statutory
amendments
ii. For Consequential Loss directly arising from the above
iii. The Cargo’s contribution to general average and salvage which the
insured is unable to recover from a customer, agent or sub-contractor.

4
iv. Under this section claim expenses related to the following is also
payable:
 Extra costs incurred by the insured due to the total failure of a

consignee to collect or remove cargo from the place of delivery
 Extra costs incurred by the insured for sending mis-directed cargo to
the correct destination provided that such costs are not for air
transport unless the original transport contract included air
transportation;
 Costs incurred by the insured for quarantine, fumigation or
disinfection arising other than in the normal course of business;
 Costs relating to the removal of debris following an accident for
which the insured is liable
Provided that such claim expenses described above is subject to a sub limit
of indemnity and sub-deductible as specified in the insurance schedule.
b) Third party legal liability
Under this section indemnity is provided to the insured for its legal liability
and claims expenses in respect of a claim arising from an accident whilst
directly performing an insured service causing:
i. Bodily injury to a third party; or

ii. Physical loss of or physical damage to third party property; or
iii. Consequential loss suffered by a third party which directly arises from a
claim that the insured is covered for under either paragraph i or ii above
c) Professional indemnity
This is generally an extension under the policy and shall apply only if it has
been noted and included within the insurance schedule. Under this
extension indemnity provided is for the legal liability for a claim and claims
expenses arising from:
i. The negligent performance of a professional duty;

ii. Fraud by an employee, other than a partner, executive officer, managing
employee, director, chairman, president, vice-president or trustee,
provided that such fraud is not intended to confer any benefit on the
insured, and the insured provide evidence to the company’s satisfaction
that the employee(s) is disciplined accordingly;
iii. Libel, slander or infringement of personal rights that has not arisen from
publication in an independent journal, magazine, newspaper, website or
electronic publication or in any pre-arranged radio or television
interview;
iv. An unintentional breach of warranty of authority where the insured has
contracted on another person’s behalf believing they have the authority
to do so;

5
v. A misdirected claim against the insured, being one which results from:
 An accident for which legal liability would in the normal course of

vessel operations be covered by any protection and indemnity policy
for the vessel owner or operator; or
 A contract into which the insured entered, within the scope of the
insured services, believing that the insured was acting "as the
principal’s agent only", provided that the insured can prove to the
insurance company’s satisfaction that the insured did not intend to
contract in the insured’s own name.
d) Fines and duties
This is also an extension under the policy and shall apply only if it has been
noted and included within the insurance schedule.
Cover provided under this extension is for legal liability for a claim and
claims expenses arising from an unintentional breach of any regulation legal
or statutory provision resulting in fines, customs duty, sales, excise tax,
value added tax or similar fiscal charges or other penalty imposed by an
Authority on the insured or other persons acting within their authority on
the insured’s behalf provided that such breach relates directly to:
i. The import or export of cargo or carrying equipment which is not owned

or leased by the insured; or
ii. Immigration; or
iii. Pollution; or
iv. The safety of working conditions
3. General exclusions
Some of the important exclusions are:
a) The insured's, or its sub-contractor’s or agent’s, own illegal trade,

dishonesty, infidelity or fraud, collusion, malicious, willful or deliberate
act(s) or reckless conduct.
b) Any provision in a contract with a customer whereby the insured incurs

liability without fault or negligence unless cover for the contract has
been granted by the Insurer and is noted within the insurance schedule.
c) Any indemnity agreement or performance guarantee with respect to

time or otherwise, or waiver not to rely on any defence or limitation of
liability, unless prior written approval has been granted by the insurer
and is noted within the insurance schedule.
d) The handling, storage or carriage of cargo which is contraband or in an

illegal trade.

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e) The safe working load or manufacturers guidelines of the insured's

handling equipment being exceeded.
f) Any contractual penalty.
g) Any penalties, liquidated damages, punitive or exemplary damages

however awarded or described or any additional damages resulting from
the multiplication of compensatory damages, fines, customs duty, sales
or excise tax or similar fiscal charge. If extension has been noted and
included as applicable to the insurance contract in the insurance
schedule the aforesaid exclusion for fines, customs duty, sales or excise
tax or similar fiscal charge shall not apply only insofar as the extension
provides for such cover.
h) Mysterious disappearance or unexplained loss or shortage upon taking a

stock take or similar inventory check.
i) Any infringement of copyright, patent, service mark, registered design or

trade name.
j) Inherent vice, patent or latent defects, ordinary leakage, ordinary loss in

weight or volume, ordinary wear and tear, ordinary corrosion and
oxidisation, fatigue or gradual deterioration.
k) The insured’s insolvency, liquidation, bankruptcy, receivership, trading

whilst insolvent or any other financial default or the extension of credit
or arising from the insured’s inability or failure to pay or collect its
debts.
l) The unsuitability of or any defect in:
i. Goods or products manufactured, processed, graded, blended, supplied

or sold by the insured or on its behalf;
ii. Material used or repairs carried out by the insured or on its behalf;
iii. Any withdrawal, recall, return, inspection, replacement or loss of use
m) Bullion, cash, bank notes, bonds, stamps, vouchers, tokens, negotiable

instruments or securities of any kind.
n) any claim made by one insured against any other or any claim made by
an associated, parent or subsidiary company or by any person or entity
having a financial or executive interest in the insured’s operation.

7
o) Seepage, pollution or contamination unless such is:
i. Caused by an event which is sudden and accidental, and such event first
commenced on an identified specific date during the period of
insurance; and
ii. The event is discovered and made aware to the insured within seven
days after it first commenced, unless such arises from cargo not in the
insured’s care, custody or control; and
iii. Reported to the company as required under the terms and conditions of
the insurance contract;
p) The bodily injury of the insured’s employees, employees of any agent or

sub-contractor, or any third party deemed to be an employee, including
claims made under any worker's compensation.
q) The dumping, handling, processing, treatment, storage of any waste or

spoil.
r) Loss, damage, cost or expense directly or indirectly caused by,

contributed to or arising from or in consequence of any of the following,
regardless of any other cause or event contributing concurrently or in
any other sequence to the loss:
i. Industrial dispute, boycott, stoppage, restraint of labour, strike, lock-

out, labour disturbance, riot, civil commotion, war, invasion, acts of
foreign enemies, hostilities (whether war be declared or not), civil war,
rebellion, revolution, insurrection, civil strife, military or usurped power
or confiscation or nationalisation or requisition or destruction of or
damage to property by or under the order of any government or public or
local authority;
ii. Any act of terrorism, which means an act including but not limited to the
use of force, violence or the threat of violence of any person or group of
persons whether acting alone or on behalf of or in connection with any
organisation or government committed for political, religious, ideological
or similar purposes including the intention to influence any government
and/or to put the public or any section of the public in fear
iii. Any continuous, intermittent or repeated exposure to or ingestion,

inhalation, installation, distribution, manufacture, sale, utilisation,
existence or absorption of the following substances or conditions in any
form:
iv. Asbestos, tobacco, alcohol, coal dust, polychlorinated biphenyls, silica,

benzene, lead, talc, dioxin, pharmaceutical products or drugs of any
type, pesticides or herbicides, human immune virus or acquired immune
deficiency syndrome or electromagnetic fields

8
s) loss, damage, liability or expense directly or indirectly caused by,

contributed to by or arising from:
i. Ionising radiations from or contamination by radioactivity from any

nuclear fuel, any nuclear waste or from the combustion of nuclear fuel;
ii. The radioactive, toxic, explosive or other hazardous or contaminating
properties of any nuclear installation, reactor or other nuclear assembly
or nuclear component thereof;
iii. Any weapon or device employing atomic or nuclear fission and/or fusion
or other like reaction or radioactive force or matter;
iv. The radioactive, toxic, explosive or other hazardous or contaminating
properties of any radioactive matter. The Exclusion in this sub-clause
does not extend to radioactive isotopes, other than nuclear fuel, when
such isotopes are being prepared, carried, stored, or used for
commercial, agricultural, medical, scientific or other similar peaceful
purposes;
v. Any chemical, biological, bio-chemical, or electromagnetic weapon
4. Rating
The economic measure for rating MTO business is determined either by:
a) Gross Freight Receipt (GFR)

b) Number of containers handled (in terms of 20 TEU)
The rate shall also depend on the following:
i. Limit of Liability for Cargo & Third Party Liability

ii. Extensions opted
iii. Deductibles
iv. Past Claims Experience
v. Nature of Cargo handled
vi. Destination of Cargo (e.g. the % of cargo normally dealt with towards
USA/South America/Eastern Europe/Africa etc.)
vii. Quality of Management
Test Yourself 5
To be eligible to be covered under the Employees State Insurance Scheme (ESIS)

how much is the maximum wage limit?
I. Rs. 6,000 per month

II. Rs. 10,000 per month
III. Rs. 15,000 per month
IV. Rs. 18,000 per month

9
CHAPTER 4 SUMMARY
Summary
a) The purpose of Public Liability Act (PLI) is to provide immediate relief to

persons affected by use of hazardous materials. It does not apply to
employees of the organisation handling hazardous materials.
b) The amount of relief payable under the PLI Act is specified under the
provisions of Section 3.
c) According to Section (4) of the PLI Act, the liability has to be compulsorily
insured under a contract of insurance.
d) Rule 10 framed under the PLI Act provides the maximum aggregate liability
of the insurer has to pay relief under an award to the several claimants
arising out of an accident
e) The Central Government may, by notification, exempt certain entities from

compulsory insurance
f) The Collector (who has the powers of a Civil Court), is empowered to hold
an enquiry into any claim and to make an award of relief which appears to
him to be just.
g) The operative clause of the Compulsory Public Liability Policy provides that
the insurance company will indemnify the insured owner against the
statutory liability arising out of accidents occurring due to handling
hazardous substances subject to the terms and conditions of the policy.
h) The premium of a Compulsory Public Liability Policy is based on the Limit of

Indemnity ‘any one accident’ (AOA) and the turnover
i) According to Section 3 of the Workmen’s Compensation Act, the employer is

liable to pay compensation laid down in the Act if personal injury is caused
to workmen by accident arising out of and in the course of his employment.
j) The amounts of compensation, specified in the WC Act vary for death,

permanent and temporary disablement (total or partial).
k) Payment of compensation for death has to be deposited by the employer

with the Commissioner whose receipt shall be a sufficient discharge.
l) The Employers’ Liability Insurance Policy is contract of indemnity designed

to pay all sums which the insured is legally liable to pay the employees in his
immediate service in respect of personal injury (which includes death) by
accident or disease ‘arising out of and in the course of the employment’.

0
SUMMARY CHAPTER 4
m) For Employers’ Liability Insurance Policy, most insurers continue to use the
occupation, classifications and rates of the erstwhile tariff for determining
premiums with minor modifications based on their individual experience.
n) For Employers’ Liability Insurance Policy, the premium rates are in Rupees
per mille and are to be calculated on the total earnings of the employees.
o) The proposal form contains details like name and business address of the
proposer, Full particulars of proposer’s trade or occupation, schedule of
employees, factory details with details of all equipment, tools and
machinery used and some other details that the insurer may need.
p) The Workmens’ Act requires the employer to deposit compensation for

death within a month of the event, delays invite interest and penalties.
q) The ESIS is a contributory scheme and deductions towards membership are

compulsorily deducted from enrolled employee wages.
r) The scheme provides for all hospitalisation treatment of the member and
dependents. The scheme also provides some other benefits.
s) The Carriers Legal Liability Policy is offered to road transport companies

carrying on the business of common carriers.
t) There are two types of cover available: Basic and Wider.
u) The premium is charged on the indemnity limit selected. The policy comes
with certain terms and conditions.
v) The Multimodal Transportation of Goods Act 1993 provides for legal liability
for loss or damage to cargo.
w) Multimodal Transport Operator Liability Policy provides indemnity where the

insured is liable to a customer or third party for loss or damage to cargo or a
third party for death, bodily injury or damage to property.

1
Answer 1
As per provisions of Section 3 of the Public Liability Insurance Act, 1991, if a

person suffers a fatal accident, then the maximum amount of relief payable is
Rs. 25,000.
Answer 2
Risks related to war and nuclear risks are excluded.
Answer 3
Under the provisions of the Employee’s Compensation Act, 2009, the minimum
amount payable on the death of an employee while performing his duties is Rs.
1,20,000.
Answer 4
Under the Employer’s Liability Insurance Policy the premium rates are to be
calculated on the total earnings of the employees.
Answer 5
To be eligible to be covered under the Employees State Insurance Scheme (ESIS)

the wage limit is Rs. 15,000 per month.

2
Question 1
As per provisions of Section 3 of the Public Liability Insurance Act, 1991, if there
is damage to a person’s property, then how much is the maximum amount of
relief payable?
I. Rs. 3,000
II. Rs. 6,000
III. Rs. 9,000
IV. Upto the actual amount of damage without any maximum limit
Question 2
Which of below statement is correct with regards to right to claim

compensation under the Public Liability Insurance, 1991?
I. If a person claims compensation under Public Liability Insurance Act, 1991,

then he cannot claim compensation under any other law for the time being
in force
II. If a person claims compensation under any other law for the time being in
force then he cannot claim compensation under Public Liability Insurance
Act, 1991
III. A person can claim compensation under Public Liability Insurance Act, 1991
and under any other law for the time being in force without any limits
IV. If a person claims compensation under any other law for the time being in
force then the court award will deduct the amount paid under the Public
Liability Insurance Act, 1991.
Question 3
Which of the below statement is true with regards to the timeframe within
which a claim should be made from the date of accident under the Compulsory
Public Liability Insurance Policy?
I. There is no timeframe within which a claim should be made from the date of
accident
II. The claim should be made any time before the renewal of the policy
III. The claim should be made within one year from the date of accident
IV. The claim should be made within five years from the date of accident

3
Question 4
Which of the below statement is correct with regards to cancellation of

Compulsory Public Liability Insurance Policy?
I. One of the conditions of the policy allows the insured to cancel the policy
with 30 days written notice to the insurer. Premium is refunded according to
short period scale subject to there being no claim under the policy.
II. One of the conditions of the policy allows the insured to cancel the policy
with 30 days written notice to the insurer. But there will be no refund of
premium under any circumstances.
III. Insured cannot cancel the policy till the time of renewal. Only the insurance
company can cancel the policy before renewal by giving 30 days written
notice. Also there will be no refund of premium under any circumstances.
IV. Either party can cancel the policy with 60 days written notice to the other
party. If the insurer cancels the policy, then there will be refund of
premium on proportionate basis and if the insured cancels the policy then
there will be no refund of premium under any circumstances.
Question 5
In case of a multimodal transport operator liability insurance policy, the rating

depends on which of the below?
I. Limit of Liability for Cargo & Third Party Liability

II. Deductibles
III. Nature of Cargo handled
IV. All of the above
Answer 1
As per provisions of Section 3 of the Public Liability Insurance Act, 1991, if there
is damage to a person’s property, then the maximum amount of relief payable is
Rs. 6,000.
Answer 2
If a person claims compensation under any other law for the time being in force
then the court award will deduct the amount paid under the Public Liability
Insurance Act, 1991.

4
Answer 3
Under the provisions of the Compulsory Public Liability Insurance Policy, a claim
should be made within 5 years from the date of accident. As per one of the
conditions of the policy there shall be no liability under the policy for a claim
made after 5 years from the date of accident.
Answer 4
One of the conditions of the policy allows the insured to cancel the policy with
30 days written notice to the insurer. Premium is refunded according to short
period scale subject to there being no claim under the policy.
Answer 5
In case of a multimodal transport operator liability insurance policy, the rating

depends on Gross Freight Receipt (GFR), Number of containers handled (in
terms of 20 TEU) and below factors:
a) Limit of Liability for Cargo & Third Party Liability

b) Extensions opted
c) Deductibles
d) Past Claims Experience
e) Nature of Cargo handled
f) Destination of Cargo (e.g. the % of cargo normally dealt with towards
USA/South America/Eastern Europe/Africa etc.)
g) Quality of Management

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6
CHAPTER 5
GENERAL PUBLIC LIABILITY (INDUSTRIAL / NON-

INDUSTRIAL RISKS)
This chapter discusses the industrial and non-industrial risks, the difference
between the two and the various clauses in a public liability policy including
exclusions, conditions applicable and the various extensions of coverage
available under a public liability policy (for both industrial and non-industrial
risks).
It also aims to provide you with knowledge about the detailed information which
is collected from the proposer through proposal forms for both industrial and
non-industrial risks.
Learning Outcomes
A. Industrial and non-industrial risks and clauses of a public liability policy

B. Exclusions and conditions stated in a public liability policy
C. Extension of coverage available under a public liability policy
D. Proposal form for a public liability policy

CHAPTER 5 INDUSTRIAL AND NON-INDUSTRIAL RISKS AND CLAUSES OF A PUBLIC LIABILITY POLICY

Every business needs a public liability policy that is tailored to its specific risks
and requirements. A public liability policy helps to protect the business against
the financial risk relating to death, bodily injury or damage to property suffered
by any third party including members of the general public, their employees or
any other business they work with. This policy covers only the civil wrong either
under common law or under statutes due to breach of duty by the insured
resulting in bodily injury or damage to the property of a third party.
In public liability arising out of the law of tort or common law, the claimant is
required to prove negligence on the part of the opposing party. It is thus
necessary for the claimant to prove injury or damage due to errors or omissions
on the part of the defendant. Coverage under a public liability policy falls
within the property and casualty classification.
The liability risk is categorized into:
1. industrial risks and

2. non-industrial risks
The structure of the policy form for both industrial risks and non-industrial risks
is almost identical, with many clauses, exclusions and conditions being common.
In this chapter, we will mostly discuss the industrial risks policy form which is
generally being followed. A few differences are there between the two policy
forms, which will be identified and discussed, wherever they occur.
A. Industrial and non-industrial risks and clauses of a public liability

policy
The categorisation of industrial and non-industrial risks is as under:
a) Industrial risks are manufacturing industries. Storage risks such as

depots, warehouses, godowns, tanks and farms which are incidental to
the business activities of the manufacturing plant are also considered as
Industrial risks.
b) Non-industrial risks are the risks other than industrial risks and
include the following:
i. Hotels, motels, club houses, restaurants, boarding and lodging houses,

flight kitchens.
ii. Cinema halls, auditoriums, theatres, public halls, pandals, open air
theatres.
iii. Residential premises.
iv. Office/administrative premises, medical establishments, airport
premises other than aviation liabilities, research institutes and
laboratories.
v. Schools, educational institutions, public libraries.

INDUSTRIAL AND NON-INDUSTRIAL RISKS AND CLAUSES OF A PUBLIC LIABILITY POLICY CHAPTER 5
vi. Exhibitions, fairs and fetes, stadia

vii. Permanent amusement parks.
viii. Film studios - indoor and outdoor, circus, zoos.
ix. Depots, warehouses, godowns, shops, tanks, farms and similar other non-
industrial risks.
The policy form for an industrial risk consists of various clauses which will
now be discussed.
(Note 1: A specimen policy form for ‘industrial risks’ is provided in Appendix-1.

The student should carefully read the policy form, clause by clause along with
the comments which follow.
Note 2: The policy wordings, clauses, deductibles etc. discussed here are as per
the market agreement between the general insurers in the past and the actual
wordings being used by the Insurers now may differ from these wordings based
on the filed wordings.)
1. Operative clause (clause 1)
This clause refers to,

a) Written proposal form which is the basis of the contract and,
b) The payment of premium by the insured.
The clause further specifies that the Insurance company will indemnify the
Insured against their legal liability (other than liability under the Public
Liability Insurance Act, 1991, or any other Statute based on ‘No-fault’
liability) to pay compensation including claimant’s cost etc. anywhere in India
according to Indian Law.
(Note: The words in the bracket do not appear in the operative clause of the
Non-Industrial Risks Policy. Instead, Exclusion 8.16 of the policy provides for the
same.)
2. Indemnity (clause 2)
The clause provides that the indemnity applies to claims arising out of accidents
occurring in the insured premises, during the period of insurance; first made in
writing against the Insured during the policy period.
Subject to the above, the Insured is indemnified in accordance with the

operative clause for injury and/or damage as defined but only against claims in
connection with the business specified in the Schedule.
The clause specifically excludes claims arising out of;
a) Pollution: it can be covered on payment of extra premium.

b) Any product: it can be covered by a separate policy.
The definitions given in the second part of the clause are discussed below which
will help to understand the provisions of the main clause.
a) ‘Injury’ means death, bodily injury, illness or disease of or to any

person. These are known as ‘Personal Injuries’.
The term ‘Injury’ has been given a specific meaning in the policy. In this
context reference should also be made to exclusion in clause 8.5(a) which
provides that the policy does not cover liability arising out of personal
injuries such as libel, slander, false arrest, wrongful detention etc. and
mental injury, anguish or shock resulting there from.
b) ‘Damage’ means actual and/or physical damage to tangible property.
The term ‘property’ generally refers to all the legal rights possessed by a
person in respect of material and immaterial things, including copyrights
etc. However, property here means only tangible or material property.
The meaning of the term will be clear when it is read with exclusion 8.5(b)
of the policy which provides that the policy does not cover liability arising
out of ‘infringement of plans, copyright, patent, trade name, trademark,
registered design’. At law, these also come under the term ‘property’.
c) ‘Pollution’ means pollution or contamination of the atmosphere or of

any water, land or other tangible property.
d) ‘Product’ means any tangible property after it has left the custody or
control of the Insured, which has been designed, specified, formulated,
manufactured, constructed, installed, sold, supplied, distributed,
treated, serviced, altered or repaired, by or on behalf of the Insured,
but shall not mean food and beverages supplied by or on behalf of the
Insured, primarily to the Insured employees as a staff benefit.
Thus, if a product which is still in the custody or control of the Insured,

causes injury or damage, liability for such claims is covered under the
policy; otherwise, the liability may be covered under a separate products
liability policy.
Secondly, food and beverages supplied as a staff benefit are not products
within the meaning of the definition. Thus, liability for claims for injury
arising out of food poisoning, for example, is covered under the policy.
e) ‘Policy period’ means the period commencing from the effective

date and hour as shown in the Policy Schedule and terminating at
midnight on the expiry date as shown in the Policy Schedule.

Example
A policy taken for one year may have the policy period commencing at 11 A.M.
on 1.1.2012 and expiring at midnight on 31.12.2012.
f) ‘Period of insurance’ means the period commencing from the

retroactive date and terminating on the expiry date as shown in the
Policy Schedule. The retroactive date is separately mentioned in the
Schedule.
(Note: This date is relevant for the coverage under the policy and is
explained later.)
Example
If the policy period was from 1 January 2012 to 31 December 2012 and it was
renewed the next year from 1 January 2013 to 31 December 2013, then under
the renewed policy, the retroactive date will be 1 January 2012, i.e. the
beginning date of the initial policy, and it will continue to be retroactive date
under all subsequent renewals.
g) Accident’ means a fortuitous event or circumstance which is sudden,

unexpected and unintentional including resultant continuous
intermittent or repeated exposure arising out of the same fortuitous
event or circumstance.
In the early days of liability insurance, the term ‘accident’ was given its
popular meaning as "an unlooked for mishap, or an untoward event which is
neither expected nor designed". However, due to various developments in
case laws in the U.K., U.S.A. etc. it was later felt necessary to have a more
precise and specific definition.
There are two ingredients in this definition.

i. The fortuitous event must be sudden, unexpected and unintentional. The
exact time and place of occurrence must be identifiable.
Example
An industrial air pollution which occurs continuously may cause illness to the
people in the area. This is not ‘accidental’. However, if there is a breakdown
of plant due to an accident, resulting in air or other pollution which causes
injury, illness etc. it is considered to be accidental.
ii. The second ingredient refers to continuous, intermittent or repeated

exposure arising out of the same fortuitous event.

Example
An event which satisfies the first pre-requisite may result in instant injury,
death or damage to property. However the same event, such as accidental
pollution may expose the persons to continuous for intermittent or repeated
exposure and may eventually, result in death, injury, illness or damage to
property (for example, a person may suffer from asthma or cancer due to such
pollution). This is also covered by the definition.
h) ‘Premises’ shall be deemed to include pipelines running outside the

premises for discharge of treated effluents at a disposal point situated
within a distance of one kilometre from the premises.
The location of the Insured premises is specified in the Schedule. This

definition becomes relevant to the Effluent Discharge Extension dealt later.
The important feature of the indemnity clause is the ‘claims made’ basis of
cover. This may be explained with an example.
Example
If the policy is taken for the first time the period of policy is, say, 1 January
2012 to 31 December 2012. The retroactive date will be 1 January 2012. If
accidents occur during 2012 and claims are made against the insured during
2012, the policy coverage applies.
If the policy is renewed for the period 1 January 2013 to 31 December 2013, it
will cover the accidents which occur during 2013 and claims for which are also
made against the insured during 2013.
However, if accidents have occurred during 2012, and claims are made against
the insured during 2013, the 2013 renewed policy will cover these claims also
because the retroactive date under the renewed policy is 1 January 2012 (the
original date of commencement of the first policy). This date will continue to
be the retroactive date in all subsequent renewals without any break in the
period of cover.
3. Notification extension clause (clause 3(a))
This clause provides that the Insured may notify the company in writing during
the policy period, of any specific event or circumstance which may give rise to a
claim in the future, that is, after the expiry of the policy period.
Acceptance of such notice by the company would mean that the company
agrees to deal with such claims which may be lodged in the future as if they
were first made against the insured during the policy period.
However, this extension is not for an indefinite period but is subject to the
maximum time limit laid down in the Indian Limitation Act.

4. Extended claim reporting clause (clause 3(b))
This clause provides for extension of time limit for notification of claims for the
accidents which had taken place during the period of insurance, but could not
be made during the policy period. This extension of time limit applies only in
the event of non-renewal or cancellation of the policy, either by the company
or by the Insured. The time limit is generally for maximum of 90 days from the
date of expiry or cancellation of the policy, as the case may be.
The extension is subject to the provisos that;
a) No other insurance is in force during the extended reporting period for

the same interest, and,
b) Such claims shall be dealt with as if they were made on the last day of
the expiring policy period and subject to the limit of indemnity and its
terms and conditions applicable as on that date.
Example
Sunrise Industries purchased an industrial public liability policy on 1 July 2011

for coverage of liability arising out of any accidents in their premises for a
period of one year. The policy was not renewed by the company in the next
year after the date of expiry, i.e. 30 June 2012. The company has not taken any
other insurance also after the expiry date.
The company received a claim on 15 September 2012 from Suresh for injuries
caused to him while in their premises on 31 March 2012 due to a wet and
slippery floor.
The insurance company shall accept the claim under the extended claim
reporting clause as it was made within 90 days of the expiry date and no other
insurance was in the force during that period. Moreover, the claim will be
treated as if it was made on the last day of the period of insurance, i.e. 30 June
2012, and will be subject to the indemnity limits, terms and conditions
applicable on that date.
5. Indemnity to others (clause 4)
This clause provides that the indemnity under the policy also extends to cover
liability of;
a) Officials of the Insured:
i. In their business capacity arising out of the performance of their

business or
ii. In their private capacity arising out of their temporary engagement of
the insured’s employees.
b) The officers, committees and members of the Insured’s canteen, social,

sports, medical, firefighting and welfare organisations in their respective
capacities as such.
c) The personal representatives of the estate of any person entitled to

indemnity under this clause.
This additional benefit under the policy is subject to compliance by such

persons with all the terms and conditions as though they were the Insured.
The Insured named in the policy is entitled to indemnity under the policy. This
named Insured usually a limited company is a separate legal entity.
However, it is possible that in some cases, claims based on negligence etc. may
be made against the insured company’s officials personally. Thus, this clause
extends the benefit of cover to such officials.
Example
Many firms provide recreation facilities for the employees (e.g. cricket,
football, hockey, etc.) and auxiliary services such as first aid, ambulance,
firefighting etc. The officers, committees etc. in charge of such facilities and
services may incur personal legal liability for any negligence while acting in
their respective capacities.
The clause 4.2 extends the indemnity to the officers, committees and members
of the Insured’s canteen, social, sports, medical and fire fighting and welfare
organisations in their respective capacities as such. In the event of death of
such persons to be indemnified, the indemnity is still available to the personal
representatives of the estate of such person (i.e. legal heirs).
6. Cross liabilities (clause 5)
This clause is incorporated in the policy where more than one Insured is covered
under the Policy.
In certain circumstances, the insured persons can have a claim against each
other for injury or damage falling within the scope of the policy. These are
called ‘cross claims’ and the payment of such claims is provided by ‘cross-
liabilities clause’.
Each such person is deemed to be a separate insured as if a separate policy is

issued to that person, subject to the total liability not exceeding the limit of
indemnity stated in the Schedule.

7. Defence costs (clause 6)
This clause provides for payment of:
a) Costs, fees and expenses of investigation, defence or settlement of any

claim, and
b) The costs of representation at any inquest, inquiry or other proceedings

directly connected with the claim.
These costs are collectively termed as ‘defence costs’ and are payable provided
they are incurred with the prior consent of the company.
8. Indemnity limits (clause 7)
This clause provides that the company’s total liability to pay compensation,
claimant’s costs and defence costs shall not exceed the indemnity limit stated
in the Schedule.
The aggregate limit represents the company’s total liability during the policy
period and the limit ‘any one accident’ applies to any one claim or series of
claims arising from one originating cause.
9. Claims series clause (clause 7.1)
An accident may result in one claim from one injured person or several claims
from more than one person injured. Again a single accident may result in a
series of claims one after another.
Example
A fire may cause injuries to several persons and/or property damage. The fire
may also result in an explosion leading to another set of claims for personal
injuries and/or property damage.
According to this clause, all such claims are added together and treated as one
claim, for the purpose of application of limit of indemnity ‘any one accident’.
Such claim is deemed to have been made on the day when the first claim in the
series was made in writing.
However, there is no coverage for claims arising from one specific cause which
are made later than 3 years after the first claim of the series.
10. Compulsory excess (Clause 7.2)
The Insured shall bear as compulsory excess the amount or percentage of the
limit of indemnity as stated in the Schedule.

11. Voluntary excess (Clause 7.3)
At the option of the Insured, the policy shall be subject to a voluntary excess as
mentioned in the Schedule.
Both the clauses, 7.2 and 7.3 provide that the compulsory excess and voluntary
excess if any, shall be applicable to both:
a) Death/bodily injury claims, and
b) Property damage claims inclusive of defence costs arising out of ‘any one
accident’.
Test Yourself 1
Which of the following businesses is not covered under industrial risks?
I. A steel mill
II. A cement industry
III. A warehouse
IV. A textile unit
Test Yourself 2
The indemnity clause of a public liability policy covers claims arising out of:
I. Infringement of copyrights
II. Wrongful detention
III. Pollution
IV. Products in the insured’s custody

EXCLUSIONS AND CONDITIONS STATED IN A PUBLIC LIABILITY POLICY CHAPTER 5
B. Exclusions and conditions stated in a public liability policy

1. Exclusions (clause 8)
Clause 8 in the policy specifies 15 exclusions which are discussed below. The
students should also refer to the Policy Form in Appendix-1 for the details.
The below mentioned exclusions are applicable for a public liability policy.
a) Clause 8.1: It is known as the ‘contractual liability’ exclusion. Public

liability insurance is only concerned with the liabilities arising under law.
If in commercial transactions and industrial operations, the Insured
assumes under contract wider liabilities than those arising under law,
such liabilities are not covered under this policy.
b) Clause 8.2: These are acts of God such as flood, storm, hurricane,
cyclone etc. which may cause catastrophic losses. However, earthquake
risk may be covered on payment of extra premium.
c) Clause 8.3: It is deliberate, wilful or intentional non-compliance of any

statutory provision. Therefore, if insurance coverage is provided for such
liability, it would be contrary to public policy and against public interest.
Further, the Insured has to declare that all statutory provisions have
been complied with. If not, it would be breach of utmost good faith. It
should be noted, however, that the exclusion applies only when non-
compliance is intentional.
d) Clause 8.4: It is about loss of pure financial nature such as goodwill. To

understand this exclusion, the definition of ‘damage’ explained earlier
must be referred to. The definition refers to tangible property. Loss of
goodwill, loss of market etc. are examples of intangible property and are
therefore not covered.
Example
A small grocery shop owner suffered heavy financial losses due to loss of
business resulting from opening of a big supermarket nearby. In this case, if the
shopkeeper files a claim against the supermarket, the insurance company will
not cover such liability as it is a loss of pure financial nature and there was no
actual or physical damage to the property.
e) Clause 8.5: This excludes personal injuries like libel, slander, false
arrest etc… This must be read with the definition of ‘injury’ and
‘damage’. The exclusion reiterates, for the sake of emphasis, what is in
the definitions such as libel, slander, false arrest, infringement of
copyrights.

CHAPTER 5 EXCLUSIONS AND CONDITIONS STATED IN A PUBLIC LIABILITY POLICY
f) Clause 8.6: Liability arising out of fines, penalties, punitive damages is

excluded. This is on grounds of public policy. The purpose of fines,
punitive damages, etc. is punishment and deterrence. That purpose will
be defeated if insurance is provided for it.
g) Clause 8.7: This exclusion relates to war and invasion risks which are not
regarded as insurable risk under normal commercial insurance policies.
h) Clause 8.8: It states about nuclear and radiations risks which are also
regarded as uninsurable risks under normal commercial insurance
policies.
i) Clause 8.9: This exclusion removes from the policy, third party liability
arising out of motor vehicles which has to be compulsorily insured under
the provisions of the Motor Vehicles Act, 1988.
However, the sub-clause specifies four circumstances where coverage is

provided under the policy (refer Appendix 1 for details). It is important
to bear in mind that the coverage in exceptions (a) to (d) to Exclusion
8.9 apply only in those circumstances where the compulsory insurance
provisions of the Motor Vehicles Act do not apply. Thus, there is no
duplication of coverage between the Public Liability Policy and the Motor
Third Party Liability Policy.
j) Clause 8.10: This excludes liability for claims arising out of

transportation of hazardous substances. (This can be covered on
payment of extra premium.)
k) Clause 8.11: Liability arising out of aircraft, watercraft or hovercraft are

excluded. Separate special policies are available to cover this liability
(marine/aviation).
l) Clause 8.12: This excludes liability for damage to property owned by the
Insured or hired by him or in his custody. Such property may be covered
under a material damage policy, e.g. Fire Policy.
However there are 3 exceptions to this exclusion where liability is

covered.
i. Damage to property temporarily occupied or worked upon by the

Insured, but liability for any defective workmanship is excluded.
ii. Damage to employees’/visitors’ personal effects.
iii. Premises tenanted by the Insured (but not liability arising under any
tenancy agreement).

m) Clause 8.13: This excludes injury/damage prior to the retroactive date.

The exclusion reiterates what is stated in the Indemnity clause that
coverage applies only in respect of accidents which occur during the
Period of Insurance, which commences on the retroactive date stated in
the Schedule.
However, there may be problems with the interpretation of the terms

‘accident’ and in determining the link of causation between ‘accident’ and
injury or damage, when there is a time-lag.
The proviso offers a practical solution when the Insured and the company
have difference of opinion as to when injury or damage occurred in
circumstances of continual or continuous inhalation, ingestion etc. following
the covered accident (e.g. pollution accident).
The date of first medical consultation by the claimant is deemed to be the

date of injury; the date when damage became evident to the claimant is
deemed to be the date of damage. And these dates will determine whether
the coverage under the policy applies or not.
n) Clause 8.14: This excludes liability arising out of the deliberate,

conscious or intentional disregard of the Insured’s technical or
administrative management of the need to take all reasonable steps to
prevent claims.
This is the common principle of good faith which says the Insured "must act
as if he is uninsured". It means that the Insured must take all reasonable
steps and care to prevent accidents as he would have taken if he had no
insurance protection.
The key words in the exclusion are: deliberate, conscious or intentional

breach of a duty of care. It would be against public policy to pay claims in
such circumstances.
o) Clause 8.15: This excludes liability which is insurable under a separate

Workmen’s Compensation Insurance Policy. The Workmen’s
Compensation Policy can be extended to cover liabilities towards
employees of contractors and sub-contractors.
Hence, the intention behind this exclusion is to avoid duplication of

coverage under these two policies.
Note: In ‘non-industrial risks’ public liability policy there is an additional

exclusion 8.16 which reads as follows:
"Any accident(s) in respect of which relief would be under the Public

Liability Insurance Act, 1991, or any other Statute that may come into force
after the issue of this policy".

There is a separate compulsory Public Liability Policy to cover these

accidents. In the ‘industrial’ risks, public liability policy, this exclusion is
provided for in the Operative Clause (No.1) itself.
2. Conditions (clause 9)
The student should refer to the policy form in Appendix 1 for details about the
conditions and study the following notes.
a) Clause 9.1: This is the notification condition which provides that the
Insured shall;
i. Give written notice to the company as soon as reasonably practicable of

any claim made against the Insured, or any specific event that may
give rise to a claim against the Insured, and
ii. Give such additional information as the company may require and
forward to the company every summons etc. And all documents relating
to the event immediately they are received by the Insured.
Notice is required by insurers to commence investigation to gather

information on the circumstances surrounding the claim.
Notice is required even when a formal claim is not made against the Insured.
There may be occurrences which may result in claims in the future.
b) Clause 9.2: This condition provides that the Insured cannot make any
offer or admit liability without the written permission of the company.
c) Clause 9.3: The provisions of this condition may be summarised as

follows:
i. The company has the right (but not an obligation) to defend the claim in
the name of the Insured and has full discretion in the conduct of any
proceedings and in the settlement of the claim.
ii. Having taken over the defence of any claim, the company may relinquish
the same.
iii. Amounts spent by the company in the defence, settlement etc., will
reduce the limits of indemnity under the policy.
iv. Any exercise of the rights under this condition does not modify or expand
the company’s liability for the claim.
d) Clause 9.4: This condition provides that the Insured shall give all such
information and assistance as the company may reasonably require.

Example
In case of any accident, the insurers require to know the full circumstances
surrounding the accident e.g., particulars of injuries and/or nature and extent
of damage of property, names, addresses and occupations of claimants,
particulars of medical assistance rendered to injured persons, names and
addresses of witnesses, if any, to the accident etc.
If the accident occurs in the business premises of the insured, then the insurers
may also require information regarding the Insured’s manufacturing activities,
fire prevention programme, effluent treatment system etc. which may
reasonably be required by them to decide whether the claim falls within the
purview of the policy, whether any exclusions apply or to put up an appropriate
defence on behalf of the Insured against the claimant.
e) Clause 9.5: This condition provides for notification of material

alterations in the risk. The Insured has to notify, as soon as reasonably
practicable of any fact which materially changes the information
supplied to the company when the policy was effected.
Secondly, the condition provides that the company may amend the terms
of the policy according to the materiality of such change.
f) Clause 9.6: This condition provides that;
i. The company may pay to the Insured the maximum limit of

indemnity (‘any one accident’ limit) in connection with any claim, or
ii. Any lesser amount for which claim can be settled and on such payment
relinquish the conduct of such claim and absolve themselves from any
further liability for such claim.
When a claim or claims made against the Insured are for amount far
exceeding the limit of indemnity applicable (for example, when the limit of
indemnity for ‘any one accident’ is, say Rs.10 lacs, and the claims made are
for, say Rs.25 lacs or more), the insurers would be burdened with costs of
defence of the claim quite disproportionate to the limit of indemnity
selected by the Insured and on which premium is paid.
The insurers’ maximum liability for any claim (inclusive of defence costs) is
the limit of indemnity for ‘any one accident’ and pays this amount to the
Insured in full discharge of their liability for the claim.
g) Clause 9.7: This is known as interpretation condition. It provides that
the Policy and the Schedule shall be read together, and any word or
expression to which a specific meaning has been attached in any part of
the Policy or the Schedule shall bear such meaning wherever it may
occur.
Example
The schedule in a policy incorporates various details such as name of the

insured, premium, policy period, indemnity limits etc. This condition
establishes a relationship between these details in the policy schedule and the
policy wordings. Thus, the term ‘Insured’ wherever it occurs in the policy means
the Insured named in the Schedule.
The condition further provides that the terms, conditions and exclusions,
including any word or phrase contained therein shall be interpreted according to
Indian Law.
h) Clause 9.8: This condition requires the Insured to keep accurate record
of the annual turnover, and at renewal, declare details of the same, if
required by the company. The company has a right to inspect such
records.
(Note: Turnover is one of the factors on which the premium is

calculated.)
i) Clause 9.9: This is the contribution condition which is incorporated in all

policies of indemnity. Where there is more than one policy covering the
same liability, each insurer is liable to pay or contribute only its rateable
proportion of such liability.
j) Clause 9.9A: This condition provides that the policy does not cover
liability which is insured by, or would but for the existence of this
policy be insured by any other policy, except in and respect of any
excess beyond the amount which could have been payable under such
policy.
Example
A shopkeeper has a shop package policy wherein public liability is covered for a
limit of Rs 25,000 under one of the sections. Shopkeeper has also taken a
separate public liability policy for an AOA limit of Rs 100,000/-.
If there is a third party liability claim on the shopkeeper and the compensation
payable is awarded as Rs 100,000/-, shopkeeper policy shall pay the first Rs
25,000/- and only the excess amount of Rs 75,000 shall be payable under the
separate public liability policy.

k) Clause 9.10: This is the cancellation condition. The policy can be

cancelled by either of the party by giving written notice of 30 days, with
proportionate refund of premium.
It is subject to a minimum retention of 25 percent of the annual premium if

cancelled by the insurers, and short period scale of refund if cancelled by
the Insured. (In the latter case, no refund is made if there is a claim under
the policy).
(Note: in ‘non-industrial’ risks policy, minimum premium retained by the

company varies according to the class of risk as provided in the market
agreement.)
l) Clause 9.11: The amount of claim paid or payable reduces the limit of
indemnity per one year under the policy; the amount cannot be
reinstated to its original level even on payment of extra premium.
m) Clause 9.12: If the company disclaims liability for any claim and, if such
claim is not made subject matter of a suit in a court law within 12
months from the date of disclaimer, the claim is deemed to be
abandoned by the Insured.
n) Clause 9.13: The company is not liable to make any payment in respect
of any claim if it is in any manner fraudulent or if there has been any
material mis-statement or non-disclosure of any material information by
the Insured.
o) Clause 9.14: This is the policy disputes clause. The condition provides
that:
i. Disputes concerning interpretation of the terms, conditions, exclusions

etc. Of the policy shall be subject to Indian law.
ii. Each party agrees to submit to the jurisdiction of a competent court in

India and to comply with all the requirements necessary to give such
court of jurisdiction.
iii. All matters arising hereunder shall be determined according to the law
and practice of such court.
3. Schedule
The students should refer to Appendix-1 and be familiar with the contents of
the Schedule of the policy. In the column ‘compulsory excess’, appropriate
percentage with minimum amounts are inserted. As already explained, these
limits are different for both industrial and non-industrial risks.

CHAPTER 5 EXTENSION OF COVERAGE AVAILABLE UNDER A PUBLIC LIABILITY POLICY
Test Yourself 3
Which of the following risks is not specified as exclusion under a public liability
policy?
I. Transportation of hazardous substances

II. Damage to premises tenanted by the insured
III. Third party liability arising out of motor vehicles
IV. Contractual liability
Test Yourself 4
According to the cancellation condition clause, the policy can be cancelled any
time by either of the party by giving a written notice of .
I. 7 days
II. 14 days
III. 21 days
IV. 30 days
C. Extension of coverage available under a public liability policy

On payment of additional premium, the basic coverage under the policy can be
extended to include liabilities arising under certain specific circumstances.
Appropriate endorsements are added to the policy. (Some of the extensions are
common to both industrial and non-industrial risks.)
1. Extension of coverage for industrial risks

a) Carriage of effluents (outside the premises)
i. The extension includes legal liability of the Insured for:

 Death or bodily injury, or
 Loss of or damage to or loss of use of property
Arising out of accident directly caused by treated effluents whilst being

carried by pipelines outside the premises insured to the discharge point as
declared to the company and claims made during the policy period.
ii. The extended cover does not include pollution risk, howsoever caused,
unless specifically covered, on payment of extra premium.
iii. It is a condition of the extended cover that the statutory provisions, for
treatment and discharge of effluents, shall be complied with.
iv. ‘Premises’ shall be deemed to include pipelines running outside the
premises for discharge of treated effluents at a disposal point
situated within a distance of one kilometre from the premises (see
definition in the indemnity clause).

EXTENSION OF COVERAGE AVAILABLE UNDER A PUBLIC LIABILITY POLICY CHAPTER 5
v. No additional premium is charged if the discharge point is within 1

kilometre of the insured premises.
vi. Additional premium (on a scale) is charged if the discharge point is

beyond one kilometre from the insured premises. (see Chapter 4)
vii. The extension is subject otherwise to all other terms, conditions,
provisions and exceptions of the Policy.
b) Pollution coverage
i. The insurance is extended to cover liability for;

 Loss of or physical damage to or destruction of tangible property or
 Loss of use of such property damaged or destroyed.
Directly or indirectly caused by seepage, pollution or contamination

which is caused by a sudden unintended and unexpected happening,
which takes place in it’s entirely at a specific time and place during the
policy period.
ii. The extension also includes the payment of the reasonable or removing,
nullifying or cleaning-up, seeping, polluting or contaminating substances,
provided pollution is caused by an ‘accident’ as defined above. These
clean-up costs are payable whether a claim has been made or not against
the Insured.
iii. The coverage excludes liability for fines, penalties, punitive or

exemplary damages.
iv. The coverage is otherwise subject to the terms, exceptions, conditions

and limitations of the policy.
Pollution extension is subject to:
 Submission of a completed additional questionnaire (see Chapter 4)

 The Insured furnishing a certificate/consent letter from the Pollution
Control Board granting permission to carry on their activities
 Payment of additional premium
v. The most important feature of the extended coverage is that it covers

only pollution caused by an ‘accident’. Examples are fire, explosion,
breakdown of effluent treatment plant, breakdown of emission control
equipment etc.
vi. It is not the intention to cover the effects of gradual pollution which may
occur on a twenty-four basis and, which is unavoidable in modern
industrial activities. This is regarded as an uninsurable risk, and is a
matter which has to be dealt both by legislation and loss prevention
measures.

vii. The extension also provides for payment of clean-up costs, whether or
not a claim is made against the Insured. It would be in the interest of the
Insured to incur and, the insurers to pay, these costs so that any
imminent hazard to third parties is prevented.
c) Earthquake risk
The policy may be extended to cover the risk of earthquake (which is

generally excluded by clause 8.2) subject to payment of additional
premium.
d) Transportation
i. The policy can be extended to include legal liability of the Insured for

 Loss of or damage to property, or
 Loss of use of property
Arising out of accident directly caused by materials/dangerous or hazardous

substances (as per list submitted to the company) whilst being transported
by rail/road/pipeline and for claims made during the policy period and
subject to the limits of indemnity.
ii. The coverage is subject to:
 Separate limits of indemnity ‘any one accident’ and aggregate during

the policy period. These limits however, form part of the overall
limits of indemnity under the basic policy.
 Compliance by the insured with all statutory provisions for carriage
of dangerous/hazardous substances.
 Exclusion of pollution risk. (this can be covered on payment of extra
premium)
 All other terms, conditions, provisos and exceptions of the policy.
 Payment of additional premium.
iii. The coverage is applicable only for full load and part load is not covered.
iv. Pollution cover and earthquake risk can be added to the transportation
coverage.
v. The transportation coverage can also be provided by a separate policy.
vi. The policy can also be issued in the joint names of the insured and the
transport contractor.

e) Technical collaborators
i. Subject to payment of additional premium, the policy is extended to

include the legal liability of collaborator (named in the policy) with
respect to the technical collaboration agreement between the named
Insured and the collaborator.
ii. No claim is payable unless the cause of action arises in India and the
liability to pay claim is established against the Insured in an Indian
Court.
iii. All terms, exclusions, conditions etc. of the policy otherwise remain
unchanged.
2. Extension of coverage for non-industrial risks
The public liability policy for non-industrial risks may be extended to cover
additional liabilities. The relevant endorsements are now examined.
a) Property in the custody of the Insured
i. The endorsement provides that the insurance is extended to include

legal liability of the Insured for loss/damage to property of residents /
bonafide guests whilst under the care, control and custody of the Insured
in the premises specified in the schedule subject to limits selected by
the Insured:
 AOA (Any one Accident)

 Aggregate during the policy period.
The limits form part of the overall limits specified in the schedule.
ii. The cover does not apply to legal liability arising out of loss of and
damage to valuables of residents/bonafide guests unless :
 They are kept in the strong room/cloak room maintained by the

Insured for safe keeping; and
 The Insured maintains proper records of such valuables in respect of
each resident/bonafide guest.
iii. Monies, securities, documents (including credit cards) and plans are
excluded from the cover.
iv. This cover is subject to compulsory excess of 1/4% of the limit of

indemnity any one accident (Minimum Rs.1,000).
v. This extension is available for hotels, motels, club houses, restaurants,

boarding and lodging houses and flight kitchens.

b) Sports facilities
i. This extension includes legal liability of the Insured for death, bodily
injury or loss or damage to or loss of use of property arising out of
use of sports facilities.
ii. The extension is subject to conditions that:
 The equipments and the premises used for sports are kept in a state
of good and proper maintenance.
 Adequate guards and experienced trainers are on duty, where
necessary.
 Coverage is subject to specified limits of indemnity (AOA/AOY) which
form part of the overall limits.
iii. This extension is available to hotels, club houses, restaurants, schools,

educational institutions and boarding and lodging houses.
c) Other extensions
The following extensions are available under policies issued on all non-
industrial risks (except shops and godowns).
i. Food and beverages
Legal liability for death and/or bodily injury and loss or damage to or loss
of use of property arising out of poisoning by foreign or deleterious matter
in food, beverages and/or any other edible items supplied by the Insured.
The extension is subject to the provision that the Insured shall take every
possible precaution that the food etc. supplied is free from contamination
and fit for human consumption, and
AOA and AOY limits selected form part of the overall limits of indemnity
mentioned in the Schedule.
ii. Swimming pool
legal liability for death bodily injury or loss of or damage to or loss of use of
property, etc. arising out of accidents (including accidents arising out of
contamination of water) in connection with the use of the swimming pool in
the Insured’s premises.
The coverage is subject to the condition that:

 The swimming pool is maintained in hygienic condition with regular
cleaning and maintenance;
 Sanitary arrangements are proper, and
 Life guards/attendants are on duty when the pool is in use.
The limits of indemnity selected form part of the overall limits.

iii. Other facilities (as specified) extension
Legal liability for death etc. or bodily injury or loss of or damage to or loss
of use of property etc. arising out of accidents caused by the use of such
facilities as specified subject to the conditions that :
 The premises/places are kept in a state of good repair and

maintenance;
 Properly trained personnel take care of operation of such facilities;
and
 The materials used are proper and free of defect.
The limits of indemnity selected form part of the overall limits under the
policy.
(Note: pollution and earthquake extensions are also available.)
Test Yourself 5
Extension of coverage for carriage of effluents outside the premises by paying

additional premium is not required if the disposal point is situated within a
distance of from the premises.
I. 0.5 kilometre
II. 1 kilometre
III. 2 kilometres
IV. 5 kilometres
Test Yourself 6
Which one of the following is not a condition for covering legal liability arising
out of loss or damage to the property in the custody of the insured?
I. The valuables are kept in the strong room/cloak room maintained by the
Insured for safe keeping.
II. The Insured maintains proper records of valuables in respect of each
resident/bonafide guest.
III. The coverage is available only for monies, securities and documents.
IV. The coverage is subject to compulsory excess of 1/4% of the limit of
indemnity.

CHAPTER 5 PROPOSAL FORM FOR A PUBLIC LIABILITY POLICY
D. Proposal form for a public liability policy
The proposal form elicits detailed information which is relevant to rating and
underwriting the risk.
The students should carefully study the questions which are to be answered by
the proposer with respect to each plant/manufacturing unit.
(Specimen form is given in Appendix - 2)
1. Proposal form for industrial risks
a) The information asked in the proposal form is summarised below.
 Name and registered and business address of the proposer

 Activities of the firm-lay-out plants
 Location of premises of manufacturing units
 Details of technical collaboration
 How long in business
 Use of gases, hazardous substances etc. their quantity, storage and
precautions taken
 Programme for prevention of fire and explosion incidents, detection
and alarm systems
 Availability of fire brigade etc.
 Possibility of leakage of chemical or gas and alarm system,
preventive measures and periodical inspection
 Condition of premises, plant etc. and their maintenance schedule
 On-site and off-site emergency plans
 Number of employees, estimated annual wages
 Actual annual sales for last year and estimated annual sales for
proposed year of insurance (unit-wise)
 Contractors/sub-contractors on the premises
 Surrounding areas
 Past losses for bodily injuries/property damage
 Past insurance history
 Nature of materials (incoming raw materials and finished goods)
 Turnover of such materials
 Mode of transportation (road/rail/pipeline)
 If by pipe line, dimensions and length of the pipe, terminal points,
whether underground/overhead/submerged, system of supervision
and monitoring of pipelines against leakage/damage
 Surrounding areas alongside the route

PROPOSAL FORM FOR A PUBLIC LIABILITY POLICY CHAPTER 5
b) Other Details
i. Limit of Indemnity
 Any one Accident

 Aggregate during the Policy Period
ii. Voluntary Excess: based on percentage of limit of indemnity per any one
accident.
iii. Policy period
c) Declaration
This clause, among other things, provides for a declaration by the proposer
that all statutory provisions relating to the business are complied with.
d) Risk assessment form
In respect of large risks, that is, where the limit of indemnity any one year,
exceed the prescribed figure in the market agreement, risk assessment form
has to be completed by the company’s engineers after a risk inspection of
the premises. (The student should study the form given in Appendix-3)
The major items in the form relate to the following:
i. Particulars of Insured and management of the company

ii. General details of premises
iii. Particulars of assets on premises
e) Effluent discharge
i. Whether discharged from the plant outside the premises by pipeline.

ii. Whether effluent treated before discharge according to pollution laws.
iii. Whether coverage required, if so, the length of pipeline from the
compound wall of premises to the disposal point.
f) Compulsory insurance
i. Whether insured under Public Liability Insurance Act.

ii. If so, name and address of the insurance company and policy number
(certified copy of the premium receipt to be furnished).

g) Pollution coverage
If pollution cover is required, pollution questionnaire elicits the following

information:
i. Production programme and main products
ii. Mode of production - continuous or batch
iii. Use, production and storage of:
 Inflammable gases
 Liquids with flash point below +55 degree celsius
 Substances with explosive properties
 Toxic substances with lethal does ( value below 5 mg/kg)
iv. Pipe systems exceeding 10 metres outside the premises

v. Reservoirs exceeding 20,000 litres (contents, total capacity)
vi. Treatment/disposal and control systems for solid, liquid and gaseous
waste or effluents
vii. Programme for the prevention of fire, explosion, chemical incidents
viii. Situation in vulnerable water protection zone water conservation areas
ix. Surroundings - urban, semi-urban, rural- recreation and tourist area:
 Within 2 km. Radius

 Within 5 km. Radius
x. Past loss experience

xi. Details of raw materials/finished products and storage thereof
xii. Details of manufacturing process of plant
xiii. Transport system
xiv. Safety system
xv. General assessment
xvi. Recommendations
h) Rating
The factors which are usually taken into account for determining the
premium for industrial risks are as follows:
i. The ratio of indemnity limits i.e. Aoa:aoy

ii. The risk category. All industries are categorised on the basis of hazards
involved and premium factor is loaded appropriately.
iii. the turnover
iv. the extension of covers opted
v. Number of locations being covered under the policy

2. Proposal form for non-industrial risks
The proposal form for non-industrial risks elicits the information given
below.
i. Name and address of the proposer

ii. Address of each of the premises and/or chain of establishments to be
insured with the following details for each of the premises:
 Type of construction
 Age of the building
 Number of floors and height of the buildings and which floor is
occupied by the proposer
 Details of other occupants
 Details of lifts, elevators, escalators, etc. With make and capacity
 Activities being carried on in the premises
 Whether the premises/equipments/machineries are in good condition
of repair?
 Details of surrounding areas/property
iii. Whether the proposer has complied with all the statutory rules
pertaining to the premises and business activities.
iv. Whether the premises have boundary/fencing.
v. Security/Safety arrangement.
vi. Details of systems for prevention of fire explosion etc.
vii. Details of "emergency plan", if any.
viii. Use of storage of gases/hazardous/toxic etc. materials and/or
equipments.
ix. Three years claims history as under:
No. Paid (Rs.)

Pending (Rs.)
Number of claims/Amount
Bodily injury
Property damage
Defence costs
x. Past insurance history

xi. Limit of indemnity
 Any one accident

 Any one year
xii. Policy period

These common questions are followed by specific questions relating to a

particular risk as follows:
a) Hotels/Motels/Club Houses/Restaurants
i. Maximum number of beds
 Average occupancy per year

 Maximum seating capacity of conference hall/rooms, night clubs,
discotheques, if any, and floor on which they are located
 Number of restaurants and seating capacity in each restaurant
ii. Other facilities provided
Whether any of these facilities is operated and controlled by the Insured:
 Health clubs
 Beauty parlours
 Hair dressers
 Shops
 Swimming pools (whether life guards provided or not)
iii. Details of sports
 Indoor (Table Tennis, Squash, Bowling etc.)

 Outdoor (Boating, Tennis, Golf, Swimming etc.)
 Aqua sports (Boating, Deep Sea-Diving etc.)
 Skiing, Hang Gliding, Sky Diving.
iv. Whether the above facilities are available to residents only and their
guests or are also available to club members and their guests.
v. Other facilities (e.g. car parking): details of security measures where
applicable.
vi. Whether there is a separate strongroom/cloakroom to store items
deposited by bonafide residents/guests for safe keeping; the records
maintained in respect of items so deposited and the special security
arrangements for it.
vii. Whether cover required against risks associated with food and beverages
served by the establishment?
viii. The estimated annual turnover/revenue/receipts:

This must include all revenue earned through occupancy in the hotel, sale of
food and beverages including liquor, conferences, marriage parties, outside
catering, rental received from shopping arcades, revenue earned from
guests for using hotel facilities and sale across the counter and other
miscellaneous incomes including all levies, taxes and surcharges.
ix. Is extension of cover required for goods in care/custody/control of the

Insured? (Extension is limited to 10% of the overall limit of indemnity).
x. The voluntary excess percentage of limit of indemnity. (This excess will
apply per accident to each and every claim.)
b) Cinema halls / Auditoriums / Theatres / Public halls / Open Air

Theatres
i. The maximum seating capacity.

ii. The other facilities provided and whether they are operated and
controlled by the Insured (to be specified).
iii. Whether cover required against risks associated with food and beverage
served in the establishment?
iv. The estimated annual turnover. (The term turnover includes gate money,
donor cards, income arising from other facilities inclusive of all taxes,
duties, levies, surcharges.)
c) Office / Residential premises / Administrative premises / Medical

establishment / Research institutions and laboratories / Airport
premises (other than aviation liabilities) etc.
i. Whether other facilities like canteen, sports, etc. are provided and if so,
list of facilities.
ii. Whether cover needed against risks associated with food and beverages
served in the establishment?
d) Schools / Educational institutions / Libraries etc.
i. Number of students and their age group.

ii. Whether hostel facility is provided. If yes, number of rooms, number of
inmates.
iii. Whether canteen facilities are provided in the institution / hostel. If
yes, whether they are hygienically maintained.
iv. Whether cover needed against risks associated with food and beverages
served in the institutions.
v. Details of other facilities provided, i.e.
 Indoor games
 Outdoor games (like mountain climbing, hang gliding, horse riding,
swimming etc.) and whether such games are taught under the
supervision of trainers and/or bodyguards.

vi. Details of laboratories
 Number of laboratories
 Measures taken to prevent accident in laboratories.
vii. Details of outings
 Whether outings are arranged by the school/college and if so, how

often.
 Procedure for taking the students for such outings. (Educational tours
may also be included here).
viii. Teacher/Students ratio
e) Exhibitions / Fairs / Circuses / Film studios (Indoor and Outdoor)

Pandals / Tournaments / Zoos / Permanent amusement parks
i. The maximum seating capacity/area occupied.

ii. Other facilities/games provided; and whether they are operated and
controlled by the Insured.
a) Warehouses / Godowns / Shops / Depots / Tank Farms
i. The types of items likely to be stored and/or sold in each of the

premises.
ii. Whether hazardous items like chemicals / crackers / explosives /

paints / kerosene / lubricants / spirits etc. are likely to be stored.
 If yes, the maximum quantity and value of each item stored and the
percentage value of such hazardous items to total stock.
 Whether municipal and other regulations for such storage are
complied with.
iii. In case of warehouses / godowns, the area occupied in cubic metres.

iv. Details of measures for prevention/control of fire and/or explosion risks.
v. Is there any possibility of leakage of chemicals and/or gas resulting into
injury/damage to third party?
 If yes, details of chemicals, quantity stored and prevention measures

taken to avoid such occurrence.
vi. Whether pollution risk is to be covered.

vii. Estimated annual turnover. (This includes total sales / hires charges /
rent earned etc. including all taxes and levies.)

3. Rating
The various factors which can influence the premium for non-industrial risks are
mentioned below.
a) The type of construction of the risk

b) Occupancy or storage
c) Number of risk locations
d) Ratio of limits of indemnity (AOA to AOY)
e) Limit of indemnity (AOA)
f) Turnover
g) Seating capacity
h) Number of students
i) Extensions of coverage opted
Some of the factors mentioned above are only relevant for certain types of non-
industrial risks. For example, seating capacity is relevant to cinemas, etc. and
number of students is relevant to schools etc.
Test Yourself 7
What is the main purpose of a proposal form for a public liability policy?
I. To collect detailed and material information

II. To collect the amount of premium
III. To outline the conditions and exclusions of the policy
IV. To determine the limits of indemnity and policy period

CHAPTER 5 SUMMARY
Summary
a) The industrial risks cover manufacturing industries and storages which are
incidental to the manufacturing plant whereas non-industrial risks covers
businesses other than manufacturing units such as official and residential
premises, hotels, cinema halls, schools etc.
b) The policy form for a public liability policy consists of nine clauses.
Clause 1 Operative clause

Clause 2 Indemnity clause
Clause 3 Notification extension 3(a) and extended claim reporting 3(b)
Clause 4 Indemnity to others
Clause 5 Cross liabilities
Clause 6 Defence costs
Clause 7 Indemnity limits
Clause 8 15 exclusions
Clause 9 14 conditions
c) There are 15 exclusions under clause 8 of a public liability clause:
8. 1 Contractual liability
8. 2 Acts of God
8. 3 Deliberate or intentional non-compliance of any statutory provision
8. 4 Loss of pure financial nature
8. 5 Personal injuries and infringement of plans, copyrights, patents etc.
8. 6 Fines, penalties and punitive damages
8. 7 War and invasion risks
8. 8 Nuclear and radiation risks
8. 9 Third party liability arising out of motor vehicles
8. 10 Transportation of hazardous substances
8. 11 Aircraft, watercraft or hovercraft
8. 12 Damage to property owned or hired by insured or in his custody
8. 13 Damage/injury prior to retroactive date
8. 14 Deliberate disregard of the management of the need to take
reasonable steps to prevent claims
8. 15 Liability insured under Workmen’s Compensation Insurance Policy.
d) The basic coverage under a public liability policy can be extended on

payment of additional premium for covering specific industrial risks such as
carriage of effluents, pollution, earthquake, transportation, technical
collaborators etc. Each of these is provided on certain terms and conditions
that are to be complied with.

SUMMARY CHAPTER 5
e) The extension of coverage is also provided for non-industrial risks such as

damage/loss to the property in the custody of the insured, sports facilities,
food and beverages, swimming pool and other facilities.
f) The proposal form of a public liability policy collects detailed information

which is relevant for rating and underwriting the risk.
g) The factors such as turnover, ratio of indemnity limits, add-ons and the risk
category are considered for determining the premium for industrial risks.
h) The factors used for determining the premium for non-industrial risks are
type of construction of the risk, occupancy, ratio of limits of indemnity,
turnover, seating capacity or number of students etc.
i)

Answer 1
A warehouse is generally not covered under industrial risks and is part of non-
industrial risks. However, if a warehouse is incidental to the business activities
of a manufacturing plant, then it is covered under industrial risks.
Answer 2
The indemnity clause of a public liability policy covers the claims arising out of
the product which is in the custody or control of the insured. However, if the
product has left the custody of the insured, then it is not covered under public
liability policy and is covered through a separate product liability policy.
Answer 3
Damages to premises tenanted by the insured are covered under insurance and
are not part of exclusions under a public liability policy.
Answer 4
According to the cancellation condition clause, the policy can be cancelled any
time by either of the party by giving written notice of 30 days.
Answer 5
Extension of coverage for carriage of effluents outside the premises by paying

additional premium is not required if the disposal point is situated within a
distance of 1 kilometre from the premises.
Answer 6
The coverage is not available for legal liability arising out of loss or damage to
the monies, securities and documents of resident/ guests in the custody of the
insured.

Answer 7
The main purpose of a proposal form is to collect detailed and material

information about the proposer.
Question 1
Clause 4 in a public liability policy provides for the extension to cover:
I. Liability of the officials of the insured

II. Liability arising after the expiry date
III. Claims made after the policy period
IV. Claims made before the policy period
Question 2
The maximum time limit allowed for notification of claims under the extended
claim reporting clause is from the date of expiry or cancellation of
the policy.
I. 30 days
II. 60 days
III. 90 days
IV. 120 days
Question 3
Where there is more than one policy covering the same liability, the insurer is
liable to pay only .
I. Up to its limit of indemnity

II. Up to 50% of such liability
III. The excess beyond the amount paid by other policies
IV. Its rateable proportion of such liability
Question 4
Pollution coverage does not provide coverage for:
I. Death caused by pollution due to a sudden unexpected happening

II. Payment for cleaning-up of polluting substances caused by accident
III. Injuries caused due to gradual pollution occurring on a 24 hour basis
IV. Damage of tangible property due to unintended happening caused by
pollution

Question 5
The extension of coverage for sports facility under a public liability policy is
subject to all of the following conditions, except:
I. The equipment and premises used for sports are kept properly maintained.
II. Adequate guards and experienced trainers are on duty, where necessary.
III. Coverage is subject to specified limits of indemnity (AOA/AOY) which form
part of the overall limits.
IV. There is compulsory excess of 1/4 % of the limit of indemnity for any one
accident.
Question 6
Which of the following factors is not used for determining the premium for
industrial risks under a public liability policy?
I. Ratio of indemnity limits

II. Risk category
III. Number of employees
IV. Turnover
Answer 1
Clause 4 in a public liability policy is ‘indemnity to others’, which provides for

the extension to cover the liability of the officials of the insured.
Answer 2
The maximum time limit allowed for notification of claims under the extended
claim reporting clause is 90 days from the date of expiry or cancellation of the
policy.
Answer 3
Where there is more than one policy covering the same liability, the insurer is
liable to pay only its rateable proportion of such liability.

Answer 4
Pollution coverage does not provide coverage for injuries caused due to gradual
pollution occurring on 24 hour basis.
Answer 5
The extension of coverage for sports facility under a public liability policy is not
subject to compulsory excess of 1/4% of the limit of indemnity for any one
accident.
Answer 6
Number of employees is not used for determining the premium for industrial
risks under a public liability policy.


CHAPTER 6
PRODUCTS LIABILITY INSURANCE
Products Liability Insurance is becoming more popular in India, particularly with

manufacturers of consumer and industrial products. This insurance was
introduced in the UK during the 1940’s, although in the United States it had
developed much earlier.
This chapter discusses the need for product liability insurance, its features and
various aspects related to products liability insurance policy. The chapter also
introduces the concept of Product recall insurance.
Learning Outcomes
A. Need for and legal aspects of products liability insurance

B. Structure of a products liability policy
C. Product recall insurance policy

CHAPTER 6 NEED FOR AND LEGAL ASPECTS OF PRODUCTS LIABILITY INSURANCE
Products liability cover had its origin in the ‘Food and Drink’ risks. ‘Food and
drinks’ covers were added by endorsement to the public liability policies issued
to hotels and restaurants. The endorsement provided cover for legal liability for
death, bodily injury or illness caused by foreign or other deleterious matter in
food or drink sold or supplied by the insured. This cover was also demanded by
manufacturers, wholesalers and retailers engaged in the supply of food and
drink.
Eventually, the demand for such cover evolved in respect of other goods such as
woolen clothing and fur coats that caused dermatitis, a skin ailment. The
judgement given by a court in the case of Donoghue v. Stevenson further
boosted the demand for products liability insurance.
With the passage of time, as the demand for this type of cover increased from
manufacturers, wholesalers and retailers, a separate products liability policy
was devised to provide cover in respect of the products manufactured, sold,
supplied, repaired, serviced etc.
A. Need for and legal aspects of products liability insurance
1. Need for products liability insurance
The demand for this kind of insurance protection has arisen because of a wide
variety of products. When these products are sold to the public, if they are
defective, they may cause death, bodily injury or illness to people or damage to
property. Apart from the goods, containers too can cause injury or damage.
An increasing consciousness on the part of the public of their legal rights and
remedies coupled with the emergence of consumer protection organisations in
the country have further contributed to the demand for this class of insurance.
Example
Products such as canned food stuff, aerated waters, medicines and injections,
animal and poultry feeding stuff, electrical appliances, mechanical equipment,
acids & chemicals and gas cylinders etc. manufactured and sold to the public in
the modern industrial society need this kind of insurance.
2. Legal background
It is necessary to have an understanding of the legal aspects having a bearing on

products liability insurance.

NEED FOR AND LEGAL ASPECTS OF PRODUCTS LIABILITY INSURANCE CHAPTER 6
The insured could be:

 A manufacturer
 A wholesaler or
 A retailer
Claims for injury or damage may be made against any one or two or all of the
above by the purchaser of the goods.
Liability for these claims may arise under any of the following:
 Indian Sale of Goods Act

 Law of Tort
 Consumer Protection Act 1986
Provisions of the Indian Sale of goods Act
Some of the provisions of this act which have relevance to the liability are
as under:
a) Section 15
Under Section 15 of the Sale of Goods Act, the seller has a responsibility to
ensure that the goods sold correspond with the description. If the sale is by
sample, then in addition to corresponding with the description, the goods
should also correspond with the sample.
b) Section 16
According to Section 16, the seller has an obligation to ensure that the
goods sold are fit for the purpose for which they are required by the buyer
and if, the goods are bought by description, that they are of merchantable
quality. This section modifies the common law maxim of ‘buyer beware’.
This provision applies whether the seller is a manufacturer or not.
c) Section 17
Section 17 provides that in contracts of sale by sample, the goods shall, not
only correspond with sample in quality, but shall also be free from defects.
d) Section 59
Section 59 confers on the buyer the right among other things, to claim
damages for breach of contract.
e) The actions under Sale of Goods Act for breach of condition or warranty
need not be based on negligence. This position applies only as between
the parties to the contract. An injured party who is not a party to the
contract may, of course, have a claim against the seller but the claim
will have to be based on negligence.
CHAPTER 6 NEED FOR AND LEGAL ASPECTS OF PRODUCTS LIABILITY INSURANCE
f) A guarantee given by the seller may include not only replacement of the
defective product but also indemnity to the buyer against any loss,
damage or injury caused by the defective product. This would be liability
assumed under contract or agreement which is excluded under the
products liability policies.
g) On the other hand, the seller may contract out of his liability by
including a disclaimer. The law does not prohibit such disclaimers so long
as the following conditions are satisfied:
i. The disclaimer is brought clearly to the notice of the buyer before the
sale is effected and
ii. The disclaimer is not contrary to public policy.
h) The buyers, too, in certain contracts, may endeavour under the terms of
purchase to transfer to the seller all liability for loss, injury or damage
suffered by the buyer. Whether the seller is liable or the buyer is liable
will have to be determined with reference to the actual circumstances
of the sale.
Thus, liability for injury or damage caused by a defective product can arise
on the basis of breach of contract as provided in the Sale of goods Act. The
protection under the Act applies only in respect of purchaser of goods and
the claimant need not prove negligence on the part of the seller.
i) Provisions of law of tort
Apart from the purchaser who is a party to the contract, claims for injury or
damage may also be preferred by a member of the public who has no
contractual relationship with the manufacturer, wholesaler or retailer e.g. a
relative or friend of the purchaser. Liability in such cases arises under the
law of tort and the principles of the law of negligence will govern the
situation.
Example
The classic English Case “Donoghue vs. Stevenson (1932)” illustrates the law in
this regard. Briefly, the facts of the case were as follows:
The Plaintiff who drank beer from a bottle of ginger beer brought by a friend
from a retailer, suffered illness because the beer contained the remains of a
snail. The defendant manufacturer was held liable. Lord Atkin in his judgement
established the following important principle.

NEED FOR AND LEGAL ASPECTS OF PRODUCTS LIABILITY INSURANCE CHAPTER 6
"A manufacturer of products, which he sells in such form as to show that he

intends them to reach the ultimate consumer in the form in which they left him
with no reasonable possibility of intermediate examination, and with the
knowledge that the absence of reasonable care in the preparation or putting up
of the products will result in an injury to the consumer’s life or property, owes
a duty to the consumer to take that reasonable care."
This decision has made it clear that a manufacturer is duty bound to exercise
care in the process of manufacture. The decision has also established that
persons other than the purchaser have a direct right of recovery against the
manufacturer which right arises in tort. Subsequent developments in the English
Law have expanded the term "manufacturer" to include repairers, assemblers,
erectors etc.
Thus, the law of tort gives rise to wider liability. The person who puts goods on
to the market owes a duty of care to all persons whom he ought reasonably to
have in mind as likely to sustain injury by the use of the goods, irrespective of
whether or not such persons are parties to the contract of sale. .
i) Provisions of The Consumer Protection Act 1986
a) The provisions of the Consumer Protection Act, 1986 apply to claims

related to defective goods. The student should refer to Chapter 2 for the
following definitions in this regard:
i. ‘Defect’ in goods,
ii. ‘Consumer complaint,
iii. ‘Consumer dispute’
iv. ‘Manufacturer’ and
v. ‘Trader’
In addition to the above definitions, the procedure of redressal of disputes

by the District Forum, State and National Commission should also be
referred.
b) Further, it should be noted that the Consumer Disputes Redressal Forum,

if satisfied that the goods complained against suffer from any of the
defects specified in the complaint, it can issue an order, directing the
opposite party to pay such amount as may be awarded by it as
compensation to the Consumer for any loss or injury suffered by the
consumer due to the negligence of the opposite party. The Forum can
also provide for adequate costs to parties.
c) The provisions of the Act are in addition to and not in derogation of the
provisions of any other law. Therefore, the complainant has the option
to seek redress in a Civil Court.

CHAPTER 6 STRUCTURE OF A PRODUCTS LIABILITY POLICY
Test Yourself 1
An injured party who is not a party to the contract may have a claim against the
seller. The claim will have to be based on which of the following?
I. Guarantee given by the seller

II. Negligence
III. Breach of condition
IV. Breach of warranty
B. Structure of a products liability policy
A Products Liability Policy is, generally structured along the same lines as a
General Public Liability Policy for industrial risks (hereinafter referred to as P.L.
Policy)
Many clauses, exclusions and conditions are common to both policies. These are
pointed out wherever relevant. To avoid repetition, only those clauses and
exclusions which are special to products liability policy are now dealt with.
Further, the policy wordings discussed here are as per the market agreement
between the general insurers and the actual wordings being used by the Insurers
now may differ from these wordings based on the filed wordings.)
1. Operative clause (clause No.1)
a) The first part of the clause refers to the business of the Insured, the
proposal and declaration and payment of premium.
b) The second part of the clause which is special to product liability policy
provides that the company will indemnify the Insured:
i. Against their legal liability to pay compensation (including claimant’s

costs, fees and expenses)
ii. In accordance with the law of the country.
c) The clause further provides that the indemnity does not apply:
i. In respect of any judgement, and payment or settlement made in

countries which operate under the Laws of the U.S.A.or Canada.
ii. To any order made anywhere in the world to enforce such judgement
etc.
iii. Unless the insured has requested that there shall be no such limitation
and has accepted the terms of the North American Jurisdiction Extension
Clause which forms part the policy.
(Note: This extension clause is explained later.)

STRUCTURE OF A PRODUCTS LIABILITY POLICY CHAPTER 6
2. Indemnity (clause No.2)

a) This clause provides that indemnity only applies to:
i. Claims arising out of accidents during the period of insurance and first
made in writing against the Insured during the Policy Period.
ii. Claims arising out of any defects in the products specified in the
schedule.
b) Further, the clause provides that the Insured is indemnified in

accordance with the Operative Clause for any injury damage or pollution
but only against claims arising out of or in connection with products
specified in the Schedule.
c) The definitions of injury, damage, pollution, policy period, period of

insurance and accident are the same as under P.L. Policy.
d) The definition of product is the same as under P.L. Policy but the
following sub-clause is omitted:
"But shall not mean food and beverages supplied by or on behalf of the
Insured primarily to the Insured’s employees as a staff benefit".
This sub-clause provides a concession to the Insured under a P.L. Policy,

which otherwise excludes products liability cover.
e) The clauses 3 to 6 viz., Notification Extension Clause, Extended Claim

Reporting Clause, Indemnity to others, Cross liabilities and Defence Costs
are the same as under P.L. Policy.
3. Indemnity Limits (clause No.7)
This clause is the same as under the P.L. Policy except that Separate
Compulsory excess are provided for different geographical locations.
Normally the excess applicable to USA/Canada are much higher when
compared to other countries.
The policy is also subject to Claims Series Clause. A claims series event is
deemed to be one claim. The date of loss shall be the date when the first claim
of the Claims Series Event is made in writing against the Insured.
Definition
A Claims Series Event is defined as a series of two or more claims arising from
one specific common cause which is attributable:
a) To the same fault in design, manufacture, instructions for use or
labelling of products or,
b) To the supply of the same products and/or services, or
c) To products and/or service showing the same defect.

Example
A defect in a particular batch of injections may result in injuries to large

number of people simultaneously or one after another.
a) All such claims are clubbed together for the purpose of applying the limit
of indemnity for any one accident. Thus, the Indemnity Limit applies to
any one claim or a series of claims arising from one originating cause.
b) The clause also provides for a time limitation. Claims arising from one
specific cause made after 3 years after the first claim of the series are
not covered.
4. Exclusions (clause No.8)
Some exclusions are common to both products and public liability policies and
some are specific to products liability.
a) Exclusions common to both products and public liability policies
i. Deliberate non-compliance of any statutory provision

ii. Pure financial loss e.g., loss of goodwill
iii. Fines, penalties, etc.
iv. War and kindred risks
v. Nuclear risks
vi. Injury and/or damage occurring prior to the Retroactive Date stated in
the Schedule
vii. Deliberate disregard of the Insured’s technical or administrative
management of the need to take reasonable steps to prevent claims
viii. Injury to employees
ix. Contractual Liability
b) Exclusions specific to products liability
i. “Liability for claims for costs incurred in the repair, reconditioning,

modification or replacement of any part of any product which is or
alleged to be defective” (8.1)
The policy is designed to pay for liability for injury or damage caused by a
defective product and not to pay for damage to the product itself.
Example
A manufacturer may have supplied a car with defective tyres. The tyres could
burst causing a collision that results in injuries to pedestrians. In such a
situation, the policy covers the liability for the injuries, but not for replacement
of tyres or repair of the car.

ii. “Liability for claims for costs arising out of the recall of any product
or part thereof”. (8.2)
After being manufactured and introduced in the market, the products may
be found to be defective. An injury or damage to third parties may or may
not have been caused.
In either case, the insured for reasons of safety may have to incur the
expense of recalling or withdrawing the products from the market. The
policy does not pay these costs of recall of the product.
A separate policy is available for covering this kind of claims (discussed later
in the chapter)
iii. "Liability for claims arising out of any product which with the
Insured’s knowledge is intended for incorporation into the structure,
machinery or control of any aircraft". (8.3)
Example
An Insured supplies components for an aircraft engine or tyres for the aircraft. A
defective part may result in damage to the aircraft or even a crash. There is a
catastrophe risk involved and such cover is arranged in the specialist aviation
insurance market. The products liability policy does not cover liability for such
claims.
iv. “Liability arising out of any product guarantee”. (8.14) this is

somewhat similar to exclusion (8.15) explained next, and to exclusion
8(1) already dealt with.
Manufacturers often guarantee their product for a specified period and

replace or repair defective parts during the guarantee period. The costs of
repair, replacement, etc. are actually business risks and cannot be covered
under a policy of insurance. Besides, it would amount to underwriting
manufacturer’s technical skills and know-how and manufacturing expertise.
v. “Liability arising out of claims for failure of the goods or products to

fulfil the purpose for which they were intended”. (8.15)
This exclusion refers to what is known as the ‘efficacy risk’.
Example
A burglary alarm may fail to function at the time when burglar breaks into
premises. Pesticides may fail to kill the pests. Machinery supplied to a factory
may start malfunctioning resulting in loss of production.

These examples show that these are commercial or trade risks and are
excluded under the policy.
vi. “Liabilities arising out of products which have left the custody or
control of the insured prior to retroactive date specified in the
Schedule”. (8.16)
To understand this exclusion, it is necessary to refer to the definition of

Period of Insurance which means the period commencing from the
retroactive date and terminating on the expiry date.
Further, the Indemnity clause (No.2) provides that the indemnity only
applies to claims arising out of accidents.
 During the period of insurance and

 First made against the Insured during the policy period.
But, according to the above exclusion, if accidents during the period of

insurance are caused by products which have left the custody or control of
the Insured prior to the retroactive date, there is no liability under the
policy.
vii. “Liability for damage to property belonging to the insured or held in

trust or in custody or control of the Insured or a person in the service
of the insured”. (8.9)
This exclusion is, more or less, similar to exclusion 8.12 of the Industrial
Risks Policy but exceptions (a), (b), (c) thereof are not included as these are
not relevant to products liability.
In essence, the products liability policy is designed to indemnify for damage

to property of third parties. If the Insured’s products cause damage to his
own property or in his or his employee’s custody, there is no liability under
the policy.
5. General conditions
The conditions (1 to 14) are the same as under the Industrial Risks P.L. Policy
except that condition 9.9(a) which appears in the latter policy is not included in
the Products Liability Policy. However, the condition 9.9 (contribution clause) is
applicable for products liability policy also.
(Note: The condition 9.9 (a) under public liability policy provides that the policy
does not cover liability which is insured by, or would but for the existence
of this policy be insured by any other policy(but not a public liability policy),
except in and respect of any excess beyond the amount which could have been
payable under such policy.)

6. Underwriting
Insurers’ decision to accept a proposal demands a thorough detailed knowledge

of all the factors influencing the risk. The necessary information is elicited in
the proposal form supported by leaflets, brochures, disclaimer notices or other
literature. (see Appendix 5 for the Proposal Form).
In addition to the proposal form, a “Risk Assessment Report” (Appendix 6)

completed by the insurers’ officials, is required in the following cases:
a) Exports to U.S.A. and Canada irrespective of limit of Indemnity.

b) Exports to countries other than U.S.A. & Canada if the aggregate limit of
indemnity exceeds certain pre-fixed limits
c) Proposals not involving exports, if the aggregate limit of indemnity
exceeds Pre-fixed limits
(Important: The students should be thoroughly familiar with the contents

of both the forms in Appendices 5 & 6)
7. The Proposal form
The information in the form may be summarised as follows:
a) Name and address of the Proposer

b) Location for distribution
c) Length of experience in the business
d) Full details of products manufactured with leaflets, brochures etc.
e) Full details of hazardous products
f) Directions for use
g) Disclaimer Notices, guarantees or warranties
h) Quality Control Systems
i) Compliance with standards like ISI
j) Complaints/Accidents Reporting System
k) Particulars of:
i. New products to be marketed during the next 12 months

ii. Products discontinued, recalled or withdrawn during the last five years
iii. Products subject to any enquiry by any Government agency
l) Past 3 years actual turnover and projected turnover of goods sold,

repaired, serviced etc.
m) 3 years sales turnover:
 Domestic
 U.S.A., Canada
 OECD Countries
 Other countries

n) Limit of Indemnity AOA/AOY

o) Voluntary excess
p) Claims history for the last 3 years
q) Insurance History
r) Details of assets, representation, association (e.g. financial, securities
etc.) in U.S.A., Canada and other countries
s) Details of compliance with U.S.A./Canadian Law (for exports to such
countries.)
t) Copy of the contract with the vendors, if vendors’ endorsement is
required
u) Declaration clause
8. Risk assessment report
The information in the Report is provided under the following headings.
a) Full description and details of Products with domestic and export

turnover
b) Product Safety Control Programme
c) Hazard analysis, & product design
d) Materials/components used in each product
e) Process of manufacturing
f) Quality Control
g) Packaging/Labeling
h) Sales & Distribution
i) Advice to customers in product use
j) Installation of the product by the Insured
k) Customer complaints procedure
l) Previous history of complaints
m) Management attitude, housekeeping and industrial relations
n) Conclusions - General assessment of risk
9. Rating
The premium chargeable under the policy is based on:
a) The product (as per classification of risk of groups)

b) Turnover
c) Limit of indemnity - Any one year
d) Ratio of limit of indemnity - Any one Accident to Any one Year
e) Extension of covers opted
f) Countries of export and their turnover
There may be variations based on the individual insurance company’s

perceptions of risk and the products filed under the IRDA “File & Use”
guidelines.

10. Extensions
a) Technical collaborators
This extension provides for inclusion of the legal liability of Collaborator

with respect to the technical Collaboration Agreement between the named
Insured and the Collaborator, subject to all the terms and conditions of the
policy.
This is subject to the proviso that no claim shall be payable under the policy
unless the cause of action arises in India and the liability is established in an
Indian Court except for claims in respect of exports of products covered
under the policy.
Additional premium is charged for the purpose.
b) Third party manufacturers
Products not manufactured by the Insured but by sub-contractors and/or

loan and licence manufacturers on their own brand name can be covered
under the policy at an additional premium.
Before acceptance, information such as copy of Agreement between the

Insured and sub-contractor, details of suppliers’ products liability etc. has to
be considered.
c) Vendor’s clause
The policy covering exports may be extended to provide ‘Limited Vendor’s

Liability’.
The ‘persons insured’ provision is amended to include designated person or

organisation as an insured but only with respect to the distribution or sale,
in the regular course of the vendor’s business, products specified in the
Schedule.
The insurance in respect of the vendor does not apply to:
i. Any expressed warranty;

ii. Any distribution or sale for a purpose unauthorised by the named
insured.
iii. Bodily injury or property damage arising out of:
 Any act of the vendor which changes the condition of the Products.
 Any fittings and/or manual work, etc, alterations to the product by
the Vendor.
 Products which have been labeled or relabeled used as a container or
part of the product by the vendor.

 Failure to maintain the product in merchantable condition

 Failure to make such inspections, tests or servicing as the ‘Vendor’
has agreed to make in connection with the distribution or sale of the
products.
iv. Bodily injury or property damage occurring within the vendor’s premises.
The insurance does not apply to any person or organisation from whom the
named insured has acquired such products or any part forming part of such
products.
The additional premium is charged on the premium on indemnity limit plus

the premium on export turnover.
d) North American jurisdiction extension clause
It may be recalled that the operative clause of the policy provides that the
indemnity does not apply to any judgment award etc. under the laws of the
U.S.A. or Canada, unless the Insured has requested for such extension.
The extension is granted by specifically stating it in the Schedule and

subject to the specific "retroactive date" and specific ‘Compulsory excess’.
The indemnity does not apply:
i. To punitive or exemplary damages

ii. Claims for injury or damage occurring prior to the ‘retroactive date’
stated under the item ‘North American Jurisdiction’. Subject to the
above, all other terms and conditions of the policy will apply.
Test Yourself 2
A Claims Series Event is defined as a series of two or more claims arising from
one specific common cause which is attributable to:
I. The supply of the same products and/or services

II. The products and/or service showing the same defect
III. Both of the above
IV. Neither I nor II

PRODUCT RECALL INSURANCE POLICY CHAPTER 6
C. Product recall insurance policy
1. Need for Product Recall Insurance:
Generally, Product liability Insurance policies exclude liability for claims for
costs arising out of the recall of any product or part thereof. Some Insurers
provide cover for these product recall expenses. This cover may be provided as
part of Product liability Insurance as an extension or as a standalone “product
recall insurance policy”.
2. Coverage under Product Recall Liability Insurance:
This policy indemnifies the insured for recall expenditure incurred by Insured.
Product recall insurance is typically purchased by manufacturers such as food
and beverage, toy, Automobile parts manufacturer and electronics companies to
cover costs such as customer notification, shipping costs and disposal costs.
Coverage generally applies to the firm itself, though additional coverage can be
purchased to cover the costs of third parties.
3. Underwriting of Product Recall Insurance:
Insurers’ decision to accept a proposal demands a thorough knowledge of all the

factors influencing the risk. A duly completed proposal form giving all the
relevant underwriting information like turnover, type of product, previous loss
history, product traceability, quality certification, recall plan etc. are
absolutely critical before proceeding on underwriting a risk.

CHAPTER 6 SUMMARY
Summary
a) Liability for injury or damage caused by a defective product can arise on the
basis of breach of contract as provided in the Sale of Goods Act or tort of
negligence or under the provisions of the Consumer Protection Act.
b) Liability for defective products may arise in a variety of ways. Whether such
liability is covered under the Products Liability Policy will depend upon the
terms, exclusions and conditions of the Policy.
c) The provisions of the Consumer Protection Act, 1986 apply to claims related
to defective goods. The Consumer Disputes Redressal Forum is empowered
to issue orders as applicable in such cases.
d) A Products Liability Policy is generally structured along the same lines as a

General Public Liability Policy for industrial risks. Many clauses, exclusions
and conditions are common to both policies.
e) Clauses that are specific to products liability policy are namely: Operative
clause, Indemnity and Indemnity Limits.
f) General conditions (1 to 14) are the same as under the Industrial Risks P.L.
Policy except that condition 9.9(a) which appears in the latter policy is not
included in the Products Liability Policy.
g) Product recall expenses incurred for recall of defective products from

market is a exclusion under the product liability policy. However, the same
can be covered under a separate policy (or sometimes as an extension of
products liability policy) known as product recall insurance policy.

Answer 1
The claim by an injured party who is not a party to the contract will have to be
based on negligence.
Answer 2
Both options are causes that could give rise to a Claims Series Event.
Question 1
The first part of the operative clause refers to which of the following?
I. Business of the Insured

II. Indemnity
III. Risk measures
IV. Indemnity limits
Question 2
Which of the following is not an exclusion common to both products and public
liability policies?
I. Nuclear risks
II. Injury to employees
III. Contractual liability
IV. Liability arising out of any product guarantee
Question 3
“Liability for claims for costs arising out of the recall of any product or part
thereof” is an example of:
I. Exclusion common to both product and public liability policies

II. Exclusion specific to products liability
III. Exclusion specific to public liability
IV. None of the above

Question 4
Which of the following is not a heading in the risk assessment report?

I. Quality control
II. Sales and distribution
III. Customer complaints procedure
IV. Probability of loss
Question 5
Which of the following is a result of the judgment given by a court in the case of
Donoghue v. Stevenson?
I. Reduction in demand for public liability insurance
II. Reduction in demand for products liability insurance
III. Increase in demand for public liability insurance
IV. Increase in demand for products liability insurance

Answer 1
The first part of the clause refers to the business of the Insured, the proposal
and declaration and payment of premium.
Answer 2
Liability arising out of any product guarantee is exclusion specific to a products
liability policy.
Answer 3
“Liability for claims for costs arising out of the recall of any product or part
thereof” is an example of exclusion specific to products liability policy.
Answer 4
Probability of loss is not a heading in the risk assessment report.
Answer 5
The judgment resulted in an increase in the demand for products liability
insurance.

CHAPTER 7
PROFESSIONAL INDEMNITY INSURANCE
This chapter aims to provide you with knowledge about the need for
professional indemnity Insurances, standard of care as required by the
professionals from various fields, the basis of liability for a professional person
and the policy forms and clauses in the various professional indemnity policies.
This chapter also discusses professional liability insurance offered to computer
service providers.
Learning Outcomes
A. Need and basis for professional indemnity Insurances

B. Policy forms and clauses for insuring various professionals
C. Computer services and software developers professional liability policy

CHAPTER 7 NEED AND BASIS FOR PROFESSIONAL INDEMNITY INSURANCES
Sumeet was interested in investing a lump sum amount in a plan which can
provide him with a certain level of income per year with a minimum risk of
capital loss. So he went to a financial consultant, Akshay, who ran a financial
consulting agency, to get some advice. Akshay suggested investing in a
particular fund according to Sumeet’s requirements.
However, Sumeet did not receive any yearly income from the fund, but in fact,
suffered a capital loss during the two year investment period. Akshay has not
even provided any updates to Sumeet during the investment period of two years
regarding the performance of his fund. Later, Sumeet came to know from other
sources that the fund was not performing well at the time of the original
investment.
Therefore, in this case, it is clear that reasonable judgement was not exercised
by Akshay while performing his duty as a professional, which had resulted in big
losses to his client. Sumeet filed a case against Akshay for professional
negligence and the court awarded compensation to be paid by Akshay to
Sumeet. Akshay also had to incur legal expenses in defending his case.
In this chapter, we will discuss what is the standard of duty of care expected
from professionals in performing their duty, when does a professional liability
arise, how can it be covered under insurance and how do the clauses in
professional indemnity policies differ from other liability policies.
A. Need and basis for professional indemnity insurances
1. Need for professional indemnity insurance
Professional indemnity insurance policies are designed to provide insurance

protection to professional people such as doctors, solicitors, chartered
accountants and architects etc. against their legal liability to pay damages
arising out of negligence in the performance of their professional duties.
Insurance brokers functioning in India are compulsorily required to insure their
liability in terms of the IRDA regulations for brokers.
In India, the professional indemnity policy is generally given by the insurance

companies to those professionals:
i. Who are governed by practices and services as laid down by a statutory

organisation/body, and
ii. Are answerable to the governing council in the event of failure to adhere
to these practices.

NEED AND BASIS FOR PROFESSIONAL INDEMNITY INSURANCES CHAPTER 7
Thus the medical professionals governed by the Medical Council of India or the
Engineers or Chartered accountants would be issued Professional indemnity
policies. All other professionals would be issued Errors & Omissions policies. This
is the common practice in India regarding professional indemnity policies.
The need for insurance protection to cover these legal liabilities by

professionals is felt due to:
a) The increasing claims consciousness among their clients.

b) More awareness in them about the impact of litigation and the high
awards in motor third party and other public liability fields nowadays.
c) The fact that the professional people, like everybody else, are prone to
commit errors in the conduct of their business and especially in the
modern conditions of life which is becoming more difficult and complex.
2. Basis of liability
The basis of liability is negligence. Basic principles of the law of negligence

have already been discussed in Chapter 2. These principles are modified and
refined with reference to special relationships which arise in different walks of
life, for example, the duty of care owed by a professional person towards his
clients and to others. Under professional liability, negligence would mean
failure to exercise a fair, reasonable and competent degree of skill as judged
with reference to the standard expected of the profession. Few case laws which
establish these principles are given below:
a) Lanphier v. Phipos (1838)
The principle regarding the standard of care was stated in this English case
concerning a doctor, in the following words:
Every person who enters into a learned profession undertakes to bring to the
exercise of it a reasonable degree of care and skill. He does not undertake,
if he is an attorney, that at all events, you shall gain your case nor does a
surgeon undertake that he will perform a cure; nor does he undertake to use
the highest possible degree of skill. There may be persons who have higher
education and greater advantages than he has, but he undertakes to bring a
fair, reasonable competent degree of skill.
b) Chapman v. Walton (1833)
In this case concerning an insurance broker, the court observed as follows:
The point therefore to be determined is whether other persons exercising

the same profession or calling and being men of experience and skill therein
would or would not have come to the same conclusion as the defendant.

For the defendant did not contract that he would bring to the performance
of his duty on this occasion an extraordinary degree of skill but only a
reasonable and ordinary proportion of it and it appears to us that it is not
only an unobjectionable mode but the most satisfactory mode of
determining this question to show by evidence whether a majority of skilful
and experienced brokers would have come to the same conclusion as the
defendant.
If 9 brokers of experience out of 10 would have done the same as the

defendant under the same circumstances or even if as many out of a given
number would have been of his opinion as against it he who only stipulates
to bring a reasonable degree of skill into the performance of his duty will be
entitled to a verdict in his favour.
c) Badgley v. Dickson (1886)
In this another English case, the standard of care expected from an architect
was stated as follows:
As architect, he is in the same position as any other professional or skilled

person, and whether it be in the preparation of plans and specifications, or
the doing of any other professional work for reward, is responsible if he
omits to do it with an ordinary and reasonable degree of care and skill.
d) L.B.Joshi v. T.R. Godbole (1968)
With reference to doctors, the law, as laid down by the Supreme Court of
India in this case is as follows:
A person who holds himself out ready to give medical advice and treatment
impliedly undertakes that he is possessed of skill and knowledge for the
purpose. Such a person when consulted by a patient owes him certain
duties, namely, a duty of care in deciding whether to undertake the case, a
duty of care in deciding what treatment to give or a duty of care in the
administration of that treatment. A breach of any of these duties gives a
right of action to the patient against doctor of negligence.
Example
If a patient dies or his condition gets worse as a result of any treatment, it does
not make the doctor liable for the act. It will need to be proved that the error
was committed by the doctor.
The doctors will have to exercise reasonable skill and care in performing their
duties. Therefore, unless and until it is not clear and evident that there was a
breach of accepted professional standards by the doctor while performing his
duty, he cannot be blamed for the condition of the patient.

Therefore, if a person holds himself out as an expert he is expected to show

a higher degree of skill than the average member of his profession.
Thus, the basis of liability is professional negligence which presupposes:
i. The existence of a duty of care,

ii. A breach of that duty, and
iii. Loss or damage caused by the breach.
Moreover, the professionals will also be liable on the principle of vicarious

liability, for the negligence of their employees arising out of and in the
course of their employment.
One of the most important questions which arise in this context is that to
whom does the professional person owe this duty to exercise a fair
reasonable and competent degree of skill?
The duty of care is owed to two categories of persons:
a) Those to whom the professional man is under some contractual or

fiduciary relationship. Here, the basis of liability for a professional
person is the breach of contract between him and his client. His liability
for negligence in the performance of his professional duties is owed only
to his client alone. This is the concept of privity of contract, which plays
important part in professional negligence claims.
The decision in the English case Candler v. Crane Christmas & Co (1951)
illustrates this concept of privity of contract.
Case Study
Candler v. Crane, Christmas & Co (1951)
The facts of the case were: the defendants, a firm of accountants and auditors
were asked by the Managing Director of a company to prepare the company’s
accounts and the balance sheet. The clerk of the firm who prepared the
accounts knew that they were required for the purpose of inducing the plaintiff
to invest money in the company. The plaintiff subscribed for shares in the
company on the basis of the draft accounts shown to him by the firm of
accountants. The company went into liquidation and the plaintiff lost the
money invested by him.
It was established that there was negligence in the preparation of the accounts
as they did not reflect a true statement of the financial affairs of the company.
The plaintiffs filed an action against the firm of accountants but the court held
that in the absence of contractual relationship between the parties, the
defendants owed no duty to the plaintiffs to exercise care in preparing the
accounts.

b) Those to whom a duty of care will arise under the circumstances coming
within the scope of Hedley Byne decision.
Under this, even in the absence of a contract, a duty of care may arise, where
there is a fiduciary relationship in which trust or confidence is placed in a
person. Such a person has to use care and skill in the conduct of duties assigned
to him. Such relationships may arise between solicitor and client, principal and
agent or trustee and beneficiary.
Case Study
Hedley Byrne & Co.Ltd. v. Hellers & Partners Ltd. (1963)
The facts of the case were: in reply to an enquiry from a bank on behalf of
its customer, concerning the creditworthiness of a firm, a merchant bank stated
in writing, that the firm “was good for its ordinary business engagements”.
But the opinion was given “without responsibility”. The bank’s customer, who
relied on this information, suffered financial loss when the firm went into
liquidation. The customer sued the merchant bank for negligent misstatements
about the firm’s standing.
The action failed because of the disclaimer on the written reply. But the case is
important because of the opinions of the House of Lords which introduced the
principle, that in appropriate circumstances the professional would be liable
to persons other than his clients.
It was held:“If in the ordinary course of business or professional affairs a person

seeks information or advice from another who is not under contractual or
fiduciary obligation to give the information or advice, in circumstances in
which a reasonable man so asked would know that he was being trusted, or that
his skill or judgement was being relied on, and the person asked chooses to
give the information or advice without clearly so qualifying his answer as to
show that he does not accept responsibility, then the person replying accepts
a legal duty to exercise such care as the circumstance require in making his
reply; and for a failure to exercise that care an action for negligence will lie if
damage results”.
Since this judgement several English cases have been decided based on the
Hedley Byrne principle.
Case Study
In Dodds & Dodds v. Millmann (1964), the plaintiff in buying a building relied
upon an inaccurate statement made by the vendor’s estate agent regarding
projected revenues and expenses.The court held that the estate agents were
liable for damages even though they were not having any contractual
relationship with the plaintiff.

Case Study
In Yianni v. Edwin Evands & Sons (1981), a valuation prepared by a firm of

valuers for a building society was negligently carried out. The applicant to the
building society relied on the report and proceeded with the mortgage and
suffered loss because of serious faults in the property.
The court held that although the applicants were not in a contractual
relationship with the valuers, there was sufficient relationship of proximity or
neighbourhood so as to put the applicants within the reasonable contemplation
of the valuer that their negligence may cause loss to the applicants.
In addition, the professional man is vicariously liable for the negligence of his
employees arising out of and in the course of their employment. Liability may
also arise under the Consumer Protection Act. It should be noted that even
service provided by the medical profession is within the scope of the Consumer
Protection Act, as per the decision of the Supreme Court of India.
3. Classification of professional risks:
Professional risks may be classified into three broad groups:
i. Where professional negligence may result in bodily injuries (fatal or

otherwise). Doctors, dentists etc. fall into this group.
ii. Where professional negligence may result in financial loss. Accountants,
solicitors etc., fall into this group.
iii. Where professional negligence may result in financial loss and/or bodily
injury. Architect etc. fall into this group.
Case Study
A site owner instructed an architect to plan and supervise the site
redevelopment including demolition work through contractors. The architect
failed to inspect a wall and issued a certificate that it could remain standing.
Later the wall collapsed injuring a workman. The architect was held liable
jointly with the demolition contractor. (Clay v. A.J. Crump & Sons Ltd., 1964).
Test Yourself 3
Which of the following conditions must be met in order to prove professional

negligence?
I. The services provided were of poor standard

II. The services provided were overcharged
III. There was a breach of duty of care
IV. There was a breach of duty of care resulting in loss or damage

CHAPTER 7 POLICY FORMS AND CLAUSES FOR INSURING VARIOUS PROFESSIONALS
Test Yourself 1
The important decision that ‘the professional would be liable to persons other
than his clients in appropriate circumstances’ was held in which of the following
court cases?
I. Candler v. Crane Christmas & Co

II. Hedley Byrne & Co Ltd. vs. Hellers & Partners Ltd.
III. Dodds & Dodds v. Millmann
IV. V.
Yianni v. Edwin Evands & Sons
B. Policy forms and clauses for insuring various professionals
1. Policy forms
Professional indemnity policies issued in India are generally structured along the
lines of industrial/non-industrial and products liability policies discussed in the
earlier chapters. However there are variations introduced by some insurers
based on their risk perceptions and the business category. Such forms are also
filed with the IRDA.
The headings of all clauses are almost same such as operative, indemnity, limit
of indemnity, defence costs, notification extension and extended claim
reporting, claims series, excess, exclusions and conditions. Many of these
clauses terms and conditions are also identical with those in industrial risks
policies and will be pointed out later in the chapter.
All the professional indemnity policies are almost same and differ from each
other in respect of certain clauses only. These differences will be discussed in
this chapter. Thus, to avoid unnecessary repetition, the clauses which are
explained in previous chapters will not be dealt with again. The clauses which
are special to professional indemnities will now be examined.
2. Clauses for Doctors and medical establishments professional indemnity

policy:
The policy forms for both doctors and medical establishments are similar except
in respect of ‘excess’ and some exclusions.
a) The indemnity clause (clause no.2)
This clause provides that: the indemnity applies only to claims arising out of
bodily injury and/or death of any patient caused by or alleged to have been
caused by error, omission or negligence in professional service rendered or
which should have been rendered (hereinafter referred to as the ‘Act’). by:
 The Insured, or

POLICY FORMS AND CLAUSES FOR INSURING VARIOUS PROFESSIONALS CHAPTER 7
 Qualified assistants named in the Schedule or

 Any Nurse or technician employed in the schedule
The two provisos to the clause are:
i. Such act during the period of insurance results in a claim first made in
ii. No liability for any claim for act committed or alleged to have been
committed prior to the retroactive date specified in the Schedule.
The clause thereafter provides definitions of policy period, period of

insurance and bodily injury. These definitions are the same as under the
other liability policies such as industrial risks, etc. policies.
b) Limit of indemnity (clause no. 3)
This clause provides that: Irrespective of the number of persons or entities

named as Insured in the Schedule, the total liability of the company for
damages inclusive of defence costs, in respect of all claims made against the
Insured during the currency of the insurance, shall not exceed the limit of
indemnity for the policy period stated in the Schedule.
There is only one limit which is applicable to the policy period. This is an
overall limit which applies to all claims against the Insured, qualified
assistants, nurses, etc.
(Defence costs, notification extension and extended claim reporting clauses

are the same as under the Industrial Risks Policy)
c) Claims series clause (Clause no.6)
The provisions of this clause are: Where a series of losses and/or bodily
injuries and/or deaths are attributable, directly or indirectly, to the same
cause or error or omission in the discharge of professional services;
i. All such claims are added together and treated as one claim, and
ii. Such claim shall be deemed to have been made at the point in time
when the first of the claims was made in writing.
There shall, however be no coverage for claims from the same cause, which
are made later than three years after the first claim of the series.
d) Compulsory excess / Voluntary excess (clauses 7 and 8)
These clauses do not appear in Doctors and ‘Medical Practitioners’ Policy. It

is applicable to Medical Establishments Policy where the Insured has to bear
for each and every claim a compulsory excess.

The Insured may opt for voluntary excess which shall be applicable to each
and every claim and, in addition to the compulsory excess.
Example
The excess clause sets the payment which an insured has to pay before the
insurer starts making the payment. The excess clause in most of the policies for
medical establishments in India requires the insured to bear a compulsory
excess of 0.25% of the indemnity limit for each and every claim. The maximum
and minimum limit is also set for this excess amount. For example, the amount
of excess which the insured has to bear can be subject to a minimum of
Rs.1,500 and a maximum of Rs. 125,000.
e) Exclusions
The special exclusions which appear in both these policies are:
i. Any act committed in violation of any law.

ii. Services rendered while under the influence of narcotics or intoxicants.
iii. Third party public liability.
iv. Claims arising from/related to Acquired Immune Deficiency Syndrome
(AIDS)
v. Claims arising out of genetic injuries caused by X-ray or radioative
treatment/diagnosis,
vi. Professional services rendered prior to the Retroactive date.
vii. Cosmesis, i.e. cosmetic plastic surgery, hair transplants, punch grafts
and the like.
The following, however, are not deemed to be cosmesis:
 Anaesthetic, X-ray or other medical nursing or laboratory services

provided in connection with the performance of cosmesis.
 Plastic surgical repair of scar tissue being the result of previous
surgery unrelated to cosmesis performed by the Insured.
 Plastic surgery in connection with burns or other traumatic injury.
f) Additional exclusions
In Doctors professional indemnity policy, two additional exclusions are

included.
i. Performance by dentists and dental surgeons of:
 General anaesthesia, or,

 Any procedure carried out under general anaesthesia unless
performed in a hospital.
ii. The use of drugs for weight reduction.

g) Other exclusions
The other exclusions in both the policies are the same as under Industrial
Risks Policies and are related to:
i. Liability assumed under agreement

ii. Loss of pure financial nature such as loss of goodwill
iii. Personal injuries such as libel, etc.
iv. Fines, penalties, punitive damages
v. Employer’s liabilities
vi. Deliberate disregard for the need to take reasonable steps to prevent
claims
vii. War, nuclear risks
The conditions are the same as under the Industrial Risks Policy.
3. Clause for other professionals
Professional indemnity policies provide protection to other professionals also

such as chartered accountants, financial accountants, management
consultants, lawyers, advocates, solicitors, counsels, consulting engineers,
architect, interior decorators and insurance brokers. They are also similar to
other policies except for changes in a few clauses, which are discussed below.
a) Indemnity clause (clause no.2)
The clause provides that the Indemnity applies only to claims arising
out of losses and/or damages during the period of insurance first made in
writing against the Insured during the Policy Period.
The Insured is indemnified in accordance with operative clause for any

breach of professional duty by reason of any negligent act, error or
omission committed during the period of insurance by:
i. The Insured as stated in the Schedule

ii. The predecessors in business of the Insured firm in respect of whom
insurance coverage is expressly provided in the Schedule,
iii. Any employee of the Insured firm or their predecessors in the conduct of
business in their professional capacity.
iv. The clause incorporates the usual provisos:
 The act during the period of insurance results in a claim first made in
 No liability for any act committed prior to the retroactive date
stated in the Schedule.
This is followed by definitions of policy period, period of insurance and

bodily injury.

b) Clauses identical to other policies
The clauses which are identical to the clauses in other policies and which
are already dealt with are: limit of indemnity clause, defence costs clause,
notification extension clause, extended claim reporting clause, claims
series clause and compulsory /voluntary excess.
c) Exclusions
The common exclusions mentioned in point 2.g above also appear in these
policies. Some of the exclusions which are specific to these policies are
mentioned below. The policy excludes claims for or in respect of:
i. Any dishonest, fraudulent, criminal or malicious act or omission.

ii. Deliberate, non-compliance with technical standards commonly observed
in professional practice laid down by law or regulated by official bodies.
iii. Conduct of any business other than that described in the Schedule.
iv. Activities of the Insured as joint venture or as partner unless such joint
venture or partnership is described in the Schedule.
v. Liabilities arising out of pollution and/or contamination.
vi. Claims for losses as a consequence of material or construction damage.
e.g. loss of production.
vii. Earthquake, flood, storm, etc.
4. Conditions
The 14 conditions mentioned in the policy are the same as under other liability
policies. These have already been dealt with in Chapter 3.
5. Proposal forms
The proposal forms for professional indemnities are in Appendices as follows:
Doctors Appendix 7
Medical Establishments Appendix 8
Consulting Engineers/ Architects/ Interior Decorators Appendix 9
Accountants/Solicitors/ Lawyers Appendix 10
(Note: The student should be familiar with the questions in the form as these
are relevant to rating and underwriting.)

6. Rating
i. The premium rates charged for individuals are on the basis of the annual
indemnity limit.
ii. For organisations and companies, in addition to the indemnity limit,
premiums are charged on annual fees or turnover and the staff strength.
iii. In the case of medical establishments, premium rates are charged on the
basis of number of patients. Loading of premium is provided for extra
facilities like x-ray etc.
Test Yourself 2
What is the ‘excess’ clause in a professional liability policy?
I. The insured has to bear a compulsory excess for each and every claim.
II. The insured will have to pay from his pocket the amount of claims which
exceeds the indemnity limit.
III. The insured may opt for excess indemnity limit during the period of
insurance.
IV. The excess limit will cover the cost of defending the claims.
I.
Test Yourself 3
Which of the following statements about the claims series clause in a

professional liability policy is incorrect?
I. It is a series of claims of losses and/or bodily injuries and/or deaths arising

from same cause or error or omission.
II. All claims in the claims series are added together and treated as one claim.
III. The claim is deemed to have been made on the date when the first claim
was made in writing.
IV. No coverage is available for the claims which are made more than two years
after the first claim of the series.
II.

CHAPTER 7 COMPUTER SERVICES AND SOFTWARE DEVELOPERS’ PROFESSIONAL LIABILITY POLICY
C. Computer services and software developers’ professional liability

policy
This policy is also termed as Tech Errors and Omissions Insurance Policy
1. Coverage
These policies are relatively of recent origin. The policy wordings and coverage
terms are likely to vary widely between different Insurers. These policies
provide coverage for legal liability of Insured to compensate others for loss
resulting from Insured’s wrongful act. The wrongful act must be by Insured in
performance of computer services for other for a fee. The wrongful act must
take place after retroactive date and before end of policy period. Wrongful act
means actual or alleged negligent act, error or omission in the performance of
computer services.
-
2. Exclusions
The common exclusions applicable for Professional Indemnity policies apply for
this policy also. Some of the additional exclusions are as under:
i. Delay in performance or failure to perform any contract unless such

claim is arising out of a wrongful act
ii. Liability assumed under any contract or agreement by way of guarantee,
warranty, penalty clause or any obligation deemed uninsurable under
Law
iii. Actual or alleged intentional non-performance or default of any of the
Insured’s contractual obligations
3. Limits of indemnity
The limits of liability applicable are for each wrongful act (AOA limit) and
aggregate limit for the policy (AOY Limit). If there are two or more professional
indemnity policies issued covering same wrongful act, the Insurers liability shall
not exceed the proportion of the loss that the policy’s applicable limit of
coverage bears to the total applicable limits of coverage under all such policies.
4. Extensions
Some common extensions which may be offered by insurers under this policy are
as under:
i. Loss of documents extension covering legal liability arising out of

destruction/damage /loss of documents pertaining to insured’s
customers which have been entrusted, lodged or deposited with the
Insured

COMPUTER SERVICES AND SOFTWARE DEVELOPERS’ PROFESSIONAL LIABILITY POLICY CHAPTER 7
ii. Loss of data extension covering legal liability arising out of

destruction/damage/loss of data pertaining to insured’s customers which
have been entrusted, lodged or deposited with the Insured
iii. Dishonesty of Employees covering liability of Insured from any claim for
fraud/dishonesty of any employee of Insured
iv. Infringement of Intellectual property rights covering compensatory

damages for unintentional IPR infringements
v. Technology liability extension to cover hacking, virus attack, denial of

service attack
5. Conditions
The policy conditions are similar to other professional Indemnity policies.
6. Premium
The premium generally depends on the past history of the client, contract
value/gross revenue and duration, territory and jurisdiction of coverage,
number of employees working on the project etc.

CHAPTER 7 SUMMARY
Summary
a) The basis of liability is negligence which means a failure to exercise a fair,

reasonable and competent degree of skill as judged with reference to the
standard expected of the profession. An expert will be judged by the
standard applying to experts.
b) Negligence arises when there is a duty of care, a breach of that duty and
consequent loss or damage by the breach.
c) The duty of care is owed both to clients and also for other than clients
under certain circumstances.
d) A professional is vicariously liable for the negligence of his employees arising

out of and in the course of their employment.
e) Liability may also arise under the Consumer Protection Act.
f) The standard of care expected from a professional was defined under

various cases, such as Lanphier v. Phipos (1838), concerning a doctor,
Chapman v. Walton (1833), concerning an insurance broker and Badgley v.
Dickson (1886), concerning architect.
g) The policy forms for both, doctors and medical establishments are similar to
other policies except in respect of ‘excess’ and some exclusions.
h) The excess clause is applicable only for medical establishments where the
insured has to bear a compulsory excess for each and every claim.
i) Claims related to violation of any law, services rendered under the influence
of intoxicants, third party public liability, AIDS, genetic injuries due to
radioactive treatments, cosmesis and services rendered prior to retroactive
date are specially excluded in a professional liability policy for doctors and
medical establishments.
j) The premium rates for individuals are charged on the basis of the annual
indemnity limit, for organisations and companies on the basis of annual
turnover and staff strength, and for medical establishments on the basis of
number of patients.
k) Professional liability policies can also be given for computer service

providers. These policies are also termed as Errors and Omissions Insurance
Policy.

Answer 1
In order to prove professional negligence, there must be a breach of duty of

care resulting in loss or damages.
Answer 2
The important decision that ‘a professional would be liable to persons other

than his clients in appropriate circumstances’ was held in Hedley Byrne & Co
Ltd. v. Hellers & Partners Ltd. case.
Answer 3
The excess clause in a professional liability means that the insured has to bear a
compulsory excess for each and every claim.
Answer 4
No coverage is available for the claims in the claims series which are made
more than three years after the first claim of the series.
Question 1
The standard of care that is expected from an architect was stated under which
of the following court cases?
I. Chapman v. Walton
II. Lanphier v. Phipos
III. Badgley v. Dickson
IV. Candler v. Crane Christmas & Co

Question 2
Professionals are liable on the basis of the principle of liability for

the negligence of their employees arising in the course of their employment.
I. Indemnity
II. Vicarious
III. Equal
IV. Contractual
Question 3
A professional person with a particular skill or expertise will be judged by the

standard applicable to .
I. Other professionals or skilled persons

II. Other persons exercising the same profession
III. Other persons with the same expertise and skill
IV. Other persons with the same period of experience and skill
Question 4
All of the following claims for doctors and medical establishments are specially
excluded under professional liability policy coverage, except:
I. Professional services rendered after the retroactive date

II. Third party public liability
III. Acts committed in violation of law
IV. Services rendered under the influence of intoxicants
Question 5
The premium rates of a professional liability policy for an individual are charged
on the basis of .
I. Annual fees/turnover
II. Annual indemnity limit
III. Number of clients
IV. Number of years of experience

Answer 1
Badgley v. Dickson case stated the standard of care that is expected from an
architect.
Answer 2
The professionals are liable on the basis of principle of vicarious liability for the
negligence of their employees arising in the course of their employment.
Answer 3
A professional person with a particular skill or expertise will be judged by the

standard applicable to other persons with the same expertise and skill.
Answer 4
The professional services rendered after the retroactive date are included under
professional liability coverage for doctors and medical establishments.
However, if they are provided prior to the retroactive date, then are specially
excluded under the professional liability policy.
Answer 5
The premium rates of a professional liability policy for an individual are charged
on the basis of the annual indemnity limit.


CHAPTER 8
COMMERCIAL GENERAL LIABILITY
The Commercial General Liability Policy (CGL Policy) is a recent entrant in the
insurance sphere in India. The demand for the policy has arisen with the
globalization of the Indian business environment. Collaborations, Franchisee-
entities and mergers with foreign entities more specifically American and West
European Corporations have resulted in a demand for the product.
This chapter will introduce you to various aspects of a CGL policy including its
coverage, structure and rating parameters.
Learning Outcome
A. Basics of commercial general liability (CGL) policy

B. CGL policy clauses: Section I – Coverage
C. CGL policy clauses: Section II – Who is an insured?
D. CGL policy clauses: Section III – Limits of insurance
E. CGL policy clauses: Section IV – Conditions
F. CGL policy clauses: Section V – Definitions
G. CGL policy: Proposal form, rating and deductibles

CHAPTER 8 BASICS OF COMMERCIAL GENERAL LIABILITY (CGL) POLICY
There is a strong public/ shareholder /consumer movement in the countries of

Western Europe and North America. All business organisations are subject to
close scrutiny in their daily operations by the public entities in their respective
countries. If any business organisation is involved in breaches or malpractices
which are in contravention of the laws and public policy of the respective
countries, they could face legal action. Courts take a strong view on such
matters.
Hence, there is pressure on organisations to ensure fair business practices and

equity in their activities. This pressure is there in their own country and other
countries where they do business or with whom they may have an association.
Hence all collaborations with Indian Companies and entities require the
protection by the foreign entity against any legal liability that may arise
because of breaches committed by the local Indian entity. This resulted in
demand for CGL Policy.
A. Basics of commercial general liability (CGL) policy
The CGL policy is a combination policy having elements of property and casualty
liabilities and financial liability within its fold. It covers public, product and
employer liabilities as also financial liabilities.
CGL policies are mainly sold to customers having foreign collaborations or

business entities in foreign countries. In India, the product is known by different
names like:
 Combined General Liability or

 Common General Liability or
 Commercial General Liability.
All these names have the nomenclature CGL.
We now study the broad contours of the policy based on generic CGL policy. The
student should keep in mind the IRDA directives on “File and Use norms” for
insurance products. Thus insurers in India may not be offering all the elements
of the product to the prospective customers. Restricted coverage may be
offered to keep the policy within reasonable costs.
Furthermore the perception of risk protection by the insuring public and the
social and legal attitude towards liability coupled by the slow pace of judicial
judgements make it difficult to price a liability product in India.

CGL POLICY CLAUSES: SECTION I – COVERAGE CHAPTER 8
B. CGL Policy clauses: Section I – Coverage
Operative clause
The Coverage under the policy is under various sections and sub-sections. Each
of these sub-sections is subject to specific terms and also common terms
applicable for all sections.
1. Coverage A: Bodily injury and Property damage liability
This section deals with coverage and exclusions pertaining to liabilities due to
bodily injury and property damage.
A1 - Coverage
The policy pays if the insured is legally obliged to pay damages for bodily injury
or property damage covered under the policy subject to the following:
i. Injury or damage should be caused by an occurrence that takes place in

the covered territory.
ii. It should happen within the policy period.
iii. The liability is limited to Indemnity limits as per Section III of the policy.
iv. This is a legal liability policy and negligence will have to be proved to
claim damages.
In order to understand the coverage provided under a CGL policy in its proper
context, it is necessary to compare the coverage provided under public and
product liability policies. Under a public liability policy, the indemnity provided
is for a claim due to legal liability arising out of accident occurring in the
insured premises arising out of injury or damage. In case of a product liability
policy, the indemnity is for claims due to legal liability arising out of accidents
arising out of defects in products specified in the policy schedule. In contrast,
the operative clause of CGL provides cover for legal liability to pay damages
because of bodily injury or property damages. There are no limitations for cover
in terms of Insured premises or products specified as long as the occurrence and
claim are in coverage territory specified, thereby providing a wider coverage.
CGL also provides cover for supplemental payments, medical expenses and fire
damages.

CHAPTER 8 CGL POLICY CLAUSES: SECTION I – COVERAGE
Coverage under CGL policy as above is restricted to cover only third party
liabilities by subjecting to certain exclusions as below:
a) Employer’s liability exclusion which excludes bodily injury to an

employee, spouse, child, parent, brother or sister of that employee. This
exclusion applies whether the Insured may be liable as an employee or in
any other capacity.
b) Damage to Property exclusion which excludes property damage to

property owned, rented, occupied by the insured or the property loaned
to Insured or in the care, custody or control of the Insured. This also
excludes the part of real property on which the Insured or any
contractor, sub-contractor working directly/indirectly on behalf of
Insured is performing operations, if the property damage arises out of
those operations.
c) Damage to Insured’s Product exclusion which excludes property damage

to Insured’s product arising out of it or any part of it.
d) Damage to Insured’s work exclusion which excludes property damage to

Insured’s work arising out of it or any part of it and included in the
products-completed operations hazard.
By including the products-completed operations hazard cover under CGL policy,

the coverage is extended to include all bodily injury and property damage
occurring away from premises owned, rented by Insured and also arising out of
insureds product or Insured’s work (except products which are in Insured’s
physical possession or work that has not yet been completed).
(Note: Though the list of exclusions are provided under a separate section
below, some of the important exclusions are discussed above for bringing in
clarity on coverage)
The insurance company has the right and duty to defend the case. However this
right will be exercised only where the law of the land permits the insurance
company to defend the case. It will end once the payouts in judgement or
settlements cross the limit of liability under the policy. Where insurers are not
permitted to defend the case they will reimburse the costs for the same that
the insured may incur.
The right to defend the case is also known as the Duty to Defend Clause. It
should be noted that the law in India does not permit insurers defending the
case except where statutorily provided. For example: Motor Third Party. Thus in
India the cause of action is between the insured and the claimant and the duty
to defend clause is not implemented.

A2 - Exclusions
The coverage does not apply to:
a) Expected or intended injury
This excludes injury or property damages expected or intended from the

Insured point of view. Deliberate damages are not covered. However cover
for damages or injury occurring when force is used to protect persons or
property is allowed.
b) Contractual liability
Liability to pay damages by reason of assumption of liability in a contract or

agreement is excluded. This exclusion does not apply to liability for damages
that the insured would have in the absence of such a contract or agreement.
However insurance contract coverage to persons for defending any liability

covered under the policy will be allowed.
Example
An employee is alleged responsible for injuring a member of the public in the
office premises, the employee pleads innocence. As the employers’ liability
policy will be required to pay any loss, the cost of defending the case of the
employee and submitting proof of innocence will be an allowable cost, if policy
terms permit.
c) Workmen’s compensation and employers liability
This exclusion extends in the case of employees to injury caused to family

members when the employee is in the course of employment at the material
time.
d) Pollution liability
It excludes bodily injury or property damage arising out of pollution at or

from any premises owned, occupied by or rented or loaned to insured,
except bodily injury sustained:
i. Within the building and caused by smoke, fumes, vapor or soot from
equipment used to heat the building or
ii. Where contractual operations are being carried out by insured or
iii. Arising out of heat, smoke or fumes from a hostile fire
iv. The policy also does not cover pollution caused by waste products,
stored or processed or collected or transported. It also does not cover
pollution caused by operations if pollutants were brought to such
premises in connection with such operations.
v. Use or ownership of Aircraft, auto or watercraft owned and mobile
equipment
e) War including civil war, insurrection, invasion, act of foreign enemy,

civil commotion, factional civil commotion, terrorism, military or
usurped or usurped power, rebellion or revolution
f) Property owned rented occupied or leased or being worked upon
g) Damage to own product
h) Damage to work included in the Products- completed operations hazard;
unless performed by sub-contractor on insured behalf
i) Damage to impaired property or property not physically injured. (refer
the definition section)
j) Recall of products
k) Employment related practices
l) Personal and advertising injury
m) Asbestos
Exclusions (iii) to (x) do not apply to damage by fire if premises are rented or
temporarily occupied by insured. In such cases, the limit of insurance for this
coverage applies
It can be observed that the above exclusions are very similar to those under the
general public and product liability policy mentioned in chapters 5 & 6.
2. Coverage B: Personal and advertising injury liability
B1 Coverage:
Coverage under this section has to be specifically requested. Under this

coverage, the policy pays the amount that the Insured becomes legally liable as
damages because of personal and advertising injury caused by an offence arising
out of Insured’s business committed within coverage territory.
B2 Exclusions:
i. Personal and advertising injury directed or caused by deliberate acts of

insured, false oral or written publications, criminal acts, publications
made prior to policy.
ii. Assumed liability, breach of contract
iii. Failure of product or goods or services to perform or quality as
advertised
iv. Wrong description of goods, products or services prices advertised
v. Committed by insured’s whose business is advertising and other media
vi. Arising out of pollution or asbestos related exposures
vii. War and kindred perils including civil war terrorism
viii. Employment related practices
ix. Costs or loses arising out of removal of pollutants or similar procedures

3. Coverage C: Medical payments
C1 Coverage
The policy pays medical expenses for bodily injury caused by an accident within
the covered territory and within the policy period provided the expenses are
incurred and reported to insurers within one year of the accident. The injured
will be subject to examination by insurer’s appointed physicians as and when
required. The coverage is applicable for accidents occurring:
i. On premises owned or rented

ii. On ways next to premises owned or rented
iii. Because of operations
C2 Exclusions
i. Expenses for injury to insured, employees, tenants or occupiers of

insured owned or rented property
ii. Persons eligible under Workers Compensation policy or similar laws
iii. Participation in athletics
iv. War and allied perils
4. Supplementary payments - Coverage A and B
a) Under this coverage, the insurers will pay for all expenses incurred by
them in investigation, defence and settlement of suits including:
i. Bail bonds upto a limit for traffic violations or accidents arising out of
use of vehicles to which bodily injury liability coverage applies.
ii. Cost of bonds to release attachments within the applicable limit of
insurance
iii. Reasonable expenses incurred by the insured on request of insurer to
assist in investigation or defense including actual loss of earning upto a
per day limit as decided for time off work.
iv. Costs taxed against the insured in the suit
v. Prejudgement interest awarded against the insured on that part of the
judgement payable by insurers. If offer to settle applicable limit of
insurance then prejudgement interest based on that period of time after
the offer.
vi. All interest on the full amount of any judgement that accrues after entry
of the judgement and before insurers have paid, offered to pay, or
deposited in court the part of the judgement that is within the
applicable limit of insurance.
These payments will not reduce the limits of insurance.

b) Under this coverage, if insurers defend an insured against a suit and an

indemnitee of the insured is also named as a party to the suit, the
insurers will defend that indemnitee on the following conditions:
i. The suit against the indemnitee seeks damages for which the insured has
assumed the liability of the indemnitee in a contract or agreement that
is an insured contract.
ii. This insurance applies to such liability assumed by the insured.
iii. The obligation to defend or the cost of the defense of that indemnitee
has also been assumed by the insured under the same insured contract.
iv. The allegations in the suit and the information known by the insurer
about the occurrence are such that no conflict of interest appears to
exist between the interests of the insured and indemnitee.
v. The indemnitee and insured authorize insurers to conduct and control
the defense of that suit and agree to assign the same counsel for both.
vi. The indemnitee agrees in writing to cooperate in investigation,
settlement or defense, supplies copies of all demands, notices or
summons or legal papers connected with the suit, notify any other
insurer whose coverage is available to the indemnitee and cooperate to
coordination with other applicable insurance.
vii. The indemnitee provides written authorization to obtain records and
other information related to the suit and conduct and control of the
defense of the suit.
If the above conditions are fulfilled, the expenses related to these defence
and litigation incurred by the insurer and the indemnitee at the request of
the insurer will be payable for bodily injury or property damage liability
under section I coverage A. These expenses will not be deemed to be
damages for bodily injury and property damage and will not reduce the
limits of insurance.
These supplementary payments end when the applicable limit of insurance

in the payment of judgements or settlements is used up or the conditions
set forth for this coverage are no longer met.
Note 1: Coverage under these sections is restricted in the Indian market. It

is usual to prescribe a maximum limit in cases where coverage under this
section may be sought. The limit will apply within the overall Aggregate
Limit stated in the schedule.
Note 2: The cover provided under this section is usually for defense of
indemnitee and costs involved in investigation and collection of information
for the suit.

CGL POLICY CLAUSES: SECTION II – WHO IS AN INSURED? CHAPTER 8
Test Yourself 1
In India, CGL product is known by which of the following names?
I. Combined General Liability and Common General Liability policy

II. Combined General Liability only
III. Common General Liability only
C. CGL Policy clauses: Section II – Who is an insured?
The term “Insured” has various meanings under CGL policy which are given
below:
1. Insured with respect to the conduct of the business is defined as under:
i. If Individual is the sole owner of the business, individual and spouse are
insureds
ii. In case of a partnership or joint venture, partnership or joint venture

and partners, members and their spouses are Insureds
iii. In case of limited liability company, the limited liability Company and
the managers are Insureds
iv. In case of any other organization, the organization, its executive officers
and directors and stockholders are Insureds
2. While performing the duties related to the conduct of business, the

following also are considered as Insureds:
a) Employees other than those included under A above. However, they are
not insureds for
b) Bodily injury or personal or advertising injury to:
 Insureds in (A) above and co-employees or such co-employees’

family.
 Where there is an obligation to share damages or repay someone else

who must pay for damages as above.
 Involved in professional health care services and providing or failing

to provide services.
c) Damage of property owned, occupied or used by, or rented to, in the

care or custody or control or over which physical control is exercised by
the insureds in (A) above or the employees.

CHAPTER 8 CGL POLICY CLAUSES: SECTION II – WHO IS AN INSURED?
d) persons or organizations acting as real estate managers
e) Person or organization with temporary control of insured’s property for

maintenance or use, on insured’s death
f) Legal representatives with respect to the duties as legal representative,

in case of death of Insureds.
3. In case of Mobile Equipment registered in insured name being driven in

public place with insured permission, the liability is covered for:
i. Any person driving such equipment or
ii. Organisation responsible for the conduct of such person if they do not
have any liability coverage for such operations.
The policy does not cover injury to co-employees or property owned, occupied
rented or in the charge of the insured or employer of the person driving.
4. New organizations formed or acquired by the insured with majority interest

will be covered as Named Insured if no existing insurance for such liability is
available to the organization.
Coverage will commence after 90 days or the end of the policy period,
whichever is earlier. Coverage A and B will not be available for offenses
committed before the acquisition of these organizations.
All such entities must be stated as named insured to qualify for the coverage
under the policy.
It will be observed from this section that the policy is required to list the names
of the insured persons eligible for benefits under the policy. The First Named
Insured being the organization entitled to most benefit of the policy. The
employees and other entities coverage is restricted under various sections.

CGL POLICY CLAUSES: SECTION III – LIMITS OF INSURANCE CHAPTER 8
D. CGL Policy clauses: Section III – Limits of insurance
The limits of insurance payable under the policy is the maximum liability of the
insurer irrespective of number of a) Insureds b) Claims made or suit brought c)
persons or organization making claims. In view of various coverage sections
under the policy, the limits of Indemnity applicable are of the following types:
1. Master Control Program aggregate is the maximum claim payable under the
policy
2. General aggregate Limit is the maximum payable in respect of damages
under coverage A excluding bodily injury or property damage included in the
products-completed operations hazard, damages under coverage B and
medical expenses under coverage C
3. Products-Completed operations aggregate limit is the maximum payable
under coverage A for damages because of bodily injury and property damage
included in the products-Completed operations hazard
4. Personal and Advertising Injury limit is the maximum payable under
coverage B
5. Each Occurrence limit is the maximum payable for the sum of damages
covered under coverage A and medical expenses under coverage C because
of bodily injury and property damage arising out of one occurrence
6. Premises rented to Insured limit is the maximum payable under coverage A
for damages because of property damage to any one premises rented to
Insured
7. Medical Expenses limit is the maximum payable under coverage C for all
medical expenses because of bodily injury sustained by any one person
Diagram 1: Master control program aggregate

CHAPTER 8 CGL POLICY CLAUSES: SECTION IV – CONDITIONS
E. CGL Policy clauses: Section IV – Conditions
1. Bankruptcy:
Bankruptcy of insured does not absolve insurers of their obligations under the
policy
2. Duties in the event of an occurrence, claim or suit:
i. Immediate notice with details of occurrence of event, injured persons

and witnesses and nature of injury or damage.
ii. If insured receives a claim, notify the insurers of claims received
iii. Forward copies of all demands, notices, summons in connection with the
claim
iv. Authorize insurer for collection of additional information, cooperate for

investigation, assist and enforce rights against person or organizations
v. No offer admission or payment to be made without insurers consent
3. Compliance of coverage terms
No legal action against insurers by any person or organization to join or be

conjoined in any suit, to sue for recovery of settlement or damages unless
coverage terms are fully complied.
4. Other insurance
If other valid insurance is available, the liability is limited as under:
a) Primary insurance: If this insurance is primary, the policy will pay or

share in equal proportion if other primary cover exists.
b) Excess insurance: If this coverage is excess over:
i. Any primary insurance i.e. Fire, Extended coverage, Erection or Builders

risks
ii. Fire insurance for rented or temporarily occupied premises
iii. Tenant liability to premises insurance where taken
iv. Aircraft, watercraft or autos for bodily injury or property damage
v. Any other insurance for liability or operations or any other insurance or
self-insurance.

CGL POLICY CLAUSES: SECTION IV – CONDITIONS CHAPTER 8
Duty to defend is not allowed if the other policy has duty to defend clause
or if defence is undertaken under this Policy, Insurer is entitled to Insured’s
rights.
This policy will pay only in excess of other policies and deductibles or self-
insurance under all other policies or insurances.
c) Method of sharing is equal sharing if permitted under other policies.

This means that each insurer contributes equal amount until its
applicable limit is paid or no loss remains, whichever first occurs. If
equal sharing is not permitted in other policies, then the sharing will be
proportionate.
5. Premium audit
Premiums are calculated on insurers’ rules and rates. The premium charged on
the policy is an advance or deposit premium. At the end of each audit period,
the earned premium will be computed and notice will be given to insured for
payment.
This must be paid on demand. Excess between advance premium and audit
premium will be refunded. Records on the basis of which calculation of
premium is done must be maintained by the insured.
6. Representations
The statements declarations made by the insured are accurate and complete
and are the basis of the policy.
7. Separation of insured
Except with respect to the Limits of Insurance and rights or duties specifically
assigned in the Coverage Part to the Named Insured, this insurance applies to
each Named Insured independently and separately to each insured against
whom claim is made
8. Transfer of rights of recovery
The insured’s rights to recover payments made under the policy are transferred
to the insurers. These rights should not be impaired. The insured is required to
assist insurer to enforce these rights.
9. When policy not renewed
Notice of non-renewal will be given by Insurer a minimum 30 days before expiry.

Proof of mailing will be sufficient.

CHAPTER 8 CGL POLICY CLAUSES: SECTION IV – CONDITIONS
10. Cancellation
For cancellation of policies, 10 days notice in case of non-payment of premium

and in all other cases 60 days notice shall be given. Insurers cancel with pro-
rata refund else as agreed if policy states Minimum premium then no refund.
Proof of mailing is sufficient proof.
11. Changes
Change in terms can be amended with insurers consent
12. Examination of books and records
Insurers may examine and audit insureds books and records relating to the
policy at any time during the policy period and upto three years thereafter.
13. Inspection and surveys
Insurers have right to conduct inspection and surveys and provide insured with
the report and recommendations. The inspections are merely for insurability
and premium purposes.
14. Premiums
First named insured is responsible for premium payment and will be entitled to
refund premiums.
15. Transfer of rights and duties
Insured cannot transfer their rights and duties under the policy without insurer’s
consent. In the event of death of Individual insured, the rights may be
transferred to legal representatives only for scope of the policy, or temporarily
to executors.

CGL POLICY CLAUSES: SECTION V – DEFINITIONS CHAPTER 8
F. CGL Policy clauses: Section V – Definitions
1. Advertisement refers to a notice that is broadcast or published to the

general public or specific market segments about the insured’s goods,
products or services for the purpose of attracting customers or supporters.
2. Auto means a land motor vehicle, trailer or semitrailer designed for travel
on public roads, including any attached machinery or equipment. But not
mobile equipment.
3. Bodily injury means bodily injury, sickness or disease sustained by a person

including death resulting from any of these at any time.
4. Coverage territory means the territory specified in the schedule.
5. Employee is permanent employee or contract employee.
6. Executive officer means a person holding office as per Company law.
7. Hostile fire means one which becomes uncontrollable or breaks out from
where it was intended.
8. Impaired property means tangible property other than the insured’s

product or work, that cannot be used or is less useful because:
i. It incorporates the insured’s product or work that is known or thought to

be defective, deficient, inadequate or dangerous
ii. The insured has failed to fulfill the terms of contract or agreement
The property can be restored to use by:
i. Repair replacement, adjustment or removal of the insured’s product or

work or
ii. Fulfilling the terms of the contract.
9. Insured contract means:
a) A contract for lease of premises. However it does not include the part of
the contract that indemnifies the landlord or owner of the property for
fire damage to the premise leased to or temporarily tenanted by the
insured.
b) A side track agreement
c) An elevator maintenance agreement
d) That part of any contract where liability is assumed on behalf of others
under tort. It does not include construction, maintenance of railways,
architects engineers or surveyors for maps drawings, field orders or
specifications or directions or failure to give directions

CHAPTER 8 CGL POLICY CLAUSES: SECTION V – DEFINITIONS
10. Leased worker is a person leased to you by a labour leasing firm under
agreement to perform duties related to the insured’s conduct of business.
11. Loading or unloading means movement into or onto an aircraft, watercraft

or auto, whilst in such craft or whilst being moved from such craft. It does
not include movement by means of a mechanical device other than hand
truck not attached to such craft or auto.
12. Local underlying policy means a primary policy effective on or after the
inception of this policy which has been issued at insurers’ direction or
coordinated specifically for this insurance program.
13. Mobile equipment means land vehicles including attached machinery or

equipment like bulldozers, forklifts used on private land, power cranes, road
construction or resurfacing equipment crawlers or other vehicles that are
self propelled. As also air compressors, pumps generators spraying welding
equipments. Any equipment not used for carriage of persons or cargo.
14. Occurrence means an accident including continuous or repeated exposure

to substantially the same general harmful conditions.
15. Personal and advertising injury means injury, including consequential

bodily injury arising out of the following offences:
a) False arrest, detention or imprisonment

b) Malicious prosecution
c) Wrongful eviction from or entry into or invasion of the right of private
occupancy of a room, dwelling or premises that a person occupies,
committed by or on behalf of its owner or landlord or lessor
d) Oral or written publication of material that slanders or libels a person or
organization or disparages a person or organisation’s goods, products or
services
e) Oral or written publication of material that violates a person’s right of
privacy
f) The use of another’s advertising idea in one’s advertisement
g) Infringing upon another’s copyright, trade dress or slogan in ones
advertisement.
16. Pollutants mean solid, liquid, gaseous, or thermal irritants or contaminant

including smoke, vapour soot, fumes, acids alkalis, chemicals and waste.
Waste includes materials to be recycled, reconditioned or reclaimed.

CGL POLICY CLAUSES: SECTION V – DEFINITIONS CHAPTER 8
17. Products - completed operations hazard
a) Includes all bodily injury and property damage occurring away from
premises insured owns or rents and arising out of the product or work
except:
i. Product that are still in physical possession of insured or

ii. Work that has not been completed or abandoned.
b) The work will be deemed completed at the earliest of:
i. When all the work called for in contract has been completed
ii. When all the work at the job site has been completed when the contract
specifies more than one jobsite
iii. When that part of the work at the job site has been put to its intended
use by any person or organization other than the contractor or
subcontractor working on the same project. Work that may need service,
maintenance, correction or repair or replacement but which is otherwise
complete will be treated as completed.
c) Excludes bodily injury or property damage arising out of:
i. Transportation of property, unless out of a condition to the vehicle

which is not owned or operated by the insured and the condition was
created by the loading or unloading of the vehicle by the insured
ii. The existence of tools, uninstalled equipment or abandoned or unused
material
iii. Products or operations for which the classification, listed in the
Declarations or in a policy schedule, states that products-completed
operations are subject to the General Aggregate Limit.
18. Property damage means:
i. Physical damage to tangible property including consequential loss. All

such loss is deemed to occur at the time of physical injury.
ii. Loss of use of tangible property that is not physically injured. All such
loss is deemed to have occurred at the time of the occurrence that
caused it.
19. Suit means a civil proceeding and includes an arbitration proceeding for
such injury or damage or an alternative disputes resolution proceeding for
the same purpose.
20. Temporary worker is a substitute for seasonal or short term work conditions

CHAPTER 8 CGL POLICY CLAUSES: SECTION V – DEFINITIONS
21. Terrorism means the unlawful use of violence against persons or property to
further political objectives and which is intended to intimidate or coerce a
government, individual or persons to modify their behavior or politics.
Terrorism does not include any act of violence directed at a specific individual
or individuals which is motivated by personal reasons specific to the parties like
robbery murder etc.
22. Product means goods or products, other than real property, manufactured,
sold, handled, distributed or disposed by insured or trading under insured
name or insured acquired business or assets and includes containers,
materials parts or equipments furnished in connection with such goods or
products.
It includes warranties or representations made at the time with respect to the

fitness, quality, durability, performance or use of the product and the providing
of or failure to provide warning or instructions.
The product does not include vending machines or other property rented to or
located for the use of others but not sold.
23. Work means the work or operations performed by or on behalf of the

insured. Materials, parts or equipment furnished in connection with such
work It includes warranties or representations made at the time with
respect to the fitness, quality, durability, performance or use of the work
and the providing of or failure to provide warning or instructions.

CGL POLICY: PROPOSAL FORM, RATING AND DEDUCTIBLES CHAPTER 8
G. CGL Policy: Proposal form, rating and deductibles
1. Proposal form
A proposal form is must for this insurance. The details to be asked for in a
proposal form are mainly pertaining to insureds name, address, details of
premises, insured’s activities, turnover figures, details of products
manufactured or supplied, quality control information, past insurance, claims
history etc.. .
Students are advised to go through the sample proposal form given in Appendix-
11 for proper understanding on the details required.
2. Rating
The premium is charged on the indemnity limits and risk exposure. Various
factors used for assessing the risk exposure are as follows:
a) Business Operations of all insured

b) Number of years of operations
c) Limit of Liability
d) Retroactive date
e) Territory and Jurisdiction
f) Number and type of locations
g) Surrounding property
h) Number of employees
i) List products manufactured
j) Description of use of product
k) Estimated turnover split by geography
l) List of valid Quality certifications
m) Previous loss history
While the standard factors required for rating a risk are mentioned above some
of the risks may require additional information. For example seating capacity is
relevant to cinemas, project turnover is relevant to construction risk, number of
rooms and facilities are relevant to hotel, etc.
3. Deductible
The policy is subject to a deductible for each section.

CHAPTER 8 SUMMARY
Summary
a) The CGL policy is a combination policy having elements of property and

casualty liabilities and financial liability within its fold.
b) CGL policies are mainly sold to customers having foreign collaborations or

business entities in foreign countries.
c) The Coverage under the policy is under various sections and sub-sections.
Each of these sub-sections are subject to specific terms and also common
terms for all sections.
d) Coverage A1 deals with coverage for Bodily injury and property damage
liability and A 2 deals with exclusions applicable for this coverage.
e) Coverage B1 deals with Personal and Advertising Injury Liability. Coverage

under this section has to be specifically requested. B2 deals with exclusions
for this coverage.
f) Coverage C1 deals with Medical payments and C 2 on exclusions.
g) In addition to the above, supplementary payments for Coverage A and

Coverage B are also dealt with.
h) Section II deals with meaning of insured.
i) Section III deals with limits of insurance applicable for different coverages
j) Section IV deals with policy conditions.
k) Section V deals with definitions.
l) Details which are to be filled in the proposal form and the various rating
parameters are also discussed in the chapter

Answer 1
Both are names by which CGL products are known in India.
Question 1
According to the premium rules, in case of cancellation, which of the following

is the notice period in case of non-payment of premium?
I. 60 days
II. 6 days
III. 10 days
IV. 16 days
Question 2
The insurance company has the right and duty to defend the case. However this
right will be exercised only:
I. Where the law of the land permits the insurance company to defend the
case.
II. If the insurance company has already defended such cases earlier
III. If the case is judicial
IV. If the case involves hearing by the Insurance Tribunal
Question 3
Under Medical expenses for bodily injury caused by an accident within the
covered territory and within the policy period, expenses are incurred and
reported to insurers:
I. Immediately
II. Within one year of the accident
III. Within 1 month of the accident

Answer 1
The notice in case of non-payment of premium is 10 days and in all other cases
its 60 days.
Answer 2
The right will be exercised only where the law of the land permits the insurance
company to defend the case.
Answer 3
Expenses are incurred and reported to insurers within one year of the accident.

CHAPTER 9
DIRECTORS AND OFFICERS LIABILITY
Directors and officers liability policies are popular in the UK, USA and other
developed countries. These policies are relatively new in India.
This chapter will give you a basic understanding of Directors and Officers
Liability policies, the need for such policies, coverage, exclusions, various
extensions available under the policy and other aspects.
Learning Outcomes
A. Features of directors and officers liability policy

B. Extensions and rating under directors and officers liability policy

CHAPTER 9 FEATURES OF DIRECTORS AND OFFICERS LIABILITY POLICY
Mr. Mohan Lal is one of the directors in ABC Ltd. One of the shareholders of ABC
company recently filed a complaint against Mohan Lal for taking a decision that
were detrimental to the long term prospects of ABC Ltd. The decision related to
the acceptance of a project was taken by Mr. Mohan Lal in his capacity as the
director of the company.
The shareholder alleged that acceptance of the project would involve huge
capital commitments and the decision is not in the interest of the company. The
company is currently heavily funded by borrowings and further borrowings may
lead the company into bankruptcy.
Directors and Officers of a company may be prosecuted for failures and civil
remedies may also be permitted against them. In this case, Mohan Lal, being a
director should have acted with diligence and carried out his duties with
reasonable care and skill.
A. Features of directors and officers liability policy
1. Need for directors and officers liability policy
Directors and officers of companies hold positions of trust. They have

responsibility to their company, the shareholders, the employees and the public
at large. They may become liable to pay damages for wrongful acts such as
failure of supervision of the affairs of the company, etc.
Apart from common law responsibilities, the duties of directors under the
Companies Act relate to prudent management of the Company. These duties
can be delegatd to the members of management. Specific duties may also be
expressed in the Articles of Association.
Thus, directors and officers may be liable to:
a) Employees: For unfair dismissal, etc.
b) Shareholders: For imprudent expansions or loans or investments, etc.
c) Creditors: For misrepresentation of financial conditions, etc.
d) Government regulatory bodies: For breach of legislation, etc.
e) Members of the public: For financial loss following reliance on incorrect

or inadequate or negligent statement of financial condition, etc.

FEATURES OF DIRECTORS AND OFFICERS LIABILITY POLICY CHAPTER 9
The policy is therefore, designed to provide protection to directors and officers

of a company against their personal liability for financial losses arising out of
wrongful acts or omissions in their capacity as directors or officers.
There are no standardized policy forms. Different policy wordings are used by
different Insurers, though the basic coverage remains more or less the same.
2. Coverage under the policy
In order to understand what the policy covers, we need to first understand the
following definitions:
Definition
1. ‘Director or Officer’ shall mean any natural person appointed or elected as

director or officer of the company while acting in their capacity as director
or officer on behalf of the Insured.
2. ‘Discovery period’ shall mean the period of time specified in the policy,
immediately following termination of the policy during which claim
notification may be given by Insured to Insurer for a wrongful act occurred
prior to expiry of the policy.
3. ‘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, defence or settlement of any claim.
4. ‘A Wrongful Act’ shall mean any actual or alleged breach of duty, breach of
trust, neglect, error, misstatement, misleading statement, omission, breach
of warranty of authority or other act done or wrongly attempted by any
Director or Officer.
5. ‘Claim’ shall mean:
a) Any writ or summons issued against or served upon any Director or

Officer for any Wrongful Act, or,
b) Any written communication alleging a Wrongful Act communicated to

any Director or Officer.
There are two insureds under the policy, namely:
 The Directors and Officers of the Company and
 The Company itself
The coverage is granted in two parts.

3. Insuring clause
The insuring clause provides:
“Underwriters agree, subject to the terms, conditions, limitations and

exclusions of this Policy to:
a) Pay on behalf of the Directors or Officers of the company:
Loss arising from any Claim first made against them during the Period of
Insurance and notified to Underwriters during the Period of Insurance by
reason of any Wrongful Act committed in the capacity of Director or Officer
of the Company except for and to the extent that the Company has
indemnified the Directors or Officers.
b) Pay on behalf of the company:
Loss arising from any claim first made against the Directors or Officers
during the period of insurance and notified to Underwriters during the
Period of Insurance by reason of any Wrongful Act committed in the capacity
of Director or Officer of the Company but only when and to the extent that
the Company shall be required or permitted to indemnify the Directors or
Officers pursuant to the law, common or statutory, or the Memorandum and
Articles of Association.”
Coverage under (b) is known as “Company Reimbursement Provision”. The

Company may have to indemnify its directors and officers for any litigations
in respect of the latter’s breach of duty etc. in the conduct of the
Company’s affairs, 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 officer. Such amounts paid by the company on
behalf of directors are reimbursable under the coverage ‘B’.
4. Exclusions
Some important exclusions are as follows. The Clause provides that

Underwriters shall not pay any loss arising from any claim:
a) Where legal action or litigation is brought in a court of law within the

Excluded Territories stated in the Schedule.
b) To the extent that an indemnity or payment is available from any

source, other than this Policy.
c) For any actual or alleged bodily injury, sickness, disease or death of any
person or any actual or alleged damage to or destruction of any tangible
property, including loss of use thereof. (This is a subject-matter of
Public Liability Policy.)

FEATURES OF DIRECTORS AND OFFICERS LIABILITY POLICY CHAPTER 9
d) Arising out of, any actual or alleged seepage, pollution or contamination

of any kind
e) Brought about by any dishonesty, fraud or malicious conduct of the

Directors or Officers provided, however, that Underwriters shall pay on
behalf of the Directors and Officers Costs and Expenses incurred in
successfully defending proceedings brought in respect of such Wrongful
Act.
f) Brought about by any Director or Officer gaining any profit or advantage

or receiving any remuneration to which he/she was not legally entitled.
g) 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.)
h) Brought about by any circumstances existing prior to or at the inception

date of this Policy and which the Directors or Officers or the Company
knew or ought reasonably to have known could give rise to a Claim.
i) For tax or fines or penalties or punitive or exemplary or multiple

damages or any Claim deemed uninsurable under law.
j) Based upon any failure or omission on the part of any Director or Officer
to effect and maintain insurance for or on behalf of the Company.
k) Based upon, actual or alleged libel, slander, infringement of copyright,

infringement of patent (separate policies can be availed of)
l) Directly, resulting from goods or products manufactured or sold or

supplied by the Company (This is a subject-matter of Products Liability
Policy.)
m) Claims brought about by individual or entity that owns more than a

specified percentage of share capital. This exclusion is known as Major
shareholder exclusion.
The limit of Underwriters total aggregate liability under both coverages (a) and
(b) is stated in the Schedule.
5. Claim Conditions
The policy conditions regarding claim notification and procedure is given below:
a) The Directors and Officers and the Company shall give to Underwriters
immediate notice in writing of any Claim.

b) The Directors and Officers and the Company shall give to Underwriters
written notice as soon as practicable of any circumstances of which the
Directors or Officers or the Company shall become aware which might
give rise to a Claim against the Directors or Officers, giving reasons of
the anticipation of such Claim, with full particulars as to dates and
persons involved.
Such notice having been given, any subsequent Claim made shall be
deemed to have been made during the Period of Insurance.
c) The Directors and Officers and the Company shall give Underwriters such
information and co-operation as Underwriters may reasonably require
and shall not disclose to anyone the existence of the Policy without
Underwriters consent, unless as a consequence of the requirements of
the law.
d) The Directors and Officers and the Company shall not admit liability for
or settle or attempt to settle any Claim or incur any Costs and Expenses
without the written consent of Underwriters who shall be entitled at any
time to take over and conduct the defence or settlement of any Claim.
e) The Directors or Officers or the Company shall not be required to contest

any legal proceedings unless Counsel (to be mutually agreed upon by the
Directors and Officers, the Company and Underwriters) shall advise that
such proceedings should be contested.
f) Underwriters shall not settle any Claim without the consent of the
Directors or Officers or the Company. If however the Directors or
Officers or the Company shall refuse to consent to any settlement
recommended by the Underwriters and shall elect to contest or continue
any legal proceedings in connection with such Claim, then Underwriters
liability for the Claim shall not exceed the amount by which the Claim
could have been so settled inclusive of Costs and Expenses incurred with
their consent up to the date of such refusal, and then only up to the
Limit of Underwriter’s Aggregate Liability stated in the Schedule.
The other policy conditions like other insurances clause, arbitration,

subrogation, cancellation etc. are applicable for this policy also.
6. Deductibles
The Policy is subject to deductible. However, generally, no deductible is

applied for coverage A and deductible is applied only for Company
reimbursement cover.

EXTENSIONS AND RATING OF DIRECTORS AND OFFICERS LIABILITY POLICY CHAPTER 9
Test Yourself 1
Which of the following is not exclusion to a Directors Liability Policy?
I. Loss arising from any claim made by any third party based upon breach of
any professional duty owed to such third party.
II. Loss arising from any claim brought about by any Director or Officer gaining
any profit or advantage or receiving any remuneration to which he/she was
not legally entitled.
III. Loss arising from any claim where legal action or litigation is not brought in
a court of law within the Excluded Territories stated in the Schedule.
IV. Loss arising from any claim for tax or fines or penalties or punitive or
exemplary or multiple damages or any Claim deemed uninsurable under law.
B. Extensions and rating of directors and officers liability policy
1. Policy extensions
Different policy forms are in use by different insurers based on which the
coverage provided may differ. General list of important additional covers that
are possible under a D & O policy are listed below along with summary of
coverage details under the extension. It is possible that some of these
extensions may be offered as in built cover by some insurers and as additional
extensions by others. The students are advised to read the policy wordings
under different forms to understand if the coverage is already provided as in
built cover or needs to be opted as an extension.
a) Representation at investigations and examinations:
Reasonable and necessary cost, fees and expenses incurred with prior
written consent of insurers for legally required attendance by any director
or officer at any official investigation, enquiry examination or similar such
proceedings
b) Outside directorships
This extends the cover for directors/officers of the Company while serving
as director/ officer for any other company, Organization, institute or society
provided such a position is held at the specific request of the Company. This
extension is usually subject to the other company not having insurance
coverage or is unable to indemnify the director.

CHAPTER 9 EXTENSIONS AND RATING OF DIRECTORS AND OFFICERS LIABILITY POLICY
c) Employment practices
This provides cover for claims concerning past, present or prospective

employee of the company and arising out of actual or alleged unfair or
wrongful employment practices like discharge, dismissal, termination,
failure to promote, wrongful deprivation of career opportunities etc.
d) Libel and slander
This provides cover for wrongful acts by reason of words-written or spoken

by an Insured person
e) Infringement of IPR
This provides cover for unintentional infringement of copyright, trademarks,

registered design patents or any plagiarism or breach of confidentiality
f) Blanket Subsidiary cover or auto acquisition of subsidiaries
Provides automatic cover for subsidiaries created or acquired by the

company during the period of insurance
g) Pollution defence cost extension
Defence cost and expenses for pollution related claims which is normally an
exclusion is included as coverage
h) Joint Venture Liability
Claim extends to include liability arising from a joint venture.
i) Prospectus liability for current or future offerings or Entity protection

for security claims or Entity coverage for Prospectus liability
Provides cover against claims brought by investors against the company or

directors following public offering by the company. This cover can also be
taken as a standalone policy under “Public Offerings of Securities Insurance
(POSI)” policy

EXTENSIONS AND RATING OF DIRECTORS AND OFFICERS LIABILITY POLICY CHAPTER 9
j) Entity Protection for critical occurrence or Crisis Communication

cover:
Provides reimbursement of any fees or costs reasonably incurred by the

company for employing the services of a public relations consultant in order
to avert or mitigate a loss for which policy coverage applies.
k) Entity protection on Employment related matters
This provides cover for claims against company, concerning past, present or
prospective employee of the company and arising out of actual or alleged
unfair or wrongful employment practices like discharge, dismissal,
termination, failure to promote, wrongful deprivation of career
opportunities etc.
l) Extended reporting time for Insured persons
This provides for extended time for reporting the claims which have
occurred after retroactive date and before expiry of the policy period.
m) Insured vs Insureds cover
Claims brought out by one director against another director is normally

excluded under the policy. This exclusion can be deleted through this
extension
n) Kidnap Response Cover
Provides cover for costs associated with kidnap for ransom or distortion. This
cover is also provided by certain Insurers on standalone basis as Kidnap and
ransom insurance policy.
2. Proposal form
a) A proposal form is always required for this insurance and it must be

accompanied by:
i. The latest audited accounts of the company and any holding or

subsidiary companies.
ii. The income tax and wealth tax returns of the last three years of the
concerned Directors and Officers proposed for coverage.

CHAPTER 9 EXTENSIONS AND RATING OF DIRECTORS AND OFFICERS LIABILITY POLICY
b) The proposal form has the usual questions related to:
i. The name and address of the companies

ii. Its nature of business and year of establishment,
iii. Previous insurance and claims or past losses if any.
c) Detailed information is also elicited on the changes in capital structure

in the last year, any acquisitions or mergers effected or contemplated.
d) List of shareholders owning 15% or more shares in the company, Gross

receipts or assets from business in USA or Canada is also sought to know
the global exposure.
3. Rating
The premium chargeable under D & O Policy is based on the limit of Indemnity
and the policy excess opted. The premium rate is influenced by various risk
factors as under:
i. Turnover and gross assets, financial position of the company

ii. The geographical operations of the Company and jurisdiction
iii. The trade activity and organisation structure
iv. The number of directors and officers seeking cover
v. Whether the company is listed or unlisted, if listed, where
vi. Past claims experience

SUMMARY CHAPTER 9
Summary
a) Directors and officers of companies may become liable to pay damages for
wrongful acts such as failure of supervision of the affairs of the company,
etc.
b) Directors liability policy is therefore, designed to provide protection to

directors and officers of a company against their personal liability for
financial losses arising out of wrongful acts or omissions in their capacity as
directors or officers.
c) The coverage is granted in two parts under the insuring clause: Directors or
officers liability and Company Reimbursement Provision.
d) As in the case of other liability insurance policies, the directors liability

policies are also subject to certain exclusions.
e) The Directors and Officers of the company would need to comply with
certain specified claim conditions.
f) As the policy covers liability of individuals, a deductible is not usual under

the policy. However in the case of coverage towards Company’s
reimbursement, a deductible may apply.
g) Many coverages are provided under the policy as extensions depending on

the need of the Insured
h) A proposal form is always required for this insurance and it must be

accompanied by latest audited accounts and income tax returns.

Answer 1
Loss arising from any claim where legal action or litigation is brought in a court
of law within the Excluded Territories stated in the Schedule. (Is not is
incorrect)
Question 1
The questions in the proposal form relate to which of the following?
I. The name and address of the companies

II. The nature of business and year of establishment
III. Previous claims
IV. All of the above
Question 2
There are a number of exclusions that may be present in policies. Which of the
following is not a policy exclusion to a Directors Liability policy?
I. Dishonesty of a director
II. Breach of professional duty
III. Fines penalties, etc
IV. Claims due to company reimbursement of directors liability
Question 3
One of the claim conditions is that the directors and officers of the company
shall give notice in writing of any claim made. Which of the following is the
time limit for such notice?
I. 24 hours
II. 48 hours
III. Immediately

Question 4
The Company may have to indemnify its directors and officers for any litigation
in respect of the latter’s breach of duty etc. in the conduct of the Company’s
affairs, provided that:
I. Such obligation is permitted by the shareholders

II. Such obligation is permitted by the Board of Directors
III. Such obligation is expressly mentioned in the Company’s Articles of
Association
IV. Such obligation is not permitted initially but later ratified by the Directors.
Answer 1
All the three options are examples of usual questions in the proposal form.
Answer 2
Company reimbursement of directors’ liability is covered under the policy under

‘Company reimbursement proviso’
Answer 3
The directors and officers of the company should give notice of any claim in
writing immediately.
Answer 4
The Company may have to indemnify its directors and officers for any litigation
in respect of the latter’s breach of duty etc. in the conduct of the Company’s
affairs, provided that such obligation is expressly mentioned in the Company’s
Articles of Association


CHAPTER 10
OTHER POLICIES & OVERSEAS PRACTICE
In the last few chapters we discussed about some major types of Liability
policies. This chapter will give you a basic understanding of some other liability
insurances like E & O policy, Clinical trial Policy. We will also be discussing on
the liability insurances practices prevailing in UK and USA.
Learning Outcomes
A. Errors and omissions liability policy

B. Clinical trials liability policy
C. Other liability policies
D. Overseas practices in liability insurance

CHAPTER 10 ERRORS AND OMISSIONS LIABILITY POLICY
A. Errors and omissions liability policy
Errors and Omissions policies are issued to a host of professionals ranging

from Quality certifying agencies to software developers, advertising agencies,
stock brokers and the whole gamut of new age professionals. Specific policy
terms and coverages provided for computer services and software developers’
professional liability has already been discussed in Chapter 7. Other
professionals’ error and omissions liability is discussed here.
There is no standard wording for such policies. Professional indemnity policy is

used with amendments to incorporate acts of errors and omissions resulting in
injuries or loss or damage. The element of negligence may or may not be
present. It may be noted that these liabilities have not yet been tested in Indian
courts of law.
1. Coverage
These policies cover breach of professional duty due to errors or omission

committed or occurring in good faith and resulting in loss or damage to others.
Legal costs are included within the overall limits of indemnity.
The policies are primarily on claims made basis and retroactive dates are to be
negotiated.
2. Exclusions
The policy will exclude:
a) Deliberate or Wilful acts
b) Dishonesty or fraudulent acts
c) Libel or slander
d) Fines and penalties
e) War or radiation risks
f) Acts occurring prior to inception of policy
In addition the standard exclusions of professional liability policies also apply.

ERRORS AND OMISSIONS LIABILITY POLICY CHAPTER 10
3. Conditions
Conditions common to professional liability policies apply here. In addition the

policy may incorporate the Duty to Defend clause enabling the insurer to take
over the defence of the case.
4. Deductible
The policy is subject to a deductible. This may be:
 A specified percentage of the limit of indemnity or
 A fixed amount
5. Proposal form
There is no standard proposal form. Insurers may call for details or documents
to ascertain the risk and exposure to decide the cover. The information called
for would range across the following:
a) Name and address of the insured and the locations of operations
b) The nature of business activity, the turnover and gross assets and
revenue.
c) The customers and the contribution to the revenue
d) The details of the directors and professional staff, their qualifications,

experience
e) Risk management procedures and contract controls
f) Pasty insurance history
g) Past loss or claims history
h) Employee turnover
6. Rating
The premium is normally applied on the indemnity limit and the turnover. Rates
take into account the concentration or spread of clients the geographical area
of operations, the experience of the directors and employees, the claims
experience.

CHAPTER 10 CLINICAL TRIALS LIABILITY POLICY
Test Yourself 1
The Errors and Omissions Liability Policy is subject to a deductible. Such

deductible may be:
I. A specified percentage of the limit of indemnity

II. A specified percentage of the limit of exclusion
III. A specified percentage of the limit of policy excess
B. Clinical trials liability policy
1. Meaning of Clinical trials
Clinical trials are medical research studies involving people. It is done to test
the efficacy and safety of a drug on humans. This may be done on healthy
volunteers or patients suffering from a disease for which the medicine is being
tested. The process to be followed, type of people who may participate,
dosages and length of the study etc. are to be as per pre-defined protocols.
2. Phases in clinical trials
Clinical trials follow four phases and each phase will have a different purpose.
a) Phase I: Safety of the treatment
It is the first stage of testing on humans and involves a group of around

twenty healthy persons. The testing is on the safety of the treatment and its
appropriate dosage and documentation of the side effects if any.
b) Phase II: Workability
This involves a larger group of around 300 persons who are having the
disease or medical condition for which the medicine is being tested. In this
stage, safety and effectiveness is tested.
c) Phase III: Comparison with existing treatment
This is carried out on a large group of around 1000 persons from across the
world. Efficacy and effectiveness is further tested at various centres. Effect
is compared with commonly used treatments and information is collected
towards obtaining marketing approvals for the drug.
d) Phase IV: Body of knowledge established
This is done after the drug obtains marketing approval. This is done for
monitoring of the efficacy and effectiveness over long term usage.

CLINICAL TRIALS LIABILITY POLICY CHAPTER 10
3. Liability during clinical trials
There are multiple stakeholders involved in a clinical trial like:
a) The sponsor whose product is being tested
b) Contract Research Organisation (known as CRO) who monitor the trial
c) Principal investigator or doctor who conducts the trial
d) The hospital/institution where the trial is conducted
e) Ethics committee that approves the trial and has to ensure the safety of
the subject
Each of these stakeholders has responsibilities towards the human subject and
has significant liability exposure
4. Coverage
The policy covers the sum which Insured shall be liable to pay as
damages/compensation for claims made by subjects for death or injury or any
other adverse reaction in the body as a result of participation in clinical trial.
The term Insured would include all stakeholders in the trial. The cover includes
legal costs also. Breaches of data may also be covered.
This policy is generally issued on No fault principle.
The policy may be a single trial or multi trial policy. Post-trial coverage is also
offered for a limited period as decided. The territorial limits are specified
5. Exclusions
The cover does not extend to the following:
a) Damages that are within permissible limits as are to be expected

within such trials
b) Deliberate contravention of instructions by the subject
c) Deterioration in condition which would normally have occurred even

without the trial
d) War and nuclear perils
e) Fines and penalties

CHAPTER 10 OTHER LIABILITY POLICIES
6. Proposal form and rating
The protocols of the clinical trials, the particulars of all agencies involved in the
process, their experience and past insurance and claims history are obtained for
the purpose of this insurance
Premium rates are based on track record of the sponsor, whether single trial or
multiple trial policy, the phase of trials involved, number of subjects, their age,
details of drug etc..
C. Other liability policies
1. Cybercrime liability
Information technology has created a new set of risk exposures to users of

products. Whilst IT has helped in globalization of economic activity and
businesses, it has also opened avenues for crime beyond national borders and
multiplication of liabilities as a consequence.
Some of the cyber liability exposures are Libel, hacking, inadvertent virus
transmission, copyright infringement, loss of identity.
The policy coverage is on the lines of an errors and omissions policy to cover
liabilities arising out of hacking email frauds, web developing, website
maintenance and E-commerce.
2. Stockbrokers Liability
Stockbrokers can be liable for wrong advice to clients and also failure to
execute or wrong execution of clients’ instructions to trade.
One of the conditions for the coverage is that they are registered members of a
stock exchange.

OVERSEAS PRACTICES IN LIABILITY INSURANCES CHAPTER 10
D. Overseas practices in liability insurances
1. U K Practices
a) A notable feature of the U.K. practice is combined or Comprehensive

Policies which include coverage for Public Liability, Products Liability
and Employers liability. In some cases, material damage coverage may
also be included.
b) Large business groups which operate in many countries have special

insurance problems. They may have to arrange local insurance as per
local laws. Nevertheless, the group head office may arrange a `global
policy’ to cover any gaps in local insurance coverages or on an èxcess
of loss’ basis to take care of large losses.
c) Market pools formed by a consortium of insurers are not very common in

liability insurance except perhaps in extra-hazardous risks e.g.
demolition contracts. However, public liability insurance for nuclear
reactor operators is available, on a pooling basis, from the “British
Insurance (Atomic Energy) Committee comprising the insurance
companies and Lloyd’s underwriters.
d) Pollution coverage: The practice varies among insurers. Some

incorporate a general exception in the public liability policy; others
consider each risk separately and decide to cover or exclude pollution
liability.
An endorsement wording recommended by Association of British Insurers

restricts pollution or contamination cover to sudden identifiable unintended
and unexpected incidents, with a limit of indemnity for àny one year’ of
insurance.
All Pollution or Contamination which arises out of one incident shall be

deemed to have occurred on the date that the Insured first becomes aware
of such incident.
e) Products Guarantee Policy: The special exclusions in the Product

Liability Policy relate to product damage, product repair or replacement
product recall, product guarantee and product performance.
However, some of these liability risks are underwritten in a small section of

the insurance market in the U.K. and U.S.A. and other developed countries.
These are not commonly insured but are restricted to special cases subject
to rigorous risk assessment and strict underwriting terms.
The products guarantee policy is designed to protect the Insured against

legal liability arising out of failure of products to fulfill their intended
function.
CHAPTER 10 OVERSEAS PRACTICES IN LIABILITY INSURANCES
The policy will pay for:
i. The cost of repairing or replacing a defective product

ii. The cost of recalling defective products
iii. The financial losses caused by such products where there is no injury to
or damage to property of third parties
Extension is available to pay for Insured’s lost sales as a result of damage to

the brand name of the product, advertising expenses already incurred,
advertising expenses to re-launch the product etc.
f) Product Liability Laws: In many developed countries, liability for

defective products is now governed by the legal principle of “strict
liability” i.e. irrespective of negligence. This law is particularly applied
in many states in the U.S.A.
The Council of the European Communities issued a directive in 1985 to

introduce strict liability law for defective products. In compliance with the
directive Consumer Protection Act, 1987 was passed in the U.K. According to
the Act, a claimant is not required to prove negligence against a
manufacturer. He has only to prove a defect and that this defect caused the
damage i.e. death, personal injury or damage to property. Thus, the Act
imposes a strict liability.
According to the Act, there is a defect in a product if the safety of the

product is not such as persons generally are entitled to expect and `safety’
in relation to a product shall include safety in the context of risks of death
or personal injury or of damage to property.
Similar legislation is introduced in Denmark, Germany, Greece, Italy etc.

The other member countries of the European Community will also pass
similar laws.
g) Professional Indemnities
i. In the U.K. mutual insurance schemes are in operation. For the medical
profession, the Medical Defence Union and the Medical Protection
Society cover their members against professional liability on a
subscription basis.
ii. Similarly, the Law Society has a mutual scheme to cover their member
solicitors.
iii. Solicitors are obliged to effect compulsory professional indemnity

insurance under the provisions of Solicitors’ Act, 1974.

OVERSEAS PRACTICES IN LIABILITY INSURANCES CHAPTER 10
iv. Insurance brokers must be registered with the Insurance Brokers

Registration Council established under the Insurance Brokers
(Registration) Act, 1977. The code of conduct of the Council provides
among other things, that the brokers must possess professional
indemnity insurance.
v. Employers’ liability Insurance is compulsory under the Employer’s

liability(Compulsory Insurance) Act 1969 operative from 1st January 1972
2. U S A Practice
a) In the U.S., the policy commonly used to insure a wide range of liability
loss exposures of most organisations is the commercial general liability
(CGL) policy. The policy consists of coverage A, B and C. The details of
coverage is as discussed under Chapter 8
b) A business owners policy is a simplified property and liability package

policy designed for small to medium-sized businesses.
c) Homeowner’s Property Liability Package Policy is designed for

homeowners
d) Farm Liability under specially designed property liability package policy.

The coverage applies to liability arising out of farming activities
including products liability. Limited pollution cover for discharge of
smoke or chemicals used in normal farming operations can be added.
Employers’ Liability Coverage for farm workers can also be added.
e) Liquor Liability Policy is designed for manufacturers distributors etc. of

alcoholic beverages. The Policy covers the liability excluded under CGL
Policy. The Policy is also available to bars, restaurants etc. for their so
called “Liquor Liability” imposed by Common Law or by state statutes.
f) Pollution Liability Policy
i. Nuclear Energy Liability Insurance is provided by various pools formed

by insurers. Two types of coverages available are:
 The facility form for operators of nuclear facilities and the suppliers’
 Transporters’ forms for those that provide services, material etc. for
such facilities or transport property to and from a facility.
The coverage is restricted to liability arising out of nuclear accidents

only. Thus, these also need CGL Policy.

CHAPTER 10 OVERSEAS PRACTICES IN LIABILITY INSURANCES
ii. Workmen’s compensation policy: Workers’ Compensation Laws are

adopted separately by each state but are more or less similar. These
laws require employed to pay prescribed benefits for occupational injury
or illness of employees, irrespective of negligence. Employers can also
claim on the basis of negligence. Both types of claims are covered under
Workers’ Compensation and Employers’ Liability Insurance.
Test Yourself 2
Liquor Liability Policy is designed for manufacturers distributors etc. of

alcoholic beverages. The Policy covers:
I. Liability excluded under CGL Policy

II. Liability included under CGL Policy
III. Liability excluded in Public Liability policy
IV. Liability included in Public Liability policy

SUMMARY CHAPTER 10
Summary
a) Errors and Omissions Policies are issued to a host of professionals.
b) There is no standard wording for such policies.
c) These liabilities have not yet been tested in Indian courts of law.
d) These policies cover breach of professional duty due to errors or omission

committed or occurring in good faith and resulting in loss or damage to
others.
e) The policies are primarily on claims made basis.
f) Certain specified exclusions apply to such policies. Conditions common to

professional liability policies also apply.
g) The policy is subject to a deductible that may be either a specified

percentage of the limit of indemnity or a fixed amount.
h) There is no standard proposal form. Insurers may call for details or

documents to ascertain the risk and exposure to decide the cover.
i) The premium is normally applied on the indemnity limit and the turnover.
j) A clinical trials liability policy covers claims made by subjects for death or
injury or any other adverse reaction in the body as a result of participation
in clinical trial
k) Following types of liability policies exist in UK and USA markets:
 Products Guarantee policy

 Homeowner’s Property Liability Package Policy
 Farm Liability
 Liquor Liability Policy
 Pollution Liability Policy
 Nuclear Energy Liability
 Workmen’s compensation policy

Answer 2
The policy is subject to a deductible that may be a specified percentage of the

limit of indemnity.
Answer 3
Liquor Liability Policy covers liability excluded under CGL Policy.
Question 1
Errors and Omissions Liability policies are primarily on:
I. Claims negotiated basis

II. Claims made basis
IV. Neither of the above
Question 2
Clinical trials may be carried out on which of the following?
I. Healthy Humans
II. Persons suffering from disease
Question 3
In the case of cybercrime liability, the policy coverage is on lines of which of

the following?
I. Public liability policy

II. Professional liability policy
III. Errors and Omissions policy
IV. Liability policy

Question 4
In the case of Pollution coverage, all Pollution or Contamination that arises out
of one incident shall be deemed to have occurred on:
I. The date of such incident

II. The date that the Insured first becomes aware of such incident
III. The date when the penalty for breach of environmental norms is levied
Answer 1
Errors and Omissions Liability policies are primarily on claims made basis.
Answer 2
The correct option is option III.
Clinical trials can be carried out in both healthy humans and on persons
suffering from diseases
Answer 3
In the case of cybercrime liability, the policy coverage is on lines of Errors and
Omissions policy.
Answer 4
All Pollution or Contamination that arises out of one incident shall be deemed
to have occurred on the date that the Insured first becomes aware of such
incident.


CHAPTER 11
CLAIMS
Broadly speaking, liability insurances are concerned with accidents causing

death or bodily injury to employees or third parties or property damage of third
parties. Public Liability and products liability insurances are concerned with
both bodily injury (fatal or otherwise) and property damage of third parties.
Professional indemnities are in a class by themselves and claims in this class

arise out of professional negligence causing financial loss to clients. However,
claims may also arise for bodily injuries, for instance medical practitioners
policies. Employers’ liability insurances relate only to bodily injuries (fatal or
non-fatal) of employees.
This chapter deals with the process of liability claims management. Claims
under Public Liability Insurance Act Policy and under Employers Liability Policy
have special features of their own and are dealt with separately.
Learning Outcomes
A. General procedure for liability claims

B. Claims procedure under statutory liability policies

CHAPTER 11 GENERAL PROCEDURE FOR LIABILITY CLAIMS
John is a medical professional. He had purchased a professional indemnity

policy. This policy will protect him against claims which might be made by his
clients alleging professional negligence by Dr John.
Until this point he had bought an intangible product – a promise that the insurer
will pay his claim when the time comes. It is only when a claim occurs that the
true value of the product he had bought can be measured.
If any of the customers of Dr John make a claim and the courts after hearing of
the case conclude that there has been negligence on his part while treating the
patient, the amount awarded against the doctor shall be compensated by the
Insurer.
A. General procedure for liability claims
1. Common features
All liability claims have certain common features. Firstly the three most
important questions to be determined are:
a) Is the insured legally liable to the claimant?
The first question has to be decided with reference to the law governing the
particular situation. Examples of such laws are:
i. Law of negligence of nuisance

ii. Law of strict liability
iii. Statutory law viz. Public Liability Insurance Act, Workmen’s
Compensation Act etc.
If the insured is not legally liable the question of claim under the policy does
not arise.
b) Is the insurer liable to the insured under the terms of the policy?
If the Insured is legally liable, the second question has to be decided with
reference to the various clauses of the policy such as operative and
indemnity clause, exclusions etc.
c) If liable, what is the amount of claim payable?
The third question has to be answered on the basis of assessment of claim in

monetary terms. There may be an award made by a court of law or amount
may be negotiated and settled out of Court by the parties concerned.

GENERAL PROCEDURE FOR LIABILITY CLAIMS CHAPTER 11
The amount of claim payable is also subject to the limits of indemnity under the
Policy, Voluntary/compulsory excess, if any, etc.
Apart from the three important questions features discussed above, the other
common features are:
i. An insured cannot make any admission of liability for the claim without
the written consent of insurers.
ii. The insurers reserve the right to conduct in the name of the Insured the
defence, negotiations and settlement of the claims.
2. Phases in the processing of liability claims
There are three main phases in the processing of liability claims namely:
 Notification
 Investigations and
 Settlement.
a) Notification
i. A policy condition provides for early notification of accident of any claim

against the Insured or any event which may give rise to a claim.
ii. Notice is required by insurers to initiate immediate investigation to

gather all factual information on the basis of a thorough examination of
all circumstances surrounding the claim. Sooner an investigation is
conducted, the better and more accurate the data that can be obtained.
iii. Notice is required even when a formal claim is not made against the
Insured. There may be events which may result in claims in the future.
The insurers would like to be in a state of preparedness to deal with such
potential claims.
iv. Notification has to be followed by a completion of Claim Form provided

by the insurers. The Claim form will have the following
information/questions:
b) Public Liability/Product Liability claim form
Policy No and Claim No.
Disclaimer that the issue of this form is not to be taken as an admission of

liability
Note that the completion and return of this form to the Company should not
be delayed if any of the particulars required cannot be immediately given.
They may be forwarded to the Company afterwards as soon as possible.

i. Particulars of Insured
 Name of Insured
 Address
 Policy Number
 Period of the Policy
 Limits of Indemnity under the Policy
ii. Particulars of accident
 Date and time of occurrence:

 Place of accident:
 When did you first come to know of the accident
 When was the accident reported to you
 When was the claim first notified to the Insurer
iii. Particulars of consequence of the accident
Has any person sustained any injuries in the accident? If so,
 State where such person was at the time of accident.

 Give name/s, address/es and occupation/s of such person/s.
 Have the injured persons been removed to hospital or medically
attended? If so, particulars need to be mentioned.
Has the accident caused damage to property or livestock ? If so, give name/s
and address/es of the owner/s of the property and/or livestock and full
description of the property and state the nature of the extent of damage.
Has any claim been made upon you by any person ? If so, state by whom and
give full particulars (if claim has been made in writing; attach a copy of the
notification received and of the bill, if submitted)
Estimated amount of claim separately under (1), (2) and (3).
iv. Other information
 Give, if possible, the names and addresses of all witnesses to the

accident.
 Has the accident been reported to any authority? If so, state to whom
and attach a copy of the report submitted.
 What action, if any, has been taken by the authority?
 Give particulars of any other insurance, if any, in respect of the same
risk.

v. Declaration
I/We, the above named, do hereby, to the best of my/our knowledge and
belief, warrant the truth of the foregoing statements in every respect and
I/We agree that if I/We have made, or in any further declaration the
Company may require in respect of the said accident, shall make any false
or fraudulent statement, or any suppression or concealment, my/our claim
shall be absolutely forfeited, and the Policy shall be null and void.
Insured’s Signature and date:
(Note: 1 Notification Extension Clause and Extended claim reporting clause

must be referred to in this context.)
c) Investigation
i. This is the most important phase of processing Liability claims. Claims

may arise out of a variety of causes e.g. fire, explosion, pollution,
transportation, defective product.
ii. The circumstances of the accident have to be investigated through

independent surveyors depending upon the type and magnitude of the
claim. Apart from independent surveyors, opinion of technical experts
may have to be sought. Reports from various authorities such as police,
Factory Inspectorate, Pollution Control Board etc. are also relevant at
this stage.
iii. In this context, reference must be made to a policy condition which

provides that the Insured shall give all such information and assistance as
the Company may reasonably require.
The Insurers would naturally depend upon the Insured for information
specially that which may be in the exclusive possession of the Insured.
The Insurers may require to know the full circumstances surrounding the
accident including the following details:
Example
a) Particulars of injuries and/or

b) Nature and extent of damage of property
c) Names, addresses and occupations of claimants
d) Particulars of medical assistance rendered to injured persons
e) Names and addresses of witnesses to the accident (if any)
f) Report made to any authority and the action, if any, taken by such authority
etc.

iv. The Insurers may also demand technical information regarding the
Insured’s manufacturing activities, fire prevention programme, effluent
treatment system etc which may reasonably be required by them to
decide whether the claim falls within the purview of the policy, whether
any exclusions apply or to put up an appropriate defence on behalf of
the Insured against the claimant.
Example
In Products Liability Claims, the insurers would like to have full details of
Insured’s Product Safety Control Programme, Quality Control, Packaging and
Labelling, advice to customers as to use, product warranties, disclaimers etc.
v. Based on the findings of the investigation, a decision has to be taken on

whether legal liability is likely to attach to the Insured. For this purpose,
legal and technical expert’s opinion is sought.
vi. The investigative process is also concerned with determining the

quantum of loss suffered by the claimant. The loss may be for fatal
injuries, bodily injuries or property damage. The measure of damages
discussed in chapter 2 is relevant at this stage.
vii. Documentary evidence in the form of post-mortem report, coroner’s

verdict in fatal claims, medical report for bodily injury claims and
independent surveyors’ assessment of property damage is obtained.
viii. If legal liability is likely to attach to the Insured and the policy coverage
applies, insurers, with the help of legal opinion, attempt a negotiated
settlement. Litigation is expensive and involves adverse publicity. It will
be appreciated that when liability claims are involved, the Insured
would naturally be concerned about his reputation. This particularly
applies to products and professional indemnity claims.
d) Settlement
i. At this stage, the claim is paid on behalf of the Insured on the basis of
negotiations or a court award as the case may be.
ii. Payment is subject to the limits of indemnity under the Policy, claims
Series Clause and to the compulsory/voluntary excess, if applicable.
iii. The limits of indemnity apply to the total of:
 Compensation,
 Claimant’s costs and
 `defence costs’
Incurred by the Insured with prior consent of insurers

iv. Whilst on the subject of settlement reference needs to be made to a

policy condition in terms of which the Company may pay to the Insured,
the maximum limit of Indemnity àny one accident’ and relinquish the
conduct of defence etc. and absolve themselves of any further liability
for the claim.
This condition is necessary because claims against the Insured may be for
amount far exceeding the àny one accident’ limit.
Example
AOA limit may be Rs. 50 lacs and the claims made are for say Rs.75 lacs or
more.
In such cases, the insurers would have to bear costs of investigation,

defence etc. quite disproportionate to the limit of indemnity selected by
the Insured.
v. When a claim is paid to third parties, a form of receipt is obtained in full

and final discharge of all liability. The form of discharge is usually
worded as follows:
I............. (name of the claimant of ...............hereby acknowledge to have

received the sum of...........rupees which amount is paid by ................ (name
of the insured) in respect of the claim made by me upon him for bodily injuries
and other loss sustained through an accident which occurred to me on or about
the ........... day of ...........19.......... at ....... and I agree that the sum is
paid with a denial of liability on the part of the said .......... (or any other
person) in respect of the said occurrence and for damage whether now or
hereafter to become manifest and to the intent that the said ........... and all
other persons be absolutely and finally discharged from all further and other
claims of every nature and kind whatsoever by me or in my behalf arising out of
the said occurrence.
Date
Signature Witness
3. Post settlement
After settlement of the claim, the aspects that need attention are:
 Recoveries under `Contribution’ Condition (this rarely arises in practice)
 Recoveries under `subrogation’ proceedings

Example
If claims are paid on behalf of a retailer or distributor, recovery may be possible

from the manufacturer who is primarily responsible for the defect in the
product and recoveries under reinsurance arrangements.
The other relevant aspects, as covered by policy conditions are as follows:
a) On payment of a claim the limit of indemnity per any one year shall
stand reduced to the extent of the amount paid;
b) No liability will attach to the policy if the claim is fraudulent or

insurance has been continued in consequence of material misstatement.
c) If liability for the claim is disclaimed by the insurers, the claim is

deemed to be abandoned by the Insured unless the claim is made the
subject-matter of suit in a Court of Law within 12 calendar months from
the date of disclaimer.
d) Any dispute concerning the interpretation of the terms, conditions etc.

of the policy is subject to Indian Law and to the jurisdiction of a
competent Court within India.
Test Yourself 1
The limits of indemnity apply to the total of:
I. Claimant’s cost, investigation costs and compensation

II. Compensation, Defence costs
III. Claimant’s cost, compensation and Defence costs
IV. Defence costs, investigation costs and compensation

CLAIMS PROCEDURE UNDER STATUTORY LIABILITY POLICIES CHAPTER 11
B. Claims procedure under statutory liability policies
Under this section, we will discuss the claims procedure followed under the
following policies:
 Compulsory Public Liability Insurance policy

 Employers’ Liability Insurance Policy
1. Claims procedure under compulsory public liability insurance policy
a) The procedure
The processing of claims is according to the provisions of the Public Liability

Insurance Act and the Rules framed thereunder. At this stage, reference
must be made to these provisions dealt with in chapter 4.
The procedure may be summarised as follows:
i. Application for claim for relief has to be made to the collector who after
holding an inquiry may make an award determining the amount and
specifying to whom it shall be paid.
ii. The insurer, who is required to pay the relief, shall within a period of
thirty days of the date of announcement of the award shall deposit the
amount as directed by the Collector. If not, the Act provides that
amount shall be recoverable from the insurer as arrears of land revenue
or of public demand.
iii. The Rules provide that in awarding relief the Collector shall insure that
the insurers maximum liability under the policy does not exceed the
limits stipulated in the Act viz. Rs. 5 crores (a.o.a.) and Rs.15 crores
(a.o.y).
Any award in excess of these limits is met from the Environment Relief Fund and
if the award is in excess of the amount of insurance and the Relief Fund, the
excess has to be made goods by the owner.
b) Other points relevant to claims
i. The owner may be liable to pay compensation under any other law. In
such cases, compensation payable is reduced by the amount of relief
paid under the Act. However, this liability under any other law is
excluded by from Act liability under exclusion 3.
(Note: The owner can insure this liability under the Industrial Risks P.L.
Policy)

CHAPTER 11 CLAIMS PROCEDURE UNDER STATUTORY LIABILITY POLICIES
ii. Condition 9 of the policy provides that the Company shall not be liable
to pay any claim:
iii. if it is fraudulent or,
iv. There has been non-disclosure of material facts.
However, if the claim is paid because of statutory provisions, the amount is

recoverable from the Insured owner. Insurers recognise that the PLI Act is a
piece of social legislation and the claimant’s rights to relief are protected.
2. Claims procedure under employers’ liability insurance policy
In regard to these claims, three issues are to be considered:
i. Is the insured employer legally liable to the workman?
If the claim is preferred under the W.C. Act, the liability will be decided
with the reference to the provisions of Act. This liability is based on `no-
fault’ principle. If the claim is preferred under Common Law the principles
of the law of negligence will apply.
ii. Whether the insurer is liable to indemnify?
This depends upon the terms, exclusions and conditions of the policy.
iii. What is the amount of claim payable?
The amount of claim payable is prescribed in the W.C. Act. If the claim is
under Common Law, the amount will depend upon the award made by a
Court of Law. Cover under the policy is for unlimited liability. In either case,
in addition to claim compensation the insurer will pay costs incurred with its
consent, in defending any claim.
Accordingly, the claims under this policy can be of two types:
As per common Law:
The processing and settlement of claims under Common Law follow the same
procedure as in Public Liability Claims already explained
As per W C Act:
The claim process is as under:
a) On receipt of notification, a claim form is issued. The form elicits the

following information:
i. The name of the Insured, his business and address

ii. Information about the injured employee:
 Name and address

 Occupation in which he was employed and the exact work he was
engaged at the time of the accident
 Whether directly employed by the insured or by a contractor. In case
of the latter, the name and address of the contractor and the nature
of the contract
 Nature of injuries
 Name of hospital to which admitted
 Probable period of disablement
iii. Information about the accident as follows:
 Date of accident
 Circumstances of the accident
 Whether it was a bona fide accident of employment
 Whether it was due to misconduct or disobedience to orders and
rules on the part of the injured employee
 Names of any two persons who witnessed the accident and names of
the person in superintendence
 Date notice of claim received by the insured
 Monthly average wages i.e. wages earned (including overtime) bonus,
food subsidy if any free quarters and any other allowance
The processing and settlement of claims is made according to the provisions

of the W.C.Act and the Rules framed there under. The amounts of
compensation are prescribed in the Act and the methods of calculation are
explained earlier in the chapter 4.
b) Claims under workmen’s compensation policies fall into the following

categories.
 Fatal
 Permanent Total Disablement and Permanent Partial Disablement
 Temporary Disablement
a) Fatal Claims
i. In addition to the claim form, fatal injury claims have to be

substantiated by a death certificate, a copy of the post mortem report
and a copy of the police report.
ii. The amount of compensation, as provided in the Act cannot be paid

directly to the dependents of the deceased worker but has to be
deposited with the Commissioner for Workmen’s compensation
appointed for the area by the State Government.

iii. The receipt of the Commissioner is a sufficient discharge in respect of

the compensation payable under the Act.
iv. The deposit has to be accompanied by a statement in form A which is

prescribed under the Rules. The statement includes name of the
disclosed workman, address, monthly wages, and age of the time of
death, etc. The Commissioner will give a receipt for the deposit in Form
‘B’ prescribed under the Rules.
v. On the basis of the claim form, death certificate, copy of the post
mortem report, police and the evidence of deposit with the
Commissioner, the claim amount is paid to the Insured.
b) Permanent total and partial disablement
i. The W.C. Act contains a list of injuries which are deemed to result in
permanent total disablement and permanent partial disablement.
In either case, the quantum of compensation is calculated on the basis of

the loss of earning capacity which is stated in the Act in terms of
percentages.
Example
Loss of both hands is deemed to be permanent total disablement resulting in

100 per cent loss of earning capacity.
Again `loss of thumb’ is deemed to be permanent partial disablement resulting

in 30 per cent loss of earning capacity. The amount of compensation in such a
case is arrived at by applying the relevant percentage to the amount for
permanent total disablement.
Where multiple injuries are sustained in the same accident the aggregate of loss
of earning capacity is to be calculated.
Example
For example, if the workman loses his thumb (30%) and two fingers of one hand
(20%) the aggregate loss of earning capacity would be 50% and the amount of
compensation determined accordingly.

ii. The maximum amount payable, however, cannot exceed that amount
which, would have been payable, had permanent total disablement
resulted from the accident.
iii. The amount of lump sum compensation can be paid:
 Directly to the injured workman or

 Deposited with the commissioner.
In either case a Memorandum of Agreement has to be sent to the

Commissioner in the forms prescribed under the Rules to the Act.
c) Memorandum of agreement
The Memorandum will be recorded by the Commissioner in a register in the

prescribed manner on being satisfied as to its genuineness and retain a copy
of the Memorandum.
The Memorandum has to be signed by the employer and the workman and
will incorporate details such as:
 The date of accident,

 Nature of injury,
 Age and wages on the date of accident,
 The amount of compensation, etc.
The Memorandum also includes a clause to the effect that it is in full

settlement of all and every claim under the Workmen’s Compensation Act,
1923.
d) Temporary disablement
i. Where injury results in temporary disablement whether total or partial,

the compensation payable is in terms of half-monthly sums specified in
the Act. This varies according to the monthly wages drawn by the injured
workman.
ii. The compensation is payable from the date of disablement where the
disablement lasts for 28 days or more; if the disablement period is less
than 28 days compensation is payable after the expiry of a waiting
period of three days from the date of disablement.
iii. The compensation is paid half monthly during the period of disablement
or five years, which ever period is shorter. The compensation is based on
the period of disablement as certified in the medical certificate.

iv. The workman entitled to receive half monthly payments may redeem his
right by accepting a lump sum amount by an agreement with the
employers. If the parties do not agree, and if the half monthly payments
have been made for not less than 6 months, either of them can apply to
the Commissioner who will determine the commutation of the half
monthly payments.
v. Agreements for half-monthly payments (or commutation to a lump-sum)

also have to be registered by a Memorandum with the Commissioner and
the claims are settled accordingly.
Test Yourself 2
Which of the following details does the Memorandum of Agreement incorporate?
I. Wages on the date of accident

II. Age on the date of accident

SUMMARY CHAPTER 11
Summary
a) All liability claims have certain common features. Firstly the three most
important questions to be determined are:
 Is the insured legally liable to the claimant?

 Is the insurer liable to the insured under the terms of the policy?
 If liable, what is the amount of claim payable?
b) There are three main phases in the processing of liability claims namely:
 Notification
 Investigations and
 Settlement.
c) Notice is required by insurers to initiate immediate investigation to gather

all factual information on the basis of a thorough examination of all
circumstances surrounding the claim. Notification has to be followed by a
completion of Claim Form provided by the insurers.
d) Sooner an investigation is conducted, the better and more accurate the data
that can be obtained.
e) Settlement is subject to the limits of indemnity under the Policy claims

Series Clause and to the compulsory/voluntary excess, if applicable.
f) After settlement of the claim the aspects that need attention are:
 Recoveries under `Contribution’ Condition (this rarely arises in practice),

 Recoveries under `subrogation’ proceedings
g) On payment of a claim the limit of indemnity per any one year shall stand
reduced to the extent of the amount paid.
h) No liability will attach to the policy if the claim is fraudulent or insurance

has been continued in consequence of material misstatement.
i) If liability for the claim is disclaimed by the insurers, the claim is deemed to
be abandoned by the Insured unless the claim is made the subject-matter of
suit in a Court of Law within 12 calendar months from the date of
disclaimer.
j) Any dispute concerning the interpretation of the terms, conditions etc. of

the policy is subject to Indian Law and to the jurisdiction of a competent
Court within India.


Answer 1

The limits of indemnity apply to the total of Claimant’s cost, compensation and
Defence costs
Answer 2
Both age and wages on the date of accident are to be incorporated in the
Memorandum of Agreement.
Question 1
Notification has to be followed by a completion of Claim Form. The reason for

this is:
I. It is a legal requirement
II. It enables quick/smooth processing of claims
Question 2
The amount of claim payable is also subject to limits under:
I. Indemnity rules
II. Voluntary/compulsory excess
III. Amount claimed
IV. Regulatory limits
Question 3
If claims are paid on behalf of a retailer or distributor, recovery may be possible

from the manufacturer who is primarily responsible for the defect in the
product and recoveries under reinsurance arrangements. This is known as:
I. Contribution condition
II. Proximate clause condition
III. Good faith condition
IV. Subrogation condition

Answer 1
The completion of claim form immediately after notification is beneficial for

the insured as it enables smooth processing of claims.
Answer 2
The amount of claim payable is also subject to the limits of indemnity under the
Policy, Voluntary/compulsory excess, if any, etc.
Answer 3
Subrogation refers the right of an insurer, following payment of a claim, to take

over the insured’s rights to recover payment from a third party responsible for
the loss. It is limited to the amount paid out under the policy.


CHAPTER 12
REINSURANCE
Just as individuals and companies feel the need to transfer risk, so do insurers.
This will happen when a risk they are offered is very large or very hazardous and
they feel it would put at risk their pool of money, unless they arrange
protection
Insurers decide how much of the risk they can safely insure and then seek cover
– called reinsurance – for the excess amount.
This chapter discusses the methods of reinsurance and aspects of fixing

reinsurance premium.
Learning Outcomes
A. Meaning, objectives and methods of reinsurance

B. Methods of fixing reinsurance premium

CHAPTER 12 MEANING, OBJECTIVES AND METHODS OF REINSURANCE
Natural catastrophes such as Tsunami in Japan in 2011, Hurricane Katrina in

2005 or the attack on the World Trade Center on September 11, 2001 resulted
in large claims for insurance companies. According to a research report,
Hurricane Katrina had a significant impact on the US non-life insurers. According
to a research agency, around 12% of all direct insurers in the US received
payments from reinsurers that exceeded 100% of their shareholders equity in
that year.
This goes to show how reinsurance can save insurers from grave consequences
as a result of significant depletion of capital caused due to unexpectedly high
catastrophe claims.
E. Meaning, objectives and methods of reinsurance
1. Meaning of reinsurance
Definition
Reinsurance is an arrangement whereby an original insurer who has accepted a

risk, transfers a part of the risk to a reinsurer so that his liability on any one risk
is limited to a figure proportionate to his financial capacity.
2. Objectives of reinsurance
a) The main object of reinsurance is to spread a heavy loss over many

insurers.
b) Reinsurance enables the insurers to accept larger risks from the insuring
public.
c) Reinsurance also helps the insurers in avoiding wide fluctuations in the

loss ratio from year to year and thus, enables them to achieve stability
in underwriting results.
d) Finally, reinsurance provides a safeguard against serious effects of

catastrophic losses.
The need for reinsurance protection in liability insurance is self-evident, as

public liability and employer’s liability insurance may involve heavy potential
losses.

MEANING, OBJECTIVES AND METHODS OF REINSURANCE CHAPTER 12
3. Methods of reinsurance
a) The facultative method
This method is the oldest. It involves submission of the details of each

proposal to the re-insurers who have the option or `faculty’ of accepting or
rejecting the proposal.
This method is a time consuming process with high administrative costs. The
treaty method which is dealt with below has largely replaced the facultative
method. However, the latter method is still used to take care of extra
hazardous or special risks not covered by treaty arrangements and risks
having liabilities exceeding the protection provided under the treaty
arrangements.
b) Treaty method
Definition
A treaty is an agreement between the ceding company and the reinsurer

whereby the latter provides automatic and obligatory protection upto certain
limits for all risks falling within the scope of the agreement.
Treaties may be divided into two broad categories.
 Proportional treaties and

 Non-proportional treaties
i. Proportional treaties
These involve proportional sharing of risks, premiums and, claims, between

the ceding companies and reinsurers. Following are the types of proportional
treaties:
Quota share treaty
Under quota share treaties, a fixed percentage of every policy is reinsured.

This involves considerable loss of premium income to the ceding company
because the ceding company is obliged to cede under the treaty even
policies which can be safely retained by it.
It is a useful method for arranging reinsurance protection for new class of

business in which the ceding company is yet to acquire sufficient
experience. For example, professional indemnities may be protected by a
quota share treaty.

Surplus treaty
Under a surplus treaty, the ceding company retains for its own net account a
certain amount of any risk or class of risks and the balance of the limit of
liability over this retention is reinsured, subject to the agreed limits of the
treaty.
ii. Non-proportional treaties
In these, the reinsurers pay for a loss only when it exceeds an agreed limit
and only upto an agreed limit. Following are the types of non-proportional
treaties.
Excess of loss re-insurance
Liability insurances are usually protected by excess of loss treaties although

proportional methods of reinsurance may also be resorted to according to
the needs.
The operative clause of the treaty may provide as follows:
The Reinsurer shall pay to the Company the amount of its ultimate net loss
as hereinafter defined in excess of Rs........ arising out of any one claim or
series of claims due to the same cause, under public liability and employer’s
liability policies issued by the Company, whether direct or by way of
reinsurance, provided always that the liability of the Reinsurer shall not
exceed Rs. in all in respect of any one occurrence.
(Note: Other liability policies may also be covered under the treaty)
The ceding company decides on the maximum amount of loss due to any one
cause or event that it is prepared to bear for its own net account. This
becomes the underlying retention or limit of the treaty.
If the ultimate net loss (as defined below) of the ceding company exceeds
this underlying figure, the reinsurer pays the excess subject to a maximum
figure which is the òverlying’ limit or the limit of the cover under the
treaty.
Definition
The term ùltimate net loss’ is defined in the treaty as the sum paid by the
ceding company in the settlement of all losses arising out of one event including
any adjustment or litigation or other expenses incurred in connection therewith
but excluding salaries of employees and office expenses of the company.

MEANING, OBJECTIVES AND METHODS OF REINSURANCE CHAPTER 12
The ultimate net loss is arrived at after deduction of all recoveries in respect of
salvage or otherwise, and all claims upon other reinsurance, whether recovered
or not.
In other words, the ultimate net loss means the actual amount of the loss paid
plus legal and adjustment expenses of claim settlement less recoveries in
respect of salvage and, amounts recoverable from other reinsurances.
Example
If the underlying and overlying limits are Rs.5 lacs and Rs.15 lacs respectively,
the reinsurers will pay the ultimate net loss in excess of Rs.5 lacs but subject to
the limit of Rs. 15 lacs. The maximum amount thus payable would be restricted
to Rs.10 lacs in respect of any one occurrence, if the amount of the ultimate
net loss is Rs.15 lacs.
On the other hand, if the amount of the ultimate net loss is more than Rs.15
lacs the excess amount is borne by ceding company, in addition to, the
underlying retention of Rs. 5 lacs.
Or another excess of loss treaty may be arranged to pay Rs. 20 lacs in excess of
Rs. 20 lacs (i.e. Rs.15 lacs + Rs. 5 Lacs) .To provide further protection for
catastrophe losses, another treaty may be arranged to pay Rs. 60 lacs in excess
of Rs. 40 lacs. (i.e. Rs.20 lacs + Rs.20 lacs)
Thus, excess of loss protection can be arranged in layers. Thus, if there is a loss
of Rs. 1 crore, the reinsured will retain Rs. 5 lacs and recover Rs.95 lacs for
reinsurers under three treaties.
It will be observed that this type of treaty does not involve any proportionate
sharing of premiums under individual policies. The reinsurer receives a
percentage of the gross net premium income of the ceding company.
The reinsurer does not also pay any proportionate part of individual claims. He
pays only that part of the claim amount which exceeds the agreed underlying
figure subject to the agreed upper limit. It is for this reason that èxcess of
loss’ reinsurance is termed `non-proportional’ reinsurance.
Stop Loss (Excess of loss ratio)
`Stop Loss’ treaty is a variation of the excess of loss treaty. This treaty
operates in respect of the annual loss ratio incurred and not in respect of
any fixed amount of the underlying retention.
The treaty is arranged to cover, say, 80% of all losses in excess of a loss
ratio, of say, 90% upto and including a loss ratio of say, 120%. The
reinsurer’s liability arises when the loss ratio exceeds the agreed
percentage.
It is usual to limit the reinsurer’s liability to a maximum amount, in addition

to the percentage limit.
It will be observed that the ceding company has to bear 20% of all losses in
excess of the agreed loss ratio. This will make the ceding company to follow
a healthy underwriting policy and effect strict control in claims settlements.
Stop Loss reinsurance is mainly suitable for a class of business in which small
losses may accumulate during a year, is not common in liability insurance in
which it is difficult to arrive at the annual loss ratio because of the
protracted nature of many liability claims which may take many years for
settlement.
This treaty however, may be suitable for products liability insurance where
there is a possibility of an aggregate of small losses which cannot be traced to
any one event or occurrence.
The stop loss reinsurance may be arranged in addition to the normal surplus or
excess of loss treaties.
Diagram 1: Methods of Reinsurance
Test Yourself 1
Which of the following is not an objective of reinsurance?
I. It enables the insurers to accept larger risks from the insuring public.
II. It provides a safeguard against serious effects of catastrophic losses.
III. It spreads a heavy loss over many insureds
IV. It helps the insurers in avoiding wide fluctuations in the loss ratio from year
to year.

METHODS OF FIXING REINSURANCE PREMIUM CHAPTER 12
F. Methods of fixing reinsurance premium
There are various methods of fixing the premium payable to the reinsurers
under the treaty. A common method is to compute at a rate per cent on the
Ceding Company’s `Gross Net’ premium income which means the original gross
premium less the premium ceded under other reinsurance arrangements prior to
and for the benefit of the excess of loss treaty.
The rate of premium is arrived at on the basis of past loss experience of the
business. The `gross net’ premium of the ceding for a period of say, five years is
divided by the cost of all claims (paid & outstanding) which are in excess of the
amount of the underlying limits. This gives the so-called `burning cost’ of the
business. The burning cost expressed in terms of percentage produces the pure
premium which is loaded by some proportion (e.g. 100/70) to provide a margin
for reinsurer’s expenses, profits and possible deterioration of claim experience.
Example
Gross Premium Rs.50,00,000/-
Claims Paid & Outstanding in excess of the underlying limits Rs. 1,00,000/-
Burning Cost 100000/5000000 x 100 = 2%
Loading for Reinsurer’s expenses etc. 2 x 100 / 70 = 2.855% (Rate of Premium).
Apart from the past experience, the rate of premium is also influenced by the
underlying limit and the limit of the cover under the treaty, the risks excluded,
the underwriting limits of the ceding company etc.
In the case of Stop Loss reinsurance, the rate of premium is calculated on the
ceding company’s premium income and is based on past experience, the nature
of business, the limits of cover, etc.
(Note : This is a very general outline of reinsurance arrangements possible for
liability insurance, from a theoretical point of view. In actual practice, this
basic approach may be varied or modified to suit the particular needs.)
Test Yourself 2
While arriving at the rate of premium on the basis of past loss experience of the
business, the `gross net’ premium of the ceding for a period of say, five years is
divided by the cost of all claims which are in excess of the amount of the
underlying limits. Such cost of claims should include:
I. Paid or outstanding
II. Paid & outstanding
III. Outstanding but not paid
IV. Paid and/or outstanding

CHAPTER 12 SUMMARY
Summary
a) Reinsurance is an arrangement whereby an original insurer who has accepted

a risk transfers a part of the risk to a reinsurer so that his liability on any
one risk is limited to a figure proportionate to his financial capacity.
b) The main object of reinsurance is to spread a heavy loss over many insurers.
c) The need for reinsurance protection in liability insurance is self-evident, as

public liability and employer’s liability insurance may involve heavy
potential losses.
d) Reinsurance methods can be broadly classified as Facultative and Treaty

method.
e) Facultative method involves submission of the details of each proposal to

the re-insurers who have the option or `faculty’ of accepting or rejecting
the proposal.
f) A treaty is an agreement between the ceding company and the reinsurer

whereby the latter provides automatic and obligatory protection upto
certain limits for all risks falling within the scope of the agreement.
g) Treaties may be divided into two broad categories.
i. Proportional treaties and

ii. Non-proportional treaties
h) Proportional treaties can be further classified as Quota Share treaty and

Surplus treaty.
i) Non-proportional treaties can be further classified as Excess of loss treaty

and Stop Loss treaty.
j) There are various methods of fixing the premium payable to the reinsurers
under the treaty. A common method is to compute at a rate per cent on the
Ceding Company’s `Gross Net’ premium income

Answer 1
It spreads a heavy loss over many insurers. (Not insureds)
Answer 2
The cost of claims should include paid and outstanding.
Question 1
Which of the following is a useful method for arranging reinsurance protection

for new class of business in which the ceding company is yet to acquire
sufficient experience?
I. Surplus treaty method

II. Quota share treaty method
III. Excess of Loss Re-insurance method
IV. Stop Loss method
Question 2
`Stop Loss’ treaty operates in respect of which of the following?
I. Fixed amount of underlying retention

II. Proportionate amount of underlying retention
III. Annual loss ratio incurred
IV. Annual loss ratio expected
Question 3
A common method of fixing reinsurance premium is to compute at a rate per

cent on the Ceding Company’s `Gross Net’ premium income. Which of the
following correctly describes this term?
I. Original gross premium less the premium ceded under other reinsurance
arrangements
II. Original gross premium less burning cost
III. Original gross premium less margin for reinsurer’s expenses

Question 4
The need for reinsurance protection in liability insurance is self-evident as:
I. Liability insurance is classified under proportional treaties methods.

II. Liability insurance is classified under non-proportional treaties methods.
III. Liability insurance may involve enormous profits for the insurer
IV. Liability insurance may involve heavy potential losses.
Answer 1
It is a useful method for arranging reinsurance protection for new class of

business in which the ceding company is yet to acquire sufficient experience.
For example, professional indemnities may be protected by a quota share
treaty.
Answer 2
`Stop Loss’ treaty operates in respect of the annual loss ratio incurred.
Answer 3
`Gross Net’ premium income means the original gross premium less the
premium ceded under other reinsurance arrangements prior to and for the
benefit of the excess of loss treaty.
Answer 4
The need for reinsurance protection in liability insurance is self-evident, as

public liability and employer’s liability insurance may involve heavy potential
losses.

APPENDICES
A. Appendix 1- Public Liability Policy
Public Liability Policy
1. Operative clause
WHEREAS the insured named in the Schedule hereto and carrying on the
business described in the said Schedule has applied to THE COMPANY LIMITED
(hereinafter called ‘the company’) for the indemnity hereinafter contained and
has made a written proposal and declaration which shall be the basis of this
contract and is deemed to be incorporated herein and has paid the premium as
consideration for or on account of such indemnity.
Now this policy witnesseth that subject to the terms exceptions and conditions
contained herein or endorsed hereon the company will indemnify the Insured
against their legal liability (other than liability under the Public Liability
Insurance Act, 1991 or any other Statute that may come into force after the
issue of this policy) to pay compensation including claimant’s costs, fees and
expenses anywhere in India, in accordance with Indian Law.
2. Indemnity
The Indemnity only applies to claims arising out of accidents occurring in the
Insured Premises during the period of insurance first made in writing against the
Insured during the policy period and the Insured is indemnified in accordance
with the Operative Clause for and/or arising out of Injury and or Damage but
only against claims arising out of or in connection with the business specified in
the Schedule and not against claims arising out of or in connection with:
 Pollution howsoever caused unless specifically covered

 Any product
For the purpose of determining the indemnity granted:
a) ‘Injury’ means death, bodily injury, illness or disease of or to any person
b) ‘Damage’ means actual and/or physical damage to tangible property
c) ‘Pollution’ means pollution or contamination of the atmosphere or of any

water land or other tangible property

APPENDICES APPENDIX 1- PUBLIC LIABILITY POLICY
d) ‘Product’ means any tangible property after it has left the custody or
control of the Insured, which has been designed, specified, formulated,
manufactured, constructed, installed, sold, supplied, distributed,
treated, serviced, altered or repaired by or on behalf of the Insured but
shall not mean food and beverages supplied by or on behalf of the
Insured primarily to the Insured’s employees as a staff benefit
e) ‘Policy period’ means the period commencing from effective date and
hour as shown in the policy schedule and terminating at midnight on the
expiry date as shown in the policy schedule
f) ‘Period of insurance’ means the period commencing from the retroactive

date and terminating on the expiry date as shown in the policy schedule
g) ‘Accident’ means a fortuitous event or circumstance which is sudden,

unexpected and unintentional including resultant continuous,
intermittent or repeated exposure arising out of the same fortuitous
event or circumstance
h) ‘Premises’ shall be deemed include pipelines running outside the

premises for discharge of treated effluents at a disposal point situated
within a distance one kilometer from the premises
3. Notification extension clause
Should the insured notify the company during the policy period in accordance
with General Condition 9.1 of any specific event or circumstance which the
Company accepts may give rise to a claim or claims which form the subject of
indemnity by this policy, then the acceptance of such notification means that
the Company will deal with such claim or claims as if they had first been made
against the insured during the policy period. The extension under this clause
will be subject to the maximum time limit laid down under the Indian Limitation
Act in force from time to time.
4. Extended claim reporting clause
In the event of non-renewal or cancellation of this Policy, either by the

Company or by the Insured, the Company will allow a time limit not exceeding
90 days from the date of expiry or cancellation of the reporting period for the
same interest, for notification of claims for accidents which had taken place
during the period of insurance but could not be made during the policy period,
provided however all claims made during the extended reporting period shall be
handled as if they were made on the last day of the expiring Policy period and
are subject to the limits of indemnity and the terms, conditions and exceptions
of the policy.

APPENDIX 1- PUBLIC LIABILITY POLICY APPENDICES
5. Indemnity to others
The Indemnity granted extends to:
a) Officials of the insured in their business capacity arising of the

performance of their business or in their private capacity arising out of
their temporary engagement of the Insured’s employees;
b) The officers, committees and members of the Insured’s canteen social,

sports, medical, firefighting and welfare organisations in their respective
capacities as such
c) The personal representatives of the estate of any person who would

otherwise be indemnified by this Policy but only in respect of liability
incurred by such person.
Provided always that all such personnel or parties shall observe, fulfill and be
subject to the terms, conditions and exclusions of this Policy as though they
were the Insured.
6. Cross liabilities
Each person or party indemnified is separately indemnified in respect of claims

made against any of them by any other person or party (other than the named
insured) subject to company’s total liability not exceeding the limits of
indemnity stated in the schedule of the policy.
7. Defence costs
The company will pay all costs, fees and expenses incurred with their prior
consent in the investigation, defence or settlement of any claims made against
the insured and the cost of representation at any inquest, inquiry or other
proceeding in respect of matters which have a direct relevance to any claim
made or which might be made against the insured, provided such claim or
claims are the subject of indemnity by the policy. Such costs, fees and expenses
are called ‘defence costs’.
8. Indemnity limits
Company’s total liability to pay compensation, claimant’s costs, fees and

expenses and defence costs shall not exceed the indemnity limit stated in the
schedule. Indemnity limit applies to any one claim or series of claims arising
from one originating cause. Indemnity limit shall represent the total amount of
company’s liability during the policy period.

a) Claims series clause
For the purpose of this policy where a series of and/or several bodily
injuries and/or property damages are attributable directly or indirectly to
the same cause all such bodily injuries and/or property damages shall be
treated as one claims and such claim shall be deemed to have been made at
the point in writing. There shall, however, be no coverage for claims made
arising from one specific cause which are made later than 3 years after the
first claim of the series.
b) Compulsory excess
The insured shall bear as compulsory excess the amount or percentage of

the limit of indemnity per any one accident so stipulated in the schedule
attached to the policy. This compulsory excess shall be applicable to both:
i. Death/bodily injury and
ii. Property damage, inclusive of defence costs arising out of any one
accident
The company’s liability shall attach for the claim in excess of such
compulsory excess (and voluntary excess, if any, opted by the insured)
c) Voluntary excess
In the event of the insured opting, the policy shall be subject to a voluntary
excess as mentioned in the schedule. This voluntary excess shall be
applicable to both:
i. Death/bodily injury and
ii. Property damage claims inclusive of defence costs arising out of any one
accident.
The company’s liability shall attach for the claims in excess of such
compulsory and voluntary excess.

9. Exclusions
This policy does not cover liability
a) Assumed by the insured by agreement and which would not have

attached in the absence of such agreement.
b) Arising out of earthquake, earth-tremor, volcanic eruption, flood, storm,

tempest, typhoon, hurricane, tornado, cyclone or other similar
convulsions of nature and atmospheric disturbance.
c) Arising out of deliberate, willful or intentional non-compliance of any

statutory provision.
d) Arising out of loss of pure financial nature such as loss of goodwill, loss
of market etc.
e) Arising out of all personal injuries such as libel, slander, false arrest,
wrongful eviction, wrongful detention, defamation etc. And mental
injury, anguish, or shock resulting thereform.
f) Infringement of plans, copy-right, patent, trade name, trade mark,

registered design;
g) Arising out of fines, penalties, punitive or exemplary damages or any

other damages resulting from the multiplication of compensatory
damages.
h) Directly or indirectly occasioned by, happening through or in

consequence of war, invasion, act of foreign enemy, hostilities (whether
war be declared or not), civil war, rebellion, revolution, insurrection or
military or usurped power.
i) directly or indirectly caused by or contributed to by
i. Ionizing radiations or contamination by radioactivity from any nuclear

fuel or from any nuclear waste from the combustion of nuclear fuel;
ii. The radioactive toxic, explosive or other hazardous properties of any

explosive nuclear assembly or nuclear component thereof
iii. This policy does not cover liability for claims arising out of

j) The ownership possession or use by or on behalf or the insured of any

motor vehicle or trailer for which compulsory insurance is required by
legislation other than the following:
i. Claims caused by the use of any tool or plant forming part of or

attached to or used in connection with any motor vehicle or trailer;
ii. Claims arising beyond the limits of any carriageway or throughfare

caused by the loading or unloading of any motor vehicle or trailer;
iii. Claims for damage to any bridge, weight of any motor vehicle or
trailer or of the load carried therein;
iv. Claims arising out of any motor vehicle or trailer temporarily in the
insured’s custody or control for the purpose of parking.
k) Transportation of materials and /or hazardous/dangerous substances

outside insured’s premises unless specifically covered.
l) The ownership possession or use by or on behalf of the insured of any

aircraft, watercraft or hovercraft.
m) Damage to property owned leased or hired or under hire purchase of on

loan to the insured or otherwise in the insured’s care custody or control
other than the
i. Premises (or the contents thereof) temporarily occupied by the insured

for work thereon or other property thereon (but no indemnity is granted
for damage to that part of the property on which the insured is working
and which arises out of such work).
ii. Employees’ and visitors’ clothing and personal effects.
iii. Premises tenanted by the insured to the extent that the insured would
be held legally liable in the absence of any specific agreement.
n) Injury and/or damage occurring prior to the retroactive date in the

schedule.
Provided always that in the event of any injury or damage arising from
continuous or continual inhalation, ingestion or application of any substance
following the covered accident and where the insured and company cannot
agree when the injury or damage occurred, then
i. Injury shall be deemed to have occurred when the claimant first

consulted a qualified medical practitioner in respect of such injury;

ii. Damage shall be deemed to have occurred when it first become evident
to the claimant even if the cause was unknown.
o) The deliberate, conscious or intentional disregard of the insured’s technical

or administrative management of the need to take all reasonable steps to
prevent claims.
p) Injury to any person under a contract of employment or apprenticeship with

the insured their contractor(s) and/or sub-contractor(s) when such injury
arises out of the execution of such contract.
10. General conditions
a) The insured shall give written notice to the company as soon as

reasonably practicable of any claim made against the insured (or any
specific event or circumstance that may give rise to a claim being made
against the insured) and which forms the subject of indemnity under his
policy and shall give all
Such additional information as the company may require. Every claim, writ,
summons or process and all documents relating to the event shall be
forwarded to this company immediately they are received by the insured.
b) No admission, offer, promise or payment shall be made or given by or on

behalf of the insured without the written consent of the company.
c) The company will have the right, but in no case the obligation, to take
over ant conduct in the name of the insured the defence of any claim
and will have full discretion in the conduct of any proceedings and in the
settlement of any claim and having taken over the defence of any claim
may relinquish the same. All amounts expended by the company in the
defence settlement or payment of any claim will reduce the limits of
indemnity specified in the schedule of the policy.
In the event the company, in its sole discretion, choose to exercise its right
pursuant to this condition, no action taken by the company in the exercise
of such right will serve to modify or expand in any manner, the company’s
liability or obligations would have been had it not exercised its rights under
this condition.
d) The insured shall give all such information and assistance as the
company may reasonably require.
e) The insured shall give notice as soon as reasonably practicable of any

fact, event or circumstance which materially changes the information
supplied to the company at the time when this policy was effected, and
the company may amend the terms of this policy according to the
materiality of such change.

f) The company may at any time pay to the insured in connection with any
claim or series of claims under this policy to which an indemnity limit
applies the amount of such limit (after deduction of any sums already
paid) or any lesser amount for which such claims can be settled and upon
such payment being made the company shall relinquish the conduct and
control of and be under no further liability in connection with such
claims.
g) The policy and the schedule shall be read together as one contract and
any word or expression to which a specific meaning has been attached in
any part of this policy or the schedule shall bear such specific meaning
wherever it may appear. The terms, conditions and exclusions of this
policy (and any phrase or word contained therein) shall be interpreted in
accordance with Indian law.
h) The insured shall keep accurate records of annual turnover which term
shall include all leviable duties and at the time of renewal of insurance
declare such details as the company may require. The company shall at
all reasonable time have free access to inspect such records.
i) If at the time of happening of any event resulting into a liability under

this policy, there be any other public liability insurance or insurances
effected by the insured or by any other person covering the same
liability, then the company shall not be liable to pay or contribute more
than its rateable proportion of such liability.
j) This policy does not cover liability which at the time of happening of any
event resulting into such liability, be insured by or would, but for the
existence of this policy, be insured by, any other policy (but not a public
liability policy) or policies, except in respect of any excess beyond the
amount which could have been payable under such policy/policies, had
this insurance not been effected.
k) The company may cancel this policy by giving thirty days’ notice in
writing of such cancellation to the insured’s last known address and in
such an event the company will return a pro-rata portion of the premium
(subject to a minimum retention of 25 per cent of the annual premium)
for the unexpired part of the insurance.
The policy may also be cancelled by the insured by giving thirty days’ notice
in writing to the company, in which event the company will retain premium
at short-period scale provided there is no claim under the policy during the
period of insurance.
In case of any claim under the policy no refund of premium shall be allowed.

l) In the event of liability arising under the policy or the payment of claim
under the policy, the limit of indemnity per any one year under the
policy shall get reduced by the extent of quantum of liability to be paid
or actual payment of such claim. Under no circumstances, it shall be
permissible to reinstate the limit of indemnity to the original level, even
on payment of extra premiums.
m) It is also hereby further expressly agreed and declared that if the

company shall disclaim liability to the insured for any claim hereunder
and such claim shall not within 12 calendar months from the date of such
disclaimer have been made the subject matter of a suit in a court of law
then the claim shall for all purposes be deemed to have been abandoned
and shall not thereafter be recoverable hereunder.
n) The company shall not be liable to make any payment under this policy
in respect of any claim if such claim shall be in any manner fraudulent or
supported by any statement or device whether by insured or by any
person on behalf of the insured and/or if the insurance has been
continued in consequences of any material misstatement or the non-
disclosure of any material information by or on behalf or the insured.
o) Policy disputes clause
Any dispute concerning the interpretation of the terms, conditions

limitations and/or exclusions contained herein is understood and agreed to
by both the insured and the company to be subject to Indian law. Each party
agree to submit to the jurisdiction of any court of competent jurisdiction
within India and to comply with all requirements necessary to give such
court of jurisdiction. All matters arising hereunder shall be determined in
accordance with the law and practice of such court.

THE. ................ INSURANCE COMPANY LIMITED
PUBLIC LIABILITY INSURANCE

SCHEDULE TO THE POLICY
Insured Name:
Address:
Policy No.:
Description of Risk:
Location of the Insured Premises:

TERRITORIAL LIMITS: Anywhere in India
Policy Period: From (time) of (date) to 12.00 midnight of

(date)
LIMIT OF INDEMNITY
Any one accident: Rs.
Aggregate during the Policy period: Rs.
RETROACTIVE DATE
Compulsory Excess:
Voluntary Excess:
PREMIUM Rs.:
IN WITNESS WHEREOF the undersigned being duly authorised by the Company

and on behalf of the Company has hereunto set his hand at this
day of 20 .
For The. ...................... Ins.Co.Ltd.

Authorised Signatory
Address of the Policy issuing office

APPENDIX 2- PROPOSAL FORM FOR PUBLIC LIABILITY INSURANCE APPENDICES
B. Appendix 2- Proposal form for Public Liability Insurance
Proposal form for Public Liability Insurance
(For Industiral Risks and Storage Risks)
Liability of the company does not commence until the proposal has been
accepted and the premium paid.
The territorial limit as applicable to this policy is anywhere in India
All questions should be answered with respect to each plant/manufacturing

units.
1. Name of the Proposer :
2. Registered Address of the

Proposer:
Subsidiaries & Associate
Companies:
4. Business Address of the Proposer:
5. Location and address of all

premises proposed for Insurance.
a) Do you wish to Insure Depots,

Warehouses, Godowns, Tank-
farms etc. If so, their
locations and turnover.
b) Are these warehouses,

Godowns, Tank-farms, etc.
Occupied by you solely or
shared with/hired to other
parties?
c) Do you wish to Insure Depots,

Warehouses, Godowns, Tank-
farms etc. If so, their
locations and turnover.

APPENDICES APPENDIX 2- PROPOSAL FORM FOR PUBLIC LIABILITY INSURANCE
6.
a) Please give full description of
activities for which cover is
required.
b) Please attach Lay-Out Plans

of the manufacturing units
proposed for Insurance.
7. Please give details of technical

knowhow/ collaboration.
8. Do you have any assets and/or

representation and /or any
domiciled operations and/or
activities and/or association
(financial, technical or
otherwise) in USA/Canada &
other foreign countries?
If so, please furnish details of

association?
9. How long have you been in the

business/
10. Please describe in brief

surrounding areas and third party
property for each unit:
a) Industrial area within an

approx. radius of 2 kms.
b) Agricultural area within an
c) Residential area within an

11.
a) Do you handle or use gases,
pressure-storage, explosive,
hazardous substances,
asbestos, toxic radioactive
materials and hydrocarbons?
If so, please give details of

their quantity, storage,
handling and precautions
taken.

b) Have you complied with

statutory provisions, rules and
regulations in respect of the
above?
12.
a) Are the premises fenced
and/or locked?
b) What security arrangements
are available?
c) Are customers/visitors
permitted unaccompanied on
the premises?
13. Are the premises, plant &

machinery in sound condition and
will they be kept in good order?
Please give maintenance
Schedule.
14. Is there a programme for the

prevention of fire, explosion
incidents?
If so, please indicate:
a) Type of detection and alarm

system
i. Availability of service
organisation in case of such
incidents (fire brigade,
specialists in environmental
protection and toxicology)
ii. Provisions made for supply of

energy, water etc. in an
emergency
b) Is there any welding, gas

cutting or hot work being
undertaken? If so, what are
the precautions taken?
c) Is there any vibration from

heavy machinery? If so, what
are the precautions taken?

d) Are the machines protected

by fences or guarded?
e) Is there any possibility of

leakage of chemical or gas
resulting into injury to third
party property damage
and/or bodily injury?
If so, please give full details

of alarm system, preventive
measures and particulars of
periodical inspection.
15. Have any sub-contractors within

the premises taken Public
Liability Policy? If so, give full
details.
16. Please give claims history for the

last three years in the following
format:
Year: 19... 19... 19...
No. of claims:
Total amount paid:
Bodily injury
Property damage
Cost of defence actions
Total amount of pending claims:
Bodily injury
Property damage
Cost of defence actions

17. Are you aware of any incidents,
conditions, defects,
circumstances or suspected
defects which may result in a
claim?

18.
a) Has your proposal or renewal
been declined or premium
been increased or special
terms been imposed by any
insurer? If so, please give
particulars.
b) Are you at present insured

under the Public Liability
Policy:
i. For premises risk?
ii. For transportation risk?
iii. If so, please give details
c) Do you have a Public Liability

Insurance Policy as per the
Public Liability Insurance Act,
1991? If so, please furnish:
i. Name and address of the

Insurance Company
ii. Policy No.
iii. Amount of premium paid

(Please enclose a certified
copy of the receipt for
payment of premium
excluding the contribution to
the Environmental Relief
Fund)
19. Please give details of:
a) On site emergency plan:
b) Off site emergency plan:
20. Please give (unit-wise)
a) Estimated total annual wages:
b) Total No. of Staff employed:

21. Please give (unit-wise)
a) Actual annual sales turnover Rs.

of last year:
b) Estimated annual sales

turnover for the proposed Rs.
year of insurance:
22. Please indicate the limit of

indemnity required:
a) Any one accident:

b) Aggregate during the Policy
period :
23. Please indicate the Voluntary
Excess... (This Excess will apply
to each and every claim) ...per
cent of Limit of Indemnity per
accident.
24. Do you require extension of

Public Liability cover for
transportation of materials
and/or dangerous/hazardous
substances?
If so, specify:
a) Particulars of such materials;
b) Expected turnover of such

materials in transit in a year
(Incoming raw materials and
dispatch of finished products)
c) Whether pollution risk

required
d) Mode of transportation
(whether by road/rail/pipe
line)

e) Limits of indemnity required

(This should form part of
overall indemnity limits as
required under question
No.22 above)
i. Any one accident: Rs.
ii. Aggregate during the policy

Rs.
period:
(Note : This transportation coverage is applicable only for full load -- part load
is not covered)
i. If by pipe line, state:
ii. Dimensions of the pipe;
iii. Total length of the pipe;
iv. terminal points;
v. Whether underground/
overhead/submerged
vi. System of supervision and

monitoring pipe lines against
leakage/damage
vii. Lay out of pipeline showing

surrounding areas alongside
the route.
25.
a) Is effluent discharged from
your plant outside the
premises by pipeline?
c) Do you require coverage for

such effluent discharge?

d) If yes, what is the length of

pipeline form the compound
wall of your premises to the
disposal point?
26. Do you require Accidental

Pollution Cover? If so please
submit details as per additional
questionnaire attached.
27. Policy period required
From (time) of (date) to 12.00 midnight of (date)
I/We desire to effect an insurance in terms of the Public Liability Policy of the
Company against the limits of indemnity specified above. I/we hereby declare
that all statutory provisions relating to my/our business proposed for insurance
are complied with. I/we further declare that the above statements and
particulars are true, and I/we have not omitted, suppressed, misrepresented or
misstated any material fact and I/we agree that this declaration shall be the
basis of the contract between me/us and the Company, and be incorporated
therein.
Place:
Date:
Signature of the Proposer
Section - 41 of Insurance Act 1938

Prohibition of Rebates
1. No person shall allow or offer to allow either directly or indirectly as an

inducement to any person to take out or renew or continue an insurance in
respect of any kind of risk relating to lives or property in India any rebate of
the whole or part of the commission payable or any rebate of the premium
shown on the policy nor shall any person taking out or continuing a policy
accept any rebate except such rebate as may be allowed in accordance with
the prospectus or tables of the Insurer.
2. Any person making default in complying with the provisions of this section
shall be punishable with fine which may extend to five hundred rupees.

APPENDIX 3- PUBLIC LIABILITY RISK ASSESSMENT FORM APPENDICES
C. Appendix 3- Public liability risk assessment form
Public liability risk assessment form
(Private and Confidential, Exclusively for the use of Insurers)
Brief Summary of Risk
(This section of Report is to cover in brief, particulars of the Company)
Messer’s a Public Limited Company, managed by

Group and involved in manufacturing of
including . The Proposer was
formed nearly years ago and started production of
Gradually in subsequent year.
plants were added. There have been no serious
incidents involving Public Liability in the past years.
The Labour force is well trained and supervised.
Main health hazard involved is but it is well controlled by

and has caused no problems till date. This process
involves only percent of company’s turnover.
Solvents or other harmful chemicals are not being used.
The main work involved in manufacturing is

which is being handled. the removal of
debris is being done by. the effluent. There is facility of
(quantity) of water.

APPENDICES APPENDIX 3- PUBLIC LIABILITY RISK ASSESSMENT FORM
Management
(This section of report is to cover broadly following particulars)
PARTICULARS OF INSURED
1. Name of the Company :
2. Address of the risk inspected:
3. Business: (Work carried out-goods

manufactured activities of the
Co.)
4. Name of the Chairman/Managing

Director/Senior Executives.
5. Names and designations of

persons with whom and contents
of this report discussed.
6. Names of foreign collaborators/

(Technical/Financial)
Contractors/ Partners in the
working of the plant. (In
particular, any Co. having base in
U.S.A.)
7. Any foreign technicians (In

particular of U.S.A. Origin)
8. Attitude towards safety system,

(State Whether negative,
positive, essential, lip-service
etc.

9. Attitude towards repairs (State

about internal repairs in part or in
whole etc.)
10. Attitude towards modification

(whether any importance given,
any time-schedule laid down etc.)
11. Housekeeping & maintenance

(Please state whether poor, good,
satisfactory, negligent, excellent
etc.)
12. Co-operation of management in

furnishing details:
(Please mention good, cold,
responsive, genuine, positive,
lacked conviction etc.)
13. Approx. number of employees (On

own premises & also elsewhere,
break-up-workers, clerical
executive)

Premises
(This section of report is to cover following items in general)
1. Approx. total area:
2. Approx. area used for

manufacturing activities:
3. Number of storeys:
4. (For Building, for plant, approx.
storey-wise length)
5. Whether solely occupied, if other

occupants:
6. (Give full details)
7. Location of Risk:
(Please state the nearby other
risk-to East, West, North, South
etc.)
8. Particulars of surrounding
property:
(Please give concise summary of

other properties such as housing
colony, any river nearby,
subsidiary and associate
companies particulars)
9. If any river is nearby, give

distance particulars of nearby
town or village.
Whether water used for drinking

purpose
10. Details of work being carried out

away from premises:
(State what work exactly is being

carried out, heat appliances,
standard or safety precautions
etc.)

Particulars of assets on premises
(Following questions are for broad guidelines, further details if necessary may
be asked for)
1. General description of building,

plant and machinery.
2. Standard of guarding.
3. Age of building, plant and

machinery.
4. Rated manufacturing capacity of

plant
5. Actual capacity being used for

manufacturing.
6. Any defective building or valve

leaking portion of plant not in
good shape.
7. Particulars or secondary back up

system.
8. Is statutory inspection necessary?
If so at what interval?
9. General condition of building,

plant and machinery.
10. Particulars of storage tank such as

thickness, inspection of the same;
materials & quantify stored etc.
to be given in detail.

Details of raw materials/finished products storage thereof
1. Nature of raw materials handled.
2. Nature of finished products.
3. Pipe lines, if any-
a) Dimensions;
b) Underground/overhead
c) Total length
d) Quantity of throughput
e) Details of terrain through

which the pipeline passes
(Route map to be obtained);
f) Monitoring system;
g) Safety and alarm system
h) Habitation (surrounding &

alongside the route)
4. Tank farms, if any (furnish details

of types of tanks, auxiliary
attached etc.)
5. Storage facilities: (Give

exhaustive details regarding
hazardous substances nature and
approximate amount of
substance, methods of handling
and storage, likely chances and
consequences of escape of
substance, precautions taken in
handling and also in preventing
escapes)

Details of Manufacturing Process of Plant
(including effluent system, its backup system and back-up system for main
plant and machinery), Please mention hazardous and risky process in detail)
Transport System
1. Please state loading, unloading

operations, transfer from tank to
tank, tank to tanker, incoming
raw materials, outgoing finished
products, etc.
2. Please mention standard of

transport operation and traffic
system keeping in mind the
probable presence of Third Party
liability risk.
3. Please mention exposure of

approx. number of vehicles in the
premises and types of vehicles.
4. Please state details of lifts,

elevators, cranes, hoists and
other movable machinery within
business premises.

Safety System
1. Safety policy of the company

(whether any manual or booklet
prescribed? (Copy to be attached)
How is standard of safety? Poor,
satisfactory or good)
2. How safety is enforced (Please

state who is overall responsible,
whether any safety committee,
training programme undertaken,
accident reporting system
investigation system)
3. History of past accidents
4. Medical facilities
5. General safety and other

protection
6. Drainage system (Testing before

and after draining Be exact and
precise, Avoid words like “often”
or “frequently” State when is
being done)
7. Particulars of detectors
8. Fire and Explosion (Assess the risk

of fire and explosion, preventive
measures, fire escapes, system of
checking of spread of fire, fire
drill, monitoring system gas
detector likely extent of Third
Party liability and property
damage and death/bodily injury)
9. On site/off site Evacuation and

Emergency Plan : (Disaster
planning)

General
1. State chances of Pollution (air

and water) (Assess the pollution
risk, whether medium or large,
obtain certificate of Pollution
control Board of State
Government or other concerned
authorities. State whether
inspected by government
authority).
2. Visitors (other than contractors

working on premises) (extent and
class of visitors coming and areas
visited).
3. Contractors working on premises

(Please give details in brief how
frequently do contractors work
what type of work is being
undertaken, extent and adequacy
of supervision, any permit
system).
4. Special and important features

from the view point of assessment
of risk which are not covered in
the format.

Recommendation
(Recommendations must be positive and not vague)
1. Whether recommended for cover

or not? (Probabilities -- how
public liability may arise - give
conclusion)
2. Whether limits of indemnity high,

low or adequate?
3. Is follow-up survey necessary? If

so, when?
4. In case of follow-up survey

whether earlier suggestions made
to proposer for improvement of
risk implemented or not.
5. (Please be specific. Avoid words

like “ordered”. State when will it
be done or give time schedule of
implementation.)
Place:
Date:
Signature:
Name:

APPENDIX 4- PROPOSAL FORM FOR INSURANCE UNDER PUBLIC LIABILITY INSURANCE ACT 1991 APPENDICES
D. Appendix 4- Proposal form for insurance under Public Liability

Insurance Act 1991
THE CO. LTD.
Liability of the Company will not commence until receipt of premium and
statutory contribution towards the Environment Relief Fund
Proposal form for insurance under

Public Liability Insurance Act 1991
1. Name of the Proposer owner in full

(see note)
2. Address PIN
3. Business
4. Paid up capital (See Note)
5. List of hazardous substances

handled and Group (See Note)
6. Details of all accidents during past

3 years and compensation paid /
claimed but not yet paid.
7. Estimated annual turnover (See

note)
a) Proposed Insurance Year

b) Previous Year
8. Number of:
a) Workmen Employees
b) Other Employees (See Note)
9. Limit of Indemnity required In

respect of Any One accident:
10. Policy period required From AM/PM

To midnight of

APPENDICES APPENDIX 4- PROPOSAL FORM FOR INSURANCE UNDER PUBLIC LIABILITY INSURANCE ACT 1991
I/We hereby declare that a) all statutory provisions relating to my/our business
proposed for insurance are complied with, b) the above statements and
particulars are true. c) I/We have not omitted, suppressed misrepresented or
misstated any material fact and d) I/We agree that this declaration shall be the
basis of the contract between me/us and the Company and be incorporated
therein.
Place:
Date:
Note to Items:
1. Owner mean a person who own, or has control over handling any hazardous
substance at the time of accident and includes -
i. In the case of a firm, any of its partners

ii. In the case of an association, any of its members and
iii. In the case of a company, any of its directors, managers, secretaries or
other officers who is directly in charge of, and is responsible to the
company for the conduct of the business of the company.
2. Paid up Capital means in the case of an owner not being a company, the
market value of all assets and stocks of the undertaking on the date of
contract of insurance.
3. Hazardous substances and Group means the items listed and grouped under
Public Liability Insurance Act, 1991 and the rules framed thereunder.
4. Turnover shall mean
i. Manufacturing unit - Entire Annual gross Sales Turnover including all

levies and taxes of manufacturing units handling hazardous substances as
defined in the Public Liability Insurance Act 1991
ii. For the purpose of this insurance, the term “Units” shall mean all
operations being carried out in the manufacturing complex in one
location.
iii. Godown/warehouse owners - Total Annual rental receipts of premises

handling hazardous substances as defined in the Public Liability
Insurance Act, 1991.
iv. Transport operators - Total annual freight receipts.
v. Others - Total annual gross receipts.

APPENDIX 4- PROPOSAL FORM FOR INSURANCE UNDER PUBLIC LIABILITY INSURANCE ACT 1991 APPENDICES
There is a separate policy covering LEGAL LIABILITY other than the Act
Liability proposed for insurance in this proposal details of which can be
obtained from the Company’s offices.
5. Prohibition of rebates
a) No person shall allow or offer to allow, either directly or indirectly as an

inducement to any person to take out renew or continue an insurance in
respect of any kind of risk relating to lives or property in India, any rebate
of the whole or part of the commission payable or any rebate of the
premium shown on the policy, nor shall any person taking out or renewing or
continuing a Policy accept any rebate, except such rebate as may be
allowed in accordance with the published prospectus or tales of the insurer.
b) Any person making default in complying with the provisions of this section
shall be punishable with fine which may extend to five hundred rupees.

APPENDICES APPENDIX 5- PROPOSAL FORM FOR PRODUCT LIABILITY INSURANCE
E. Appendix 5- Proposal form for product liability insurance
Proposal form for product liability insurance
Liability of the Company does not commence until the proposal has been
accepted and the Premium paid
1. Name of the Proposer (in full)
2. Name of the Subsidiaries &

Associate Cos. (In full)

Proposer.
4. Business address of the proposer
5. Location from where distribution is

effected.
6. How long have you been in the

business?
7. Do you manufacture the complete

product? If not, what
components/parts are purchased
by you?
8. Can the date of manufacture of

each product be identified by the
factory number stamped on it?
9. Do you have any assets and/or

representation and / or association
(Financial, Technical or otherwise)
in U.S.A. / Canada and other
foreign countries? If so, please
furnish details of association.
10. Are you affiliated in any manner

with any of your suppliers and
distributors?

APPENDIX 5- PROPOSAL FORM FOR PRODUCT LIABILITY INSURANCE APPENDICES
11. A) Please give full description of

the following for the last three Years )
years.
a) Goods manufactured - actual

turnover
b) Goods sold / supplied - actual

turnover
c) Goods repaired, serviced,

tested and processed
12. B) For the above please give the

projected turnover for the
proposed period of insurance as
under;
a) Goods manufactured
b) Goods sold or supplied
c) Goods repaired, serviced,

tested and processed
13. Please furnish details of products

to be considered for insurance
which are manufactured and/or
designed:
a) Name of the product:
b) Principal component:
c) Annual Units produced:
d) Annual turnover:
e) How long has it been in the
market?
f) Expected life of use:
g) Intended use:
h) Intended customer/ultimate
user:
i) Warranties as to use:

j) Technical know-how /
collaboration
14. Do you have Research and

Development Department?
15. Please specify and products which

are inflammable/explosive,
dangerous, radioactive, harmful to
health, poisonous by themselves or
any combination with others,
please give full details and state
what precautions are taken.
16. Please state whether goods sold or

supplied subject to disclaimer
notice, and if so, please give full
text, particulars of such disclaimer
notice.
17. Please furnish particulars of new

products to be marketed during the
next 12 months.
18. Please furnish details and list of

products discontinued or recalled
or withdrawn during the last five
years.
19. Please elaborate complaints,

incident/ accident reporting
system in your organisation
20. Please give details of checks or

examinations or controls including
batch control and testing carried
out or effected to discover possible
defects or errors in products
21. Do your products comply with

standards like ISI or any other
Standards?

22. Have your products ever been

subject to any enquiry or
investigation by any Government
agency, concerning the
efficiency/adequacy of Labelling,
hazardous contents or safety? If so,
please give full details.
23. What is the failure rate of each
product after hand over?
24. Do you issue guarantees and/or

warranties to purchasers? If so, for
what period do you guarantee
or/or warrant your product?
25. Particulars regarding directions for
use:
a) Is it by printing on container or
product?
b) Is it by separate leaflet or
brochures?
c) Is the hazard warning clearly

shown?
26. Please furnish claims history for

the last three years in the
following format.
a) Year:
b) No of claims:
c) Total Amount Paid
Bodily Injury Rs.
Property Damage Rs.
Cost of Defence Action: Rs.
Total amount of pending claims: Rs.
Bodily Injury: Rs.

Property Damage: Rs.
Cost of Defence Action Rs.
27. Are you aware of any incidents,

conditions, defects, circumstance
or suspected defects which may
result in claim?
28. Have your proposal or renewal

been declined or premium
increased, special, terms imposed
by any insurer? If so please give
details:
29. Please indicate the limit of

indemnity required for domestic
sales
a) Any one accident:
b) Aggregate during the policy

period.
30. Please indicate Voluntary Excess

for each claim (in addition to
Compulsory Excess) you are willing
to bear.
31. Pleas quantify sales turnover

product wise for the last 3 years as
under
a) Domestic
b) U.S.A. / Canada
c) OECD countries (to list)
d) Other countries including non-

OECD countries.
32. How long have you been exporting

to the following countries and do
you require cover for exports to
these countries?

a) Domestic
b) U.S.A. / Canada
c) OECD countries (to list)
d) Other countries including non-

OECD countries.
(Cover for exports will be granted only

if domestic turnover is covered)
33. Do you require “Limited Vendor’s

Endorsement”?
(Please enclose a copy of the

contract with the vendor/s and give
the names to each product of export of
such countries)
34. Do you comply with U.S.A. /

Canadian State/Federal
Laws/Standards applicable to each
product of export to such
countries.
35. Please give details of any power of

attorney to Asset in U.S.A. /
Canada
Policy Period:
From (time) of (date) to 12.00 midnight of (date)
I/We desire to effect an Insurance in terms of the Product Liability Policy of the
Company Ltd. against the limits indemnity specified
above I/We hereby declare that all statutory provisions relating to my/our
business for Insurance are complied with. I/We further declare that all the
above statements and particulars are true, and I/We have not omitted
suppressed, misrepresented or misstated any material fact and I/We agree that
this declaration shall be the basis of the contract between me/us and the
Company and be incorporated therein.

Place:
Date:

APPENDICES APPENDIX 6- PRODUCT LIABILITY RISK ASSESSMENT REPORT
F. Appendix 6- Product liability risk assessment report
Product liability risk assessment report
I. Name of the insured
Address of the Insured:
(Give all locations and specify product at each and how they interlink)
II. Product
1. Full description:
(Attach brochures and details including past products)
2. Total turnover of each product
3. Markets
(Include possible - specify any high risk areas)
4. Countries of export will extent of previous exports even if product no

longer supplied to such markets.
5. Export Turnover
a) U.S. A. / Canada:
b) OECD
c) Other including non-OECD countries
6. Domestic sales turnover
III. Product safety control programme
1. Has a Programme been devised?

If so, give details
2. Is this programme comprehensive and clearly understood by concerned
persons?
3. Is this programme distributed to all departments?
4. Is the programme regularly checked and updated?
5. In the absence of written programme, what other arrangements exist?
6. Has a product Safety committee been formed? How frequently do they
meet?

APPENDIX 6- PRODUCT LIABILITY RISK ASSESSMENT REPORT APPENDICES
7. Does Committee include decision makers form:
a) Design Engineers
b) New Product Dept.
c) Manufacturing
d) Quality Control
e) Service Dept.
f) Legal Dept.
g) Advertising Dept.
h) Personnel Dept.
8. Are the regular safety personnel involved in drafting and implementing

the programme?
IV. Areas of responsibility to supplement programme
1. Who has overall responsibility for product safety?
2. Has someone from top level management been designated to co-ordinate

programme implementation?
3. Are Quality Assurance Audits undertaken? Those should cover all aspect
referred to in the various sections of this report. How regular are these?
What is procedure for implementation of findings?
4. What training has been given?
5. Are insured members of any trade association?
6. Are Insured members of Institute of Quality Assurance like Indian

Standards Institute. British Standards Institute, etc.?
If so, what extent do they use the services offered?
V. Hazard analysis & product safety
A.
1. Hazard analysis
a) Is this undertaken
b) What system is used?
c) Does this include consideration of misuse of product as well as Correct

use.
d) Does it include consideration of previous history?

2. Does the Product conform to a recongnised Standard e.g. I.S.I., B.S.I.

etc. Or any code or Practice followed?
3. Is outside technical know-how/ collaboration/ consultancy sought? Gove

details
4. Are inbuilt safety devices/guards etc. Designed to “fail safe”? Give

details
5. What warnings are displayed on products “Are these adequate and

displayed on product “Are these adequate and displayed prominently”
6. What would be effect of failure of product to perform its intended

function?
B. Design
1. To what extend is design undertaken by the insured?
2. It these a statement of the requirements of the design expressed by

drawings and performance specifications and is there additional
documentation of process lay-out-process Specification test Schedules
etc.
3. How are design changes handled and are systems adequate to ensure old
designs withdrawn?
4. How are new designs tested prior to commencement of production? What

records are kept?
C. Materials used
1. What are the materials/components used for each product?
2. Are any components subcontracted? Give details of specification

adopted.
3. How is quality of the material/components checked? Give details of

testing.
4. What would be effect of faulty material/component on the finished

product?
D. Manufacture
Describe briefly the manufacturing process.

E. Quality control:
1. Are quality control procedures maintained? If so outline briefly the

procedures for quality control from raw material to finished product.
2. Are complete inventory records reflecting consignments and / or

delivery to consignees maintained and are serial and/or batch number
reflected on the finished product and on consignment invoices?
3. Can the date of manufacture of each product be identified by the

factory number stamped on it?
4. Do you keep sample of products involved in your quality control

procedures?
F. Packaging/labelling
1. Nature of packaging - Is it adequate?
2. Where are supplied obtained from?
3. Is packaging adequate to protect handler?
4. What checks are made on packaging quality?
5. How is packaging labeled? Is this adequate to give clear indication of

contents? (Supply copies if available? Is labelling adequate and of
suitable size?
6. How is Labelling controlled prevent errors?
7. Who undertakes packaging? If an outside agency, what control does

Insured have?
8. What records are kept?
VI. Sales and distribution
A. Sales
1. How are sales organised?
2. What Advertising Literature is used? (Attach copies if available)
3. Does this make any extravagant or misleading claim?
4. Is advice to customer given?

Give details.

5. Conditions of Sale
(Attach copy if available)
6. Is it necessary for product to have any test certificate?

If so, who provides this?
B. Distribution
1. What is your distribution network?
2. What method of transport is used?
3. What dispatch control procedures and records are used?
4. Does the product have a shelf life? If so, state period and how this is
indicated to the customer. E.g. sell by date?
5. Is there any interim storage? Give details
6. Is the transport used available for other products?
7. If applicable what cleansing and inspection methods are used between

products?
C. Advice to customers in product use:
1. What facilities do the Insured have for customer enquiries relating to the
use of the product?
2. What records are kept of additional advice given?
3. Is any guidance/advice given on customer premises? Give details
D. Installation:
1. What percentage of product is installed by Insured?
2. Do insured undertake full commission of product?
3. Is the installation being done by qualified and skilled staff?

VII. Customer complaints
1. What is procedure for handling complaints?
2. How is customer advised of any fault discovered in a particular design or

batch or work?
3. Are the Insured able to trace the location of any specific product or
component after sale?
4. What would be effect of a product failure -- give maximum possible loss,

if they can be quantified? (Consider nature of business of possible user).
5. Is there an established method of product recall?
7. Are faults tabulated and analysed to locate problem areas or trends? If

so how often and what action is taken?
8. Is there an established method of coordinating faults with design and

manufacturing process to avoiding reference and to rectify where
necessary?
VIII. Previous history
1. What has the history been of:
a) Complaints?
b) Injuries of person from products?
c) Damage to property from products and consequential losses arising

thereform?
d) Claims against the Insured? Whether proven or otherwise over the past 3
years.
2. Are proper records kept?
3. What action is taken on complaints of customers?
4. Is reference made to all such previous, records when considering a new

design (i.e. do they learn by their mistakes?)

IX. Other considerations:
1. Is there any other factor likely to affect the risk (e.g. items of local
knowledge - language problem- general law management attitude
displayed by poor housekeeping etc.?
2. Comment on supervisor and labour relation.
X. Conclusions:
1. Please provide:-
a) Positive assessment of hazards related to products.
b) Assessment of organisation and methods employed (in the light of

information obtained) to deal with such hazards and produce to a
customer a product which is both safe and reliable in use.
c) An opinion relating to acceptability at the time of survey and the trends

anticipated in the risk in the future.
2. Please consider:
a) All manufactured products have a failure rate.
b) Can a defective product be supplied?
c) What is probability of a defective product producing a claim?
d) What would be likely cost of that claim and its effect?
e) If we had to defend an action-Can we say it was a good product -

designed and produced with safety in mind and sold in a safe manner
with adequate instructions.

APPENDIX 7- CASE LAWS APPENDICES
G. Appendix 7- Case laws
Public Liability Case Law
1. Union of India vs Union Carbide.On 3rd Dec 1984 Methyl Iso Cyanate (MIC)
leaked from a storage tank of the Union Carbide factory at Bhopal resulting
in the immediate death of 3000 persons and injuries to many others and
also property damage to some. The Supreme Court of India approved
settlement of US$ 470 million (Rs 713) crores to be distributed among the
Kin of the 3000 deceased and 105000 injured and property owners.
Unfortunately many of the victims were low income public who fled the city
and were unaware of their entitlement. Evidentiary records place the dead
and injured at 20000 and 569000 respectively. Many are still to be
compensated. The Public Liability insurance cover was a mere Rs 2.5 crores.
2. Others vs Uphaar Cinema, DESU, NDMC, DDA. A fire in the transformer

located in the basement of the Cinema resulted in the death of 59 children
and injured many when they were unable to exit the theatre due to the fire
engulfing the fire exit area. The Delhi High Court awarded a compensation
of Rs. 17 crores to be paid by the Cinema Owners-Ms. Ansal Builders, the
Delhi Electric Supply Unit, the New Delhi Municipal Corporation and its
agencies. The awards were Rs. 15 lacs to heirs of all under 20 year olds, Rs.
18 lacs to heirs of over 20 year olds and Rs. 1lac to the injured individually.
Products Liability Case Law
Pharmaceuticals:
48. The classic case, “Thalidomide”, is an example of catastrophic loss potential

inherent in products liability insurance.
49. In 1954 the German chemical firm of Grunenthal GmbH succeeded in the
synthetic production of thalidomide, which was put on the German market
in 1957 under the name of “Contagion” and soon found a considerable
market as one of the most effective tranquilizing and sleeping drugs.
Thalidomide drugs were sold with increasing success under about 50 trade
names in practically all Western countries apart from the U.S. When, the
drug was first connected with the increasing number of deformities in
newly-born children, the firm withdrew the drug from the market, offer
having been made liable to pay damages in millions.
50. Cutter Laboratories (California) supplied Salk Vaccine for an official

campaign of mass vaccination against poliomyelitis. About 60 of the children
treated were taken ill, since for unexplained reasons some of the vaccine
supplied by Cutter contained active polio virus. Although the firm had
strictly followed official instructions during manufacture, it was held liable
for damages. In some 60 law-suits damages of over US$ 12 million were
claimed.
APPENDICES APPENDIX 7- CASE LAWS
51. A bit American pharmaceutical concern brought a drug known as “MER-29”

on to the market, after years of research. The intended effect of the drug
was to lower the cholesterol content of the blood and thus reduce the
danger of heart attacks. In the Spring of 1962, it was withdrawn by the firm
since some of the patients treated with it had suffered side-effects, in
particular damage to the eyes (cataracts). According to the firm’s estimate,
about 4,00,000 persons had been treated with “MER-29” by then. In 1966
the New York State Court in White Plains, N.Y., awarded one plaintiff the
spectacular amount of US $ 1,200,000.
52. One of the biggest US pharmaceutical firm, Merrell Dow, agreed to pay $
120m in compensation to victims of the drug Debendex which was alleged to
have caused defects to children after being taken by their mothers to
combat morning sickness during pregnancy. It is one of the largest out of
court settlements of its kind.
The firm had denied liability for any ill effects from the drug, but in order to
avoid costly litigation which might have lasted for years, it felt worth
coming to suitable arrangements with 700 American parents who claimed
their children had suffered deformities as a result.
53. “Stalinon”, a drug for the treatment of skin diseases, first marketed by a
small French firm in 1953, caused the death or serious disablement of
several hundred persons. It took several years before the adverse side -
effects of the drug were fully recognized.
54. A court in Detroit / U.S. ordered a pharmaceutical company to pay $ 2.28m.

for pain and suffering to the surviving dependents of a 20 years old woman
who had allegedly died from the side effects of a contraceptive pill. The
American died in 1975 from blood clot in the brain one month after starting
to take the pill. According to the court, the company neglected to provide
the doctors with sufficient information about the results of the laboratory
tests which revealed that the medicine increases the risk of blood clotting in
the case of persons with blood group A,B or AB. Although the blood group of
the deceased had never been determined, the company was held liable by
the court.
Transportation Products
55. The Goodyear Tire & Rubber Company in Akron, Ohio was ordered by a
Rhode Island Superior Court to pay $ 19 million to the estate of the Formula
1 race car driver, Mark Donohue, who died in an accident in Zeltweg,
Austria, in 1975. The jury determined that the crash occurred because the
left tire of the car was defectively manufactured by Goodyear. Under Rhode
Island’s strict liability law, any manufacturer or supplier of a defective
product which caused an injury or death is liable, without negligence having
to be proven.

56. A Texan district court awarded $ 106.9 m. ($ 100 m. punitive and $ 6.9 m.
actual damages) to the family of a woman who died from burns after a car
accident. The court found the American car manufacturer 75% at fault in the
accident. He was found guilty of gross negligence in not spending $ 4 to $ 24
per car to repair a design defect that allowed the fuel tank to rupture
following the collision.
57. Texas police officers injured in motorcycle accidents were awarded $ 43 m.

in damages by a district court. Design defects caused the heavy motorcycles
to wobble at high speeds which led to falls. The manufacturer had failed to
warn buyers of the instability problem.
58. Damages of $ 3,583,583 were awarded to a 46 year old female interior

designer who suffered brain damage, fractured vertebrae, and a bladder
injury after her car went out of control and crashed. The plaintiff charged
the defendant’s manufacturer of the vehicle with negligent design and
claimed that the accelerator was improperly designed. The defendant
contended the accident resulted because the plaintiff was impaired by drug
use.
59. A 28 year old male suffered a closed head injury, a broken leg and a
collapsed lung when the motorcycle he was riding struck the rear of a car.
The plaintiff was wearing a full face helmet manufactured by the defendant
and contended that the lining of the helmet was defectively manufactured
and contributed to the extensiveness of his injuries. The defendant argued
that the plaintiff was responsible for his injuries by speeding. The award was
reduced by 50 percent to $ 5,000,000 for the plaintiff’s negligence.
60. The Oklahoma Supreme Court awarded against a car manufacturer $ 1.8
million damages to the plaintiff who suffered paralysis of arms and legs,
after he was thrown out of car in an accident. This was due to faulty design
of the lock of the front door. It was held that the door should not have
opened.
61. In April 1965 the Boeing Aircraft Corporation and an airline company were
together ordered to pay US $ 2,000,000 to the dependent of a passenger
who had died along with 43 others in a 1963 air crash. The plaintiff argued
that the manufacturer neglected to inform the airline of certain flight
characteristics which manifested themselves under certain atmospheric
conditions and which he should have been aware of.
Commercial & Industrial Products
62. A 69-year-old male developed chronic asbestosis after working in a paper

factory. The plaintiff contended that exposure to the asbestos laden
products caused his disease and that the defendant failed to warn of the
possible dangers associated with asbestos. The defendant contended that
they did not know of the hazards at the time of the plaintiff’s exposure.

APPENDICES APPENDIX 7- CASE LAWS
The jury awarded $ 1,035,000 in compensatory damages and $ 75,000,000 in

punitive damages.
63. 62. A 59 year old male pedestrian was severely injured by debris which had
been knocked loose by a crane. The plaintiff suffered severe facial, skull,
arm and hand fractures, brain damage, a “frozen” shoulder, and leg nerve
damage which caused a permanent limp. He contended that when a crane
pulley failed, the crane struck the building next to which he was walking.
The Plaintiff contended that the pulley was defectively designed and that
the defendant’s manufacturer was aware of internal cracking in the pulley
when it was cast.
Compensatory damages; 1,080,385 and Punitive damage $ 6,000,000 were

awarded.
64. A large firm in the cattle feed business in Texas had commissioned an oil
firm to produce a more suitable lubricant for its machines. During
production which involved high temperatures, a relatively small quantity of
this lubricant found its way into the cattle feed, and according to the
experts caused a dangerous disease (hyperkeratosis) in the animals fed with
the contaminated product. It took more than three years before the cause
of the disease which struck thousands of animals, resulting in claims over $
10 million was determined.
Consumer Products
65. 64. A 21 month old male infant slipped through the rungs of a highchair and
was caught by the neck on the food tray. As a result, the plaintiff suffered
permanent brain damage. He alleged that the design of the restraint
mechanism on the chair was defective. The defendant contended that the
plaintiff’s mother was negligent because she failed to properly supervise the
infant. Damage of $ 2,700,000 were awarded.
66. A man was killed when paint remover he was using exploded. It was
contended that there were insufficient warnings on the packaging that the
product could be ignited by a spark at a low temperature. The plaintiff
theorized that the explosion could have been caused by a spark produced by
a metal scraper that the decedent had been using. The defendant as7serted
that the decedent was guilty of contributory negligence and should not have
used the product near a gas furnace and water heater. The defense also
claimed that the product included adequate warning of potential hazards.
After the jury returned its verdict, the parties settled for $ 773,470. Past
and future wage: $ 1,200,000.

67. An 8 year old male was wearing a 100% cotton flannel shirt while playing
with matches. The plaintiff accidentally struck a match, and the shirt
exploded into flames. As a result of accident, the plaintiff suffered third
degree burns from his chin to his waist. He contended that the defendant’s
manufacturer was liable for his injuries because his shirt had not been
treated with a fire retardant material as required by federal law. The
defendant’s manufacturer contended that the requirements for flame
retardant treatment applied only to children’s sleepwear and not to other
articles of clothing. Settlement was to the tune of $ 2,700,000.

APPENDICES APPENDIX 11- CGL PROPOSAL FORM
H. Appendix 11- CGL proposal form
CGL proposal form
1. Name & Registered Address of the Insured (including names of all subsidiaries
or affiliated companies to be insured):
2. Website Address:
3. Please describe your business operations and activities:
4. Length of time in business:
5. Name and Registered Address of Additional Insured, if any:
6. Form: [ ] Claims Made [ ] Occurrence Based
7. Limits of Insurance (Amount in Indian Rupees):
Any One In the

Limit of Liability
Event Aggregate
General Aggregate Limit
Products/Completed Operations Limit
8. Policy Period:
9. Retroactive date (only for Claims Made Form):
10. Territory:
11. Jurisdiction:
A. Premises and Operations
1. Please give full description of activities for which cover is required:
2. List all premises to be insured in India and overseas:
Warehouses/Godowns/Shops/Depots/Tank
Location Manufacturing Units
Farms/Offices
No. of Nature of
No. of locations Nature of Risk
locations Risk
India
Overseas

APPENDIX 11- CGL PROPOSAL FORM APPENDICES
3. Please quantify annual sales turnover of last three years (Amount in Indian
Rupees):
Year Premises Operations Transportation*

Projected
Current
Last Year
*Please provide the particulars and mode of transportation of such materials:
4. Please describe in brief surrounding areas and third party property within an
approximate radius of 2 kms from each manufacturing unit:
Manufacturing Industrial Agricultural Residential

Others
Unit Area Area Area
North
East
South
West
5. Please attach Lay-Out Plans and Risk Inspection Report of the manufacturing
units proposed for Insurance:
6. Do you handle or use gases, pressure-storage, explosive, hazardous

substances, asbestos, toxic, radioactive materials and hydrocarbons? If so,
please give details of their quantity, storage, handling and precautions taken:
7. Is there a programme for the prevention of fire, explosion incidents? If so,

please indicate:
a) Type of detection and alarm system:

b) Availability of service organisation in case of such incidents (fire brigade,
specialists in environmental protection and toxicology):
c) Provisions made for supply of energy, water etc. in an emergency:
8. Will you, or your employees, handle or come into contact with any industrial
dust of know harmful nature (e.g. asbestos, silica, cotton), radioactive
materials, or any other substance harmful to health?
9. Extensions required:

B. Travel of Executives
1. Number of Employees that Travel Overseas Annually:
2. Number of travel days per year:
3. Purpose of trips:
4. Overseas Travel Destinations:
C. Advertising Information:
1. What percentage of your annual sales is derived directly from your web site?
2. Do you use comparative advertising in your advertisements? If "Yes", was an

independent organization consulted on how such comparisons were made?
3. Is music used in your advertisements? If "Yes", were all the rights secured
prior to use?
4. Is the likeness of famous people used in your advertisements?
5. Have you ever been sued, or have you sued another, for copyright or
trademark infringement?
6. Besides the information related to your goods, products or services, do you

produce any other publications for external use?
D. Products / Completed Operations:
1. Please provide a specific description of products manufactured or supplied:
2. Please furnish details of products to be considered for insurance:
End Usage/ Expected Life

Principal Annual Units
Products Intended of the
Components Produced
Customer Use Product

APPENDIX 11- CGL PROPOSAL FORM APPENDICES
3. Please quantify annual sales turnover of last three years (Amount in Indian
Rupees):
Rest of the
Year USA/Canada/Australia UK/Europe India
World
Projected
Current
Last Year
4. Do you provide any services or treatment other than sale of products? If yes,
please describe the nature of services and estimated annual turnover:
5. Please furnish particulars of new products to be marketed during the next 12

months:
6. How long have you been exporting to these countries?
a) USA and Canada:

b) UK/Europe:
c) Rest of the World:
7. Do you manufacture the complete product? If not, what components/parts are

purchased by you?
8. Do you have Research & Development department or Technical Know-

how/Collaboration?
9. Do you retain rights of recovery against manufacturers?
10. Please specify any products, which are inflammable/explosive, dangerous,

radioactive, and harmful to health, poisonous by themselves or any
combination with others. If so, please give full details and state what
precautions are taken.
11. Please furnish details and list of products discontinued or recalled or

withdrawn during the last five years.
12. Have your products ever been subject to any enquiry or investigation by any
Government agency, concerning the efficiency/adequacy or labelling,
hazardous contents or safety? If so, please give full details.
13. Are any products manufactured and sold under someone else’s label or
trademark? If yes, please give full details.
14. Does the Insured’s contract of sale agree to hold distributors harmless?

15. Does the Insured require the name of vendor to be included as a Named
Insured? If yes, pls provide the name, address and list of products to be
supplied to the vendor:
16. Does the vendor undertake final preparation of product?
E. Quality Control:
1. Give details of checks or examinations or controls including batch control and

testing carried out or effected to discover possible defects or errors in
products.
2. Do your products comply with standards like ISI or any other Standards?
Loss Information
1. Please enter all claims or losses (regardless of fault and whether or not
insured) or any occurrences or incidents, conditions, defects, circumstances
or suspected defects, which may give rise to a claim; over the last five years
under Public Liability and/or Products Liability (Amount in Indian Rupees):
Date
Date of Amount Amount Claim
Description of Claim of
Occurrence Paid Reserved Status
Claim
DECLARATION (in respect of all sections)
I/ We declare that to the best of my/our knowledge and belief the above
statements are true and complete and will form part of the contract
between me/us and the Insurance Company.
Signature
Position in Your Company
Date

IC 74 Liability Insurance

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IC 74 LIABILITY INSURANCE

Visit www.ambitiousbaba.com for the useful Para 13.2 & III

INTRODUCTION TO LIABILITY INSURANCE

This chapter provides explanation on what is liability and how it is covered

A. Liability insurance and its historical background

2 IC-74 LIABILITY INSURANCE

Look at this Scenario

In the increasingly complex conditions of modern life, accidents resulting in

A. Liability insurance and its historical background

Dictionary meaning of the term ‘liability’ is ‘responsibility’. The term ‘legal

In simple terms, legal liability is the legal responsibility of a person to pay

2. Classification of legal liability

Legal liability may be classified into two categories.

a) Criminal liability: It is enforced by the State, resulting into punishment

IC-74 LIABILITY INSURANCE 3

Under Workmen’s Compensation Act 1923, the employer, irrespective of his

a) Insurance covering Statutory liability i.e. liability defined by a specific

4 IC-74 LIABILITY INSURANCE

Liability insurance is more commonly classified as:

i. Property and casualty liability i.e. acts of negligence resulting in loss or

ii. Financial liability i.e. negligence resulting in financial losses to third

The purpose of liability insurance is to provide indemnity to the insured in

5. Historical background of liability insurance

Employers’ liability insurance originated as a direct result of the Employer’s

IC-74 LIABILITY INSURANCE 5

Professional indemnities began to be offered in the early period of the 20th

6 IC-74 LIABILITY INSURANCE

6. Liability insurance in India

Another factor responsible for the growth of public liability insurance is

The development of the Workmen’s Compensation Act was partially affected by

IC-74 LIABILITY INSURANCE 7

Legal liability is a specific which can be enforced by law.

B. Basic principles of insurance and their applicability to liability

a) The existence of a potential legal liability which is capable of being

b) Such potential liability must be the subject matter of insurance, and

c) The insured must bear a legal relationship to the subject matter

8 IC-74 LIABILITY INSURANCE

If the insured has a technical collaboration agreement, the collaborator may

Similarly, products’ liability policies covering exports may be extended to cover

Insurable interest must be capable of measurement in terms of money. In case

A construction company may incur a liability due to collapsing of their new

The principle of insurable interest leads to the principle of indemnity. The

The principle of indemnity can be strictly observed in liability insurances.

IC-74 LIABILITY INSURANCE 9

A drug manufacturing company introduces a new drug in the market. The

10 IC-74 LIABILITY INSURANCE

In employer’s liability policies, no limit of indemnity is specified. These policies

IC-74 LIABILITY INSURANCE 11

Subrogation may be defined as the transfer of rights and remedies of the

The principle of subrogation is corollary of the principle of indemnity. The

12 IC-74 LIABILITY INSURANCE

5. Utmost good faith

A engineering goods manufacturing company planned to take a public liability

IC-74 LIABILITY INSURANCE 13

The principle of utmost good faith is reiterated in a liability insurance policy

In addition to the duty of disclosure, the insured, under common law, is

The insured has in the financial loss that may be caused to

14 IC-74 LIABILITY INSURANCE

C. Scope and special features of liability insurance

1. Scope of liability insurance

Liability insurance comprises mainly of the following policies:

a) Act policy under ‘Public Liability Insurance Act’ (hazardous substances)

For example, products liability insurance provides coverage mainly to the

IC-74 LIABILITY INSURANCE 15