Property Insurance

PROPERTY INSURANCE
Diploma in insurance study text
Milton Asimwe
Joseph Iranya
LIST OF FIGURES ............................................................................................................................................................... 3
LIST OF TABLES ................................................................................................................................................................. 3
1. RISK AND INSURANCE .............................................................................................................................................. 4
1.1 INTRODUCTION ................................................................................................................................................ 4
1.2 LEARNING OBJECTIVES ..................................................................................................................................... 4
1.3 DEFINITION OF RISK .......................................................................................................................................... 4
1.4 RISK MANAGEMENT ......................................................................................................................................... 7
1.5 INSURANCE CONTRACT .................................................................................................................................... 8
1.6 PRINCIPLES OF INSURANCE............................................................................................................................. 10
1.7 CHAPTER SUMMARY ...................................................................................................................................... 13
1.8 REVISION QUESTIONS ..................................................................................................................................... 14
1.9 CASE STUDY QUESTION .................................................................................................................................. 14
2. PROPERTY INSURANCE .......................................................................................................................................... 15
2.1 INTRODUCTION .............................................................................................................................................. 15
2.2 LEARNING OBJECTIVES ................................................................................................................................... 15
2.3 NON-COMMERCIAL PROPERTY INSURANCE .................................................................................................... 15
2.4 COMMERCIAL PROPERTY INSURANCE ............................................................................................................ 16
2.5 MAJOR HAZARDS AND PERILS ......................................................................................................................... 17
2.6 RISK SURVEYS ................................................................................................................................................. 19
2.7 CHAPTER SUMMARY ...................................................................................................................................... 23
2.8 REVISION QUESTIONS ..................................................................................................................................... 24
3. FIRE INSURANCE .................................................................................................................................................... 25
3.1 INTRODUCTION .............................................................................................................................................. 25
3.3 CAUSES OF FIRE .............................................................................................................................................. 25
3.4 CLASSIFICATION OF FIRE ................................................................................................................................. 26
3.5 THE STANDARD FIRE POLICY ........................................................................................................................... 26
3.6 BASIS OF COVER/SETTLEMENT ....................................................................................................................... 27
3.7 UNDERWRITING FACTORS .............................................................................................................................. 28
3.8 RATING OF A FIRE RISK.................................................................................................................................... 29
3.9 MAXIMUM FORSEEABLE LOSS/ESTIMATED MAXIMUM LOSS/PROBABLE MAXIMUM LOSS AND REINSURANCE.
30
3.10 POLICY TERMS AND CONDITIONS ................................................................................................................... 33
3.11 SUMMARY OF CHAPTER ................................................................................................................................. 44
3.12 REVISION QUESTION ...................................................................................................................................... 46
4. BUSINESS INTERRUPTION/CONSEQUENTIAL LOSS ................................................................................................. 47
4.1 INTRODUCTION .............................................................................................................................................. 47
4.3 SCOPE OF COVER ............................................................................................................................................ 47
4.4 GROSS PROFIT AND ANNUAL TURN OVER ....................................................................................................... 50
4.5 INDEMNITY PERIOD ........................................................................................................................................ 51
4.6 BASIS OF INDEMNIFICATION........................................................................................................................... 53
4.7 THE TIME EXCESS ............................................................................................................................................ 55
4.8 THE SUMS INSURED UNDER BUSINESS INTERRUPTION ................................................................................... 55
4.9 POLICY CONDITIONS AND CLAUSES................................................................................................................. 56
4.10 EXCLUSIONS ................................................................................................................................................... 58
4.11 SUMMARY OF CHAPTER ................................................................................................................................. 59
4.12 REVISIONS QUESTIONS ................................................................................................................................... 60
5. NON-COMMERCIAL PROPERTY INSURANCE .......................................................................................................... 61
5.1 INTRODUCTION .............................................................................................................................................. 61
5.3 DOMESTIC PACKAGE (HOME/HOUSE OWNERS) INSURANCE ........................................................................... 61
5.4 PRIVATE MOTOR INSURANCE ......................................................................................................................... 70
5.5 CHAPTER SUMMARY ............................................................................................................................................ 72
5.6 REVISION QUESTIONS .......................................................................................................................................... 73
6. COMMERCIAL PROPERTY INSURANCE ................................................................................................................... 73
6.1 INTRODUCTION .............................................................................................................................................. 73
6.3 INDUSTRIAL ALL RISKS .................................................................................................................................... 74
6.4 THEFT/BURGLARY INSURANCE ....................................................................................................................... 81
6.5 MONEY INSURANCE ....................................................................................................................................... 82
6.6 GOODS IN TRANSIT .............................................................................................................................................. 83
6.7 MOTOR INSURANCE ....................................................................................................................................... 87
7. ENGINEERING AND CONSTRUCTION INSURANCE .................................................................................................. 94
7.1 INTRODUCTION .............................................................................................................................................. 94
7.2 MACHINERY AND PLANT ................................................................................................................................. 95
7.3 BOILERS AND PRESSURE VESSELS .................................................................................................................... 95
7.4 PLANT ALL RISKS ............................................................................................................................................. 97
7.5 MACHINERY LOSS OF PROFITS INSURANCE ..................................................................................................... 98
7.6 CONSTRUCTION INSURANCE .......................................................................................................................... 99
7.7 REVISION QUESTIONS ................................................................................................................................... 105
8. POLITICAL VIOLENCE AND TERRORISM INSURANCE ............................................................................................ 106
8.1 INTRODUCTION ............................................................................................................................................ 106
8.2 OBJECTIVES .................................................................................................................................................. 106
8.3 SCOPE OF COVER .......................................................................................................................................... 106
8.4 UNDERWRITING CONSIDERATIONS .............................................................................................................. 110
8.5 MAIN EXCLUSIONS ....................................................................................................................................... 110
8.6 TERRORISM REINSURANCE .................................................................................................................................. 111
8.7 CHAPTER SUMMARY .......................................................................................................................................... 112
8.8 REVISION QUESTION .......................................................................................................................................... 113
9. PROPERTY CLAIMS ............................................................................................................................................... 114
9.1 INTRODUCTION ............................................................................................................................................ 114
9.2 LEARNING OBJECTIVES ................................................................................................................................. 114
9.3 PROPERTY CLAIMS PROCESS ......................................................................................................................... 114
9.4 CALCULATION OF PROPERTY AND ENGINEERING CLAIMS ............................................................................. 114
9.5 REVISION QUESTIONS ................................................................................................................................... 120
REFERENCES ................................................................................................................................................................. 121
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APPENDIX I ................................................................................................................................................................... 123
LIST OF FIGURES
Figure 1: Risk Management Process ................................................................................................................... 8
Figure 2: Fire Tetrahedron ................................................................................................................................ 25
Figure 3: The Business Interruption Chain of Loss ............................................................................................ 48
Figure 4: Illustration of the Indemnity Period ................................................................................................... 51
LIST OF TABLES
Table 1: Classification of Fire ............................................................................................................................ 26
Table 2: Rating Scale for Different Indemnity Periods ...................................................................................... 52
Table 3: Calculation of BI Rate for different indemnity Periods. ....................................................................... 52
Table 4: Calculation of Gross Profit ................................................................................................................... 54
Table 5: Rates applicable for a Homeowners Policy ......................................................................................... 69
Table 6: Fire Minimum Rating Guide .............................................................................................................. 126
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1. RISK AND INSURANCE
1.1 INTRODUCTION
Risk is a concept that we encounter in what we do and every action that we perform in our day to day
activities, for example, eating a certain type of food, driving to work in the morning, going to sleep at night.
All these actions involve uncertainty about an outcome that we cannot possibly foresee.
1.2 LEARNING OBJECTIVES

By the end of this chapter, the reader should be able to;
 Explain the concept of risk and identify the different types of insurable risk
 Identify the characteristics of an insurance contract
 Explain the concepts of property insurance
 Explain what risk management
 Identify the process involved in risk management
 Identify and explain the principles of Insurance
 Identify the different conditions inherent in an insurance policy
1.3 DEFINITION OF RISK

The Concept of Risk and how it is defined varies from industry to industry.
(Boggs, 2011) defines risk as;
Uncertainty surrounding an outcome arising out of lack of knowledge regarding future events.
For risk to exist, therefore, uncertainty regarding the outcome has to exist. If you knew that in the morning
as you set off for work it would rain, there would be no risk involved since you already are aware of what is
going to happen.
For risk to exist also, there should be a possibility of loss from the outcome. While driving to work in the
morning, there is a possibility that you might get into an accident. If the accident does happen, your car
would most likely get damaged.
Activity
Think of scenarios in your day to day life that would demonstrate the element of risk
CATEGORIES OF RISK
The outcome of risk can either have a financial impact or not and the level of loss can vary from small to
sever. Depending on the type and magnitude of the outcome, risk can be broken down into four categories.
These are;
a. Financial and Non- Financial Risks

b. Pure and Speculative Risks
c. Specific and Fundamental Risks
d. Dynamic and Static Risks
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Financial
Risk Non-
Financial
Risk
Pure Risk Vs
Dynamic Risk Categories Speculative
Static Risk of Risk Risk
Particular
Risk Vs
Fundamental
Risk
Financial Risk Vs Non-Financial Risks
The outcome as a result of a risk can either have a financial impact or not. A Risk in which the loss can be
quantified or measured in financial terms is known as a financial risk. Consider for example that while you
are away at work, a burglar breaks into your home and makes away with the TV set, the loss, in this case, is
the TV set and the value of the financial value of the TV set can be determined.
On the other hand, for a non-financial risk, the value of loss cannot be measured in monetary terms. For
example, the goodwill of a company name. Damage to a company’s name and reputation as a result of a
lawsuit cannot be measured in financial terms.
Pure Risk Vs Speculative Risk
A Risk is considered pure if the outcome results into either a loss or no loss. If a loss does occur, then it
should have a financial impact. A House can either burn down or not. If it burns down, then the financial
value of the loss should be measurable.
A speculative Risk one the other hand is one in which outcome results into either a loss, no loss or gain.
What this means is that the party taking on the risk stands the chance to either benefit from the risk or
suffer a loss if the risk does happen. Classic examples of speculative risk are gambling and investment.
Mathew likes football and is an avid supporter of Manchester United. He places a bet of Ugx 1,000 on
Manchester winning against Arsenal. If Man Utd beats Arsenal, Mathew stands to gain Ugx 2,000. However,
if Arsenal Beats Man Utd. Then He stands to lose the entire Ugx 1,000
What do you think would happen If Man Utd Drew against Arsenal?
Dynamic Vs Static Risk
Dynamic Risks are risks that arise as a result of changes in the economic environment. They could include,
Change in Prices of goods and services, Change in Consumer tastes and preferences, Changes in income
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levels and many others. The changes in technological improvements, for example, have improved efficiency
in many manufacturing industries but they have also resulted in a loss of Jobs. Dynamic risks affect a large
number of people and given their nature, are hard to predict.
Conversely, static risks do not arise from changes in the economic environment. Regardless of the economy,
such risks do not change and remain constant.
Particular Vs Fundamental Risks
A particular risk also referred to as specific Risk is unique to a specific individual or organization. In other
words, particular risks only affect a given individual or organization. For example, if your wallet is stolen,
the loss only affects you as an individual and not everyone else. If your house is broken into and items are
stolen, the loss of the stolen items affects you only as the owner of the house.
Fundamental risks, on the other hand, affect a large number of individuals or organizations and are non-
discriminatory in nature. The impact of fundamental risks cuts across a large proportion of a population.
For example, an earthquake could damage a sizeable number of buildings in Kampala and also lead to loss
of lives.
Fundamental risks could result from acts of nature, such as earthquakes and weather events or even acts
of man like terrorism.
For a risk to be insurable, it should possess the following characteristics;
a) Financial
b) Particular (Specific)
c) Static
d) Pure
PERILS AND HAZARDS
When discussing risks and perils, the two components risk that cannot be missed out are perils and Hazards.
What are Perils and Hazards?
A Peril Is simply that circumstance which causes the occurrence of the undesired event, loss or damage. For
example, a fire, an earthquake, a windstorm etc.
A hazard is, on the other hand, that which influences the occurrence of a peril. The greater the hazard, the
greater the likelihood of occurrence of the peril. Hazards can mainly be categorized in two. These are;
a) Physical Hazard: These relate to the physical characteristics that influence the occurrence of a loss,
damage. Examples could include, driving a car with worn out tyres. A building constructed next to the
road or highway.
b) Moral Hazard. These relate to the behavioural characters on the individual or organization that could
result in a loss. For example, carelessness, lack of due diligence. A driver, for example, knowing that his
vehicle is insured would not be concerned about the loss of theft and may end up not taking reasonable
measures to ensure that the vehicle is safe.
Other forms of hazards include; Morale Hazard- which relates mainly to the character of the individual or
organization and Legal Hazard which identifies itself with the likelihood of loss from legal suits.
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Activity:
Study your organization’s environment and the colleagues you work with and identify some of the
physical and moral hazards that could result in a loss by fire.
1.4 RISK MANAGEMENT

Risk, as we have seen in Section 1.3, is uncertainty surrounding the outcome of future events. We can also
say it is the chance of loss. In the core structure of risk is uncertainty. Without it, then there can be no risk.
Uncertainty also influences the possibility of loss. The greater the uncertainty, the greater the loss.
For every organization, the variety of risks that they face may impact their overall objectives. Through the
process of risk management, an organization can have an evaluated approach to monitoring the various
risks they are faced with.
This section looks at the description of risk management by established standards and the various process
involved in setting up an effective risk management process.
Definition:
Various risk management professionals have developed different definitions of risk management.
For purposes of this study guide is benchmarked on the ISO 31000 Standard.
Risk Management is the process of identifying, evaluating, responding and monitoring of the risk.
The Risk Management Process consists of 5 stages i.e. Risk Identification, Risk analysis and evaluation, Risk
Treatment, monitoring of the risk and finally reviewing of the risk management framework
• Identification of Risk
1
• Analysis and Evaluation of Risk

2
• Treatment of Risk and Reaction Planning

3
• Reporting and Monitoring Risk Perfomance

4
• Revewing the Risk Management Framework

5
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Figure 1: Risk Management Process
Risk Identification
Risk identification involves recognizing and or identifying the different risks that an organization could be
faced with. The risks can be categorized in a risk register.
Risk Analysis and Evaluation

Once the risk has been identified, the likelihood and consequence of each of the risk are determined. The
Risks can then be ranked depending on their magnitude.
Treatment of Risk
During this process involves identifying or developing strategies to mitigate the risk. It also involves
developing a contingency plan for the risk. Risk treatment measures could include risk transfer, risk
avoidance etc.
Risk Monitoring and Review

Using the risk register, each of the risks can be monitored
1.5 INSURANCE CONTRACT

Much as it is not an utmost solution to risk management, Insurance has and is still being used as an effective
risk management tool for both business and individuals. This section looks at what an insurance contract is,
its characteristics and the principles on which insurance is based.
An Insurance contract is an agreement that evidences the contractual obligations between two parties. I.e.
the insured (Policyholder) and the insurer. In exchange for a premium, the insurer agrees to compensate
the other party in the event that it sustains a loss or damage within a specified period of time.
DEFINITION
The Insurance Act 2017 defines an insurance contract as a contract under which one party known as the
insurer, in exchange for a premium, agrees with another party, known as the policyholder, to make a
payment or provide a benefit to the policyholder or another person on the occurrence of a specified
uncertain event which, if it occurs, will be adverse to the interest of the policyholder or to the interests of
the person who will receive the payment of benefit.
CHARACTERISTICS OF AN INSURANCE CONTRACT
Like any other business contract, Insurance contracts are governed by the rules of contract law. For it to be
enforceable particular elements need to exist and these are;
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Offer and
Acceptance
Elements of a
Legality Valid Insurance Consideration
Contract
Legal
capacity to
Contract
Offer and Acceptance

An offer represents an intention by one party (the offeror) to another party (offeree) to carry out something.
When this is followed by an unreserved acceptance by the second party (the offeree) would result in the
formation of a contract. If the offeree, proposes an amendment or a counter-offer then the initial offer is
rejected and ceases to exist. In this case, the offeree now becomes the counter offeror.
For example;
Sam, a sales agent for ABC insurance company makes an offer to John to insure his Home for fire insurance.
Much as John would like have his home covered against fire, He feels since the area the area he lives in is
susceptible to earthquakes and would, therefore, like to have an earthquake coverage as well. He then
makes a counteroffer to Sam to have his home covered for both fire and earthquake. Sam accepts John’s
counter offer and has his home covered for both fire and earthquake.
For an offer should have a timeline within which it can be accepted or declined. Insurance offers would
normally have a 30-day validity period. The offeror should also specify to the offeree the form of acceptance
which would normally be in writing.
Consideration
In a legally enforceable insurance contract, consideration should flow in both directions. That is to say from
the offeror to the offeree and Vis visa. Consideration simply means that which is gained or lost in return for
a promise. It does not have to be adequate. In the above example,
The Consideration passing from ABC insurance company to John is the promise to indemnify John in the
event that he suffers a loss. On the contrary, the consideration passing from John to ABC is the premium he
is willing to pay for the coverage.
Legal Capacity to Contract

For a contract to be considered valid, both parties should be allowed by law to have the legal capacity to
enter into one. An individual below the age of 18 and/or not of sound mind is not able to enter into a
contract. An Insurance contract, therefore, made by such a person is considered void and not enforceable.
Likewise, is a person is considered insane or intoxicated, then such persons do not have the capacity to
enter into contracts of insurance.
In the case of ABC insurance company, it should conform to the laws governing the creation of a company.
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Legality
A contract should not contravene the common law. A contract that does that is considered null and void.
For example, ABC Insurance Company and John cannot enter into a contract where ABC offers John
protection for getting a state fine for driving poorly on the road.
1.6 PRINCIPLES OF INSURANCE

Insurance as we know it today has been built on a foundation of pillars. These pillars serve as the basis on
which every insurance contract is structured and are known as the principles of insurance. This section
explores and introduces the reader to these principles which include;
a. Insurable Interest
The word interest carries a host of meanings. From English literature, however, Interest means to have
a right or legal share of something i.e. a financial involvement with something. This principle of
Insurable interest borrows this meaning of interest in its definition. According to this principle, for
insurable interest to exit, there should be a legal financial relationship between the insured and the
subject matter of insurance. This means that if subject matter happened to get damaged, the insured
would suffer financial loss.
For Example:
Andrew goes into a car Bond and purchases a brand new Car for his daily use. Since he purchased the
Car, he has a legal interest in it and secondly if the car gets damaged, Andrew would suffer a financial
loss. Why? Because the car cost him money to purchase. Andrew, therefore, has an insurable interest
in the car and can have it insured.
Question:
What if the Vehicle was stolen by Peter, would Peter have an Insurable Interest in the Car?
b. Utmost good faith

According to this principle, both parties to the insurance contract i.e. the insured and the insurer should
act with honesty to each other and disclose all facts material to risk regardless of whether the other
party asks for the information or not.
A Material Fact is that which will influence the judgment of a prudent underwriter in deciding whether
to take a risk, decline it or take it under certain conditions.
Example:
Jane wished to purchase a Comprehensive Motor Private Insurance for her vehicle from ABC insurance
company. Prior to this, Jane had insured her car with ACE insurance and had two claims that were fully
settled. ABC insurance company requests Jane to fill in a proposal form as a prerequisite. On the form,
however, one of the questions to request Jane to state if she had had any Claims before to which she
replied NO.
Because of this, Jane is charged a lower premium than she should have ordinarily been charged. By not
disclosing that she had prior claims on the same vehicle, the Judgment by ABC insurance company on
the pricing was is affected.
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On the other hand, ABC insurance company may also not disclose to the Jane that her policy attracts
an excess.
In as much as there is an obligation to provide information material to the risk, It Is not a requirement
that certain types of facts be disclosed i.e. facts already known by the insurer or those that are common
knowledge, for example, the fact that petrol fuel is combustible.
Breach of a contract comes in two ways;
i. Mis-Representation: Deliberately giving false information
ii. Non-disclosure: inability to give material information regarding the risk.
c. Proximate Cause
Losses that happen arise as a result of damage by an insured peril. But it is not uncommon that multiple
perils may be involved in a single loss incident. For example, an earthquake could strike Kampala and
as a result, a fire breaks out in a building causing damage.
This Principle states that the proximate cause is that initial peril that sets out a chain of events that
leading to subsequent damages. The significance of this principle lies in the fact that some if not all
losses are, may have multiples causes of loss of which some may not have been insured or may be
excluded from the policy. Hence to ascertain whether a loss is payable or not, the primary cause of loss
(peril) should be determined.
Question:
A 9 Block Residential Apartment Building is insured for Fire Insurance. A Fire breaks out on the eight
floor and as a result, a water pipe that transfers water into an outside storage tank ruptures and water
starts flowing into the Eight Floor damaging some of the contents. The water flows into 6th Floor and
damages Equipment the equipment in the living room. Determine what the proximate cause is for the
damages on the sixth floor.
d. Indemnity
All contracts of insurance except for life, personal accident and worker’s compensation are contracts of
indemnity. Indemnity is simply the measure of the insurer's obligation to the insured in the event of a
loss. The extent of the insurer's compensation under this principle should be either the real or actual
value of the property damaged or lost. This means that the purpose of the cover is not to better the
insured but rather to ensure that the settled back in the position he enjoyed prior to the loss. Indemnity
can either be in the form of cash, replacement or repair.
What Constitutes a Fair Indemnity? Two Landmark cases laid the foundation for the definition of
indemnity. In the case of Reynolds vs Phoenix Assurance Company (1978), A commercial building was
purchased by the claimant for £18,000 and insured for £ 628,000.00. The building was damaged by a
fire. The insurers declined to have the building reinstated. The Courts held that there were three
possibilities for indemnity
a. The market value of the property
b. An amount sufficient enough to replace the building with a building of modern construction
c. The Cost of reinstatement.
Leppard Vs Excess Insurance company (1979 the claimant bought a cottage in Cornwall for £ 1,500 in
1972. In 1974 he insured it for £ 10,000. He signed a declaration in the proposal form that “the sums to
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be insured represent not less than the full value (the full value is the amount which it would cost to
replace the property in its existing form should it be totally destroyed)”. Under the policy, which
incorporated the proposal, the insurers agreed to provide insurance and indemnity and “at [their]
option by payment reinstatement or repair indemnify the insured in respect of (A) loss or damage
caused by …. (1) fire.” In 1975 the claimant increased the insured value to £ 14,000 and cottage was
subsequently destroyed by fire. The insurers denied liability and the claimant brought an action for a
declaration that the insurers were liable either by payment calculated upon the basis of the full
reinstatement cost or actual reinstatement to indemnify him in respect of the loss caused by the
destruction of the cottage. It was agreed that the cost of reinstatement after taking into account
betterment would be £ 8,694
e. Subrogation
This principle allows the Insurer to exercise its rights of remedies from the proceeds of a claim against
third party persons. These rights are passed on to the insurer by the insured after they have been
indemnified fully for loss. Consider the example below.
Peter takes his car for repair in a Motor Garage. During the course of repair and from the negligence of
the Mechanic, the windscreen is damaged. Peter can make a claim against his insurer for the damage.
After he has been indemnified fully and in the process transferred his rights to the insurer, the insurer
will pursue then pursue its subrogation rights against the motor garage.
This principle serves to ensure that the insured does not benefit twice from the loss.
f. Contribution
Insurance is not a tool which one can use to gain an advantage and benefit more from an insurance
policy in the event of a claim. Under this principle, in the event that there is double insurance, the
insurers shall share the burden of the claim. This means that if the same subject matter of insurance is
covered under two or more separate policies and the aggregate sum insured exceeds the limit of
indemnity legally allowed, in the event that a claim arises, each of the insurers covering the property
will share in the claim up to a combined limit not exceeding the actual sum insured of the property.
Consider the example below.
Example
A wife and Husband each decide to the insurer the family car valued at Ugx 10,000,000 with two
different insurers without the knowledge of the other. A Claim arises and the car is totally damaged.
They will not receive 20,000,000 as compensation from the claim (10M from each insurer). Instead,
each insurer will share the loss and contribute 5M each.
The proportion of loss paid by each insurer is known as the rateable proportion. The sum of each
rateable proportion should be equivalent to 1.
For the principle of subrogation to apply, the respective policies must each;
a. Cover the peril that gives rise to the loss
b. Cover the same subject matter of insurance
c. The interest of the property covered should be the same.
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Question:
A Clearing and Forwarding Company takes out a Burglary to cover stock of coffee kept at its warehouse.
At the same time, the Merchant Company owning the coffee in the warehouse also takes out a burglary
policy covering the same stock.
In the event of a theft loss, will the principle of contribution apply? Explain
INSURANCE AS A RISK MANAGEMENT TOOL

Insurance is only a part of the risk management process. The financial impact of losses does affect
organizations in various ways such as loss of income, loss of income, loss of property, loss of employees
and personnel all of which have an adverse effect on the business production and organizational
processes.
The preference for insurance as a risk reduction tool is mainly due to the cost implications. It is cost-
effective to use insurance as a risk transfer mechanism for risks that are expensive to control/mitigate.
For a long time, insurance utilized using traditional methods i.e. property insurance, Motor Insurance,
Liability and accident insurance. However, with the emergence of new and complex risks, Alternative
Risk transfer mechanisms such as parametric instruments are increasingly being adopted.
Parametric Instruments employ the use of financial instruments or special purpose vehicles to transfer
risk via the capital markets to investors.
1.7 CHAPTER SUMMARY

Risk Uncertainty surrounding an outcome arising out of lack of knowledge regarding future events.
There are four different classifications or categories of risk i.e.;
 Financial and Non- Financial Risks
 Pure and Speculative Risks
 Specific and Fundamental Risks
 Dynamic and Static Risks
Risk management is the process of identifying, evaluating, responding and monitoring of the risk.
The Risk management process involved 5 stages. These are;
 Risk Identification,
 Risk analysis and Evaluation,
 Risk treatment
 Risk reporting and monitoring
 Review of the risk management framework
According to the Insurance ACT 2017, It is defined as contract under which one party known as the
insurer, in exchange for a premium, agrees with another party, known as the policyholder, to make a
payment or provide a benefit to the policyholder or another person on the occurrence of a specified
uncertain event which, if it occurs, will be adverse to the interest of the policyholder or to the interests
of the person who will receive the payment of benefit.
The four important characteristics of an insurance contract include;
a. Offer and acceptance

b. Consideration
c. Legal Capacity
d. Legality
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The principles of insurance for the foundation on which insurance is built. They include the following;
a. Insurable interest
b. Utmost good faith
c. Indemnity
d. Proximate Cause
e. Consideration
f. Subrogation
1.8 REVISION QUESTIONS

1. Identify the different categories of risk.
2. Identify and explain the four categories of risk.
3. Differentiate between a peril and a hazard giving examples of each.
4. Identify the stages involved in the risk management process
5. List and explain the six key principles of Insurance
1.9 CASE STUDY QUESTION

Foods Company is a cold storage warehouse, storing and delivering frozen foods for supermarkets.
Established in 1999, Foods Company employs 30 people.
The warehouse has a good sprinkler system with a regular maintenance programme in place
a. Goods inwards are stored on pallets and stacked in chiller units or freezer compartments
b. Temperatures in the cold storage range from -5 degrees Celsius in the chiller units to -30 degrees Celsius
in the freezer units
An accident book is kept on site. Normally there are only a few minor injuries recorded but the last month
has seen 2 employees go off ill and subsequently diagnosed with asthma. A potential cause is a dry
atmosphere when working in extremely cold temperatures increases the likelihood of employees showing
signs of asthma.
A bi-weekly meeting takes place on site between the site manager and the health and safety manager to
discuss risk management matters. The agenda for today’s meeting is risk assessment with a review of health
and safety hazards and the matters discussed are restricted to operational risks.
Source:https://www.theirm.org/media/1366705/Principles-of-Risk-Risk-Management_specimen-
examination-guide_v2.pdf
a) As an Insurance underwriter, identify some the risks that the warehouse could be faced with
b) Discuss how insurance could be used as an effective risk management tool
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2. PROPERTY INSURANCE
2.1 INTRODUCTION
Property from a literal point of view refers to anything that a person or business has a legitimate claim over.
A legitimate claim over a property gives the owner of such property rights to its usage.
There are two categories under which property falls; (1) Tangible Property such as buildings, furniture, cars,
money and (2) In Tangible Property such as knowledge or intellect.
Depending on who the owner of the property is i.e. individual or business, the tangible property can further
be subdivided into commercial property and noncommercial property. Given that property whether
commercial or noncommercial usually has a financial value attached to it, In the event of loss or damage to
such property, the owner could stand to lose out. To insure the owner against the risk of such loss or
damage is what property insurance is all about.
This chapter looks at what property insurance is and the different types of property insurance available. It
also highlights the major types of perils covered under property insurance and why risk surveys are a key
component of commercial property insurance.

By the end of this chapter, the learner should be able to;
 Differentiate between commercial and non-commercial property insurance

 Identify the types of Commercial and non-Commercial property insurance
 Identify and describe the major hazards and perils
 Understand the importance of risk surveys in property insurance
 Describe the components of a good survey report
2.3 NON-COMMERCIAL PROPERTY INSURANCE

Non Commercial property insurance involves insurance covers tailored to meet the needs of individual
property owners rather than business.
The types of non-commercial property insurance include;
a. Home/House owners Insurance

b. Private Motor Vehicle Insurance
HOME/HOUSE OWNERS INSURANCE
Homeowners also referred to as domestic package insurance is specifically designed for individuals who
own homes are or are living in a rented house. The standard homeowner’s policy has several sections
which include;
(i) Building
(ii) Building Contents
(iii) All Risks
(iv) Workers Compensation
(v) Owners/Occupiers Liability
Each of the sections can be purchased separately however either or both of the first two sections (Building
and Contents) are mandatory sections. One can have a home owner’s policy that covers;
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a. Building and any other section
b. Building Contents and any other section
c. Building, Contents and any other section
d. Building and Building Contents
PRIVATE MOTOR VEHICLE INSURANCE
This policy covers individuals who own vehicles for their private use i.e. social, domestic and pleasure
purposes. Private Motor Insurance can be subdivided into three categories;
a. Statutory Third Party Insurance: - Mandatory Cover required by law for any vehicle that is driven on a
public road. Indemnity to the insured covers legal liability that the insured would be liable for arising
from death or bodily injury to a third party. The limits of cover are stipulated under the law.
b. Third Party, Fire and Theft: - This cover not only indemnifies the insured for legal liability arising from
death or bodily injury to a third party but also loss or damage to the insured vehicle from fire and/or
theft.
c. Comprehensive Insurance: - An All Risks cover that indemnifies the insured for loss or damage to the
vehicle from all risks except excluded by the policy. Covers own damage to the vehicle including fire
and theft, third party liability- both bodily injury and property damage. Additional extensions to the
policy include cover for towing charges, protection and wreckage removal etc
Non-Commercial Property Insurance is discussed in further detail in subsequent chapters.
2.4 COMMERCIAL PROPERTY INSURANCE

Commercial Property Insurance includes products that are tailored to meet the needs of business and
include the following;
a. Fire and allied perils Insurance.

b. Asset all Risks and Industrial All Risks
c. Business Interruption.
d. Engineering Covers such as Contractors All Risks, Erection All Risks, Machinery Breakdown, Machinery
Breakdown Loss of Profit, Boiler and Pressure Vessel, Deterioration of Stock, Contractors Plant and
Machinery.
e. Stand Alone Terrorism and Sabotage.
Fire and Allied Perils Insurance:- This form of insurance primarily covers the insured against loss or
damage to property insured as a result of a fire and the allied perils. The Allied perils include; Malicious
damage, earthquake, lightning, flooding, impact damage by own vehicles, aircraft etc. Fire insurance is
covered in greater detail in chapter 3.
Asset All Risks and Industrial All Risks:- This a comprehensive form of coverage that is specifically tailored
to meet the needs of businesses. Under both the Assets All Risks Cover and the Industrial All Risks cover,
all risks are covered under the policy unless they have been excluded. The covers are divided into two
sections. The Assets All Risks will often encompass more than two sections i.e. Material Damage, Business
Interruption, Machinery Breakdown etc. with Machinery Breakdown being the primary sections of the
cover.
On the other hand, the Industrial All Risks Cover covers just two sections i.e. Material Damage and
Business Interruption.
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Engineering Covers:- Similar to the Assets and Industrial All Risks Covers, the engineering covers are also
described as All Risks Covers. All Risks are covered except excluded. The different types of engineering
covers include;
- Contractors Plant and Machinery which covers loss or damage to machinery while on site
- Machinery Breakdown- which covers loss or damage to machinery from breakdown
- Contractors All Risks and Erection All Risks
- Deterioration of Stock
- Boiler and Pressure Vessels
- Machinery loss of Profit- which provides coverage for loss of income following damage to
machinery.
Stand Alone Terrorism Cover: - Covers loss or damage to property insured from the property from perils
such as riots, strikes and civil commotion, war, mutiny, sabotage etc. Terrorism insurance is covered in
greater detail under chapter nine. It is worth noting that under non-commercial property, coverage can be
extended to cover terrorism as well albeit at an additional cost.
2.5 MAJOR HAZARDS AND PERILS

From Chapter 1, we saw that a peril is that which causes the occurrence of a loss whereas a hazard is that
which influences the occurrence of a loss.
In Property insurance, the perils and hazards that are attributable to losses are quite many. Our Focus under
this section will be the main perils and hazards.
Major Perils
1) Fire
Fire is one of the commonest perils around. It is the heat and light that emanates from the combustion
(burning) of substances. Fire can either be controlled or uncontrolled. When controlled, fire is useful
for example for cooking or eating. In an uncontrolled state, it becomes a source of destruction.
Insurance mainly focuses on the loss or destruction of uncontrolled fires.
2) Explosion
An explosion is a violent burst in an object caused by a build of pressure within it as a result of heat.
When the liquids and/ or solids in an object are heated, they expand and change into gas producing
heat. The heat increases their pressures as these gases look for an escape route. The Buildup in pressure
results into an explosion. Explosion can be caused by a fire or a fire can result in an explosion.
For insurance purposes, explosions resulting from the bursting of water pipes and flue gas explosions
are usually not insured.
3) Lightning
Fire from the sky as it is usually referred to, lighting is a direct electric current that flows either between
two clouds of opposite charges or between the clouds and the earth. The impact of the lightning strike
on an object could result in damage to the building or a fire that could end up burning the building.
Lightning strikes could also result in power surges when they damage to power lines.
4) Windstorms
A storm is a disturbance in the atmospheric conditions of an environment. Windstorms are ideally
storms encompassed with violent winds moving at speeds in excess of 55km per hour. The winds can
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be either in short bursts or longer periods. The damages to buildings and other property can be
significant.
How different are windstorms from hail storms? Can hail storms also be considered as a major
insurance peril?
5) Earthquakes
An Earthquake is a sudden movement/shaking of the earth’s surface caused by movement of the earth’s
rocks. They usually do occur along geological faults. When these rock masses move against each other,
they generate energy which when released produces what is known as a seismic wave.
More often, earthquakes occur at the bottom of the sea with little or no potential damage to property.
However, for the earthquake that occurs closer to cites, the potential for damage to property and loss
of lives is significant.
The size of an earthquake is measured using a Richter magnitude scale.
The most recent earthquake in Uganda struck southwestern Uganda in July 2017. It had a magnitude
of 5.3 and depth of 10km.
The most destructive earthquake recorded in Uganda occurred on the 20 th of March 1966 in Tororo
leaving 157 people dead. The Magnitude of the earthquake was 6.8 on the Richter scale
Source:https://observer.ug/news/headlines/54118-earthquake-strikes-western-uganda.html
6) Floods
A flood is an overflow of water onto land that is usually dry. Floods usually caused by heavy rains,
storms. The impacts of floods include damage to property, destruction plants and crops, loss of human
life among others.
One place in Uganda that is predominantly known for flooding during the heavy rains is Bwaise a
Kampala Suburb.
River Manafura in eastern Uganda caused flooding in the parts of Butaleja District in March of 2018
after it broke it’s banks as a result of heavy rainfall
What do you think are some of the causes of floods?
The list of major perils is not exhaustive. Other Perils covered under property insurance include; theft, riot
and strikes, spontaneous combustion, Aircraft and Vehicle Impact among others
Major Hazards
Hazards, as we have seen from chapter 1, are those characteristics/factors that influence the occurrence of
a loss. They fall under two main categories i.e. physical hazards and moral hazards.
The physical hazards reflect those aspects of a risk which are tangible. These can be those of aspects of the
risk which intimate the loss occurrence and those that spread the loss.
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Some of these physical hazards include;
 The lack of fire extinguishers and smoke alarms/detectors and water sprinklers in a premise
 Storage of hazardous materials/substances within a premises
 The occupation/trade of a business i.e. vehicle dealership compared to matchbox manufacturing.
 Constructing a building/premises with makuti/grass thatched roof instead of corrugated iron
sheets
 The type of stock dealt in by the insured. i.e cardboard boxes would increase the likelihood of fire
spreading easily because of its combustible nature compared to the stock of motorcycle spare parts
 Location of the business premises i.e. is it in a congested area or less congested area.
 The size of the premises.
 The age of the building
 The nature and type of construction material used.
The moral hazards as explained earlier are the intangible aspects of a risk. The primary focus for
underwriting risks is the human element of the insured i.e. attitude, carelessness etc.
Some of the moral hazards include the following.
 The attitude of the insured toward his/her peers

 Management outlook
 Carelessness
 The integrity of the employees insured
 Housekeeping
 Poor maintenance of machinery
Describe how the attitude of the employees in your organisation can influence the judgment of a prudent
underwriter whilst deciding whether to insure your items or not.
2.6 RISK SURVEYS

Risk management as we have seen in chapter 1 is an integral part of the safeguarding the interest of both
the insured and the insurer. The risk management chain comprises 4 key steps which include identifying
potential risks, assessing, analyzing and controlling the risk.
In Insurance, risk assessment plays a very vital role since it gives the insurance company grounds on whether
to accept or decline a risk. For property classes such as fire and allied perils, Burglary, Industrial All Risks
and/or Asset All Risks, Construction All Risks and Erection All Risks, the risk survey process has an integral
role to play in guiding a prudent underwriter on risk assessment and analysis I.e. identification of any
potential hazards and exposures. Not only for just insurance purposes, but the survey report is also key to
the underwriter for reinsurance purposes.
When quoting for any risk such as a building, depending on the location, occupation and sum insured, an
insurance company will conduct a survey of the premises/risk. Through the risk survey, the underwriter is
able to identify different hazards, both physical and moral, that are prevalent in the risk and have a better
understanding of the exposure that he is dealing with. Not only does it aid identifying the hazards, but also
in confirming that the material facts presented in the proposal form are accurate. Through a risk survey,
the underwriter would be able to determine the following;
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(i) The physical and moral hazards that are prevalent in the risk
(ii) The possible financial risk from insuring a given property
(iii) Determine risk acceptability and any underwriting measures.
(iv) Ascertain the gaps and recommend risk improvement measures
The benefits of carrying out a survey accrue to both the insurer and the policyholder.
Benefits of a survey to the Insurer
a. It helps in identifying gaps that need to be improved so as to reduce the possibility of large losses
b. Ensuring that the adequate and correct premium is charged for the risk
c. Provides highlights on housekeeping
d. Provides an accurate description of the risk i.e. buildings, stock, furniture etc.
e. It aids the insurer in determining his risk acceptance appetite and retention
f. It identifies areas of high exposure
g. Provides highlights on housekeeping aspects for the insured.
Benefits of a survey to the Policyholder
a. Identifying hazards that could affect the business

b. Provide an opportunity for reduction in premium in exchange for risk improvement
Risk surveys are carried out by qualified independent professionals, to have confidence that the information
to be provided by the risk surveyor is adequate and not biased, the underwriter would need to know that
the surveyor meets some of these requirements.
a. Is suitably qualified
b. Has sufficient knowledge about risk management
c. Has adequate professional indemnity insurance coverage
d. Is well known within the insurance market and amongst other underwriters
e. Has sufficient experience to make recommendations that are in line with recognized international risk
management best practices standards.
CONDUCTING A RISK SURVEY EXERCISE
A risk survey exercise is one that can’t be done in a rush. The surveyor will require a considerable amount
of time in conducting the exercise so as to come out with a proper report. The exercise involves a four-
stage process.
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Stage 1: Onsite Assesment
Stage 2: Compiling the risk Survey Report
Stage 3: Communicating the findings to the principle
Stage 3: Follow up on the recomendations made
1. Stage 1:- Onsite Assessment

This involves collating information on the site, recording assessments, taking photographs, going
through various documents such as stock records, accident logs, security and health & safety reports,
maintenance records for machines.
Risk Survey Checklist

During the on-site assessment, the checklist below is recommended to smoothen the process.
 Location of the risk

 Building construction and occupation. To determine exposure to fire, lightning, explosion and other
perils
 Security measures in place
 Human resource deployment and conditions of work
 Inherent danger- posed by occupation, activities, and neighbourhood
 Housekeeping
 Maintenance regime
 Critical equipment
 Record keeping
 Cash handling and procedures
 Movement of stocks and inventory
 Past incidents
2. Stage 2:- Compiling the risk survey report

After the onsite assessment, using the information collated, the survey report is prepared. The report
usually includes the findings of the survey on the potential hazards and exposures for the surveyed risk
and recommendations on how the hazards can be mitigated.
Qualities of a good risk Survey Report

The risk survey report varies depending on the nature and type of risk being surveyed, however, the
key components of a good risk survey report include;
 A review of the adequacy and capability of a fire suppression systems
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 A Review on the adequacy of the electrical safety systems in place
 A Review on business interruption
 Classification of any inherent risk exposure
 If a risk involves machinery breakdown, the survey will include recommendations for managing
potential loss exposures
 An overview of the business interruption
 Risk rating summary of the overall risk i.e. poor, average, above average or good
 An overview of the loss estimates for the risk. I.e. Probable Maximum Loss (PML) or Maximum
Probable Loss (MPL).
Components of a Risk Survey Report
A good survey report in addition to the qualities mentioned above should include the following
components I.e.
 Details of the Insured

 Location/s
 Occupation
 Description of the premises
 Description of processes
 Plant and Equipment
 Security
 Fire protection
 Details on staff
 Compliance with statutory requirements
 Loss Estimates
 Housekeeping
 Analysis of Insurances in place/Underwriting remarks
 Summary of findings
3. Stage 3:- Communicating the findings to the principle (insurer)

The risk surveyor briefs the insurer on the findings from the survey exercise and also advises on any
proposed risk improvement measures.
4. Stage 4:- Follow up

The Risk surveyor follows up with the insurer to ascertain whether the recommendations have been
put in place.
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2.7 CHAPTER SUMMARY
Property can be divided into two categories i.e tangible property and intangible property.
The insurance for tangible property falls under two main categories of property insurance. These are;
 Non-Commercial property insurance
 Commercial property insurance
Commercial property insurance is tailored to meet the needs of individual property owners and includes;
(a) Homes Insurance and (b) Private Motor Vehicle Insurance
Non Commercial property insurance on the other hand is specifically tailored towards the needs of
business property owners and includes; (a) Fire and Allied Perils (b) Business interruption/consequential
loss (c) Assets All Risks, (d) Engineering Covers- such as machinery breakdown, contractors all risks,
erection all risks, contractors plant and machinery etc. and standalone terrorism insurance covers.
Risk management plays an integral role in safeguarding the interests of both the insured and the insurer
by identifying the gaps in both the insurable risks and the operational risks of a given business.
The main components of any insurance business are perils and hazards. The Perils are that which actually
cause a loss while hazard is that which influences the occurrence of a loss. Some of the perils include; Fire,
Lightning, Floods, Earthquake among others. The Hazards, on the other hand, are subdivided into the
physical hazards and moral hazards. The physical hazards are tangible while the moral hazards are
intangible aspects of a risk.
A risk survey would usually be carried out by a suitably qualified professional. To ensure this, some of the
requirements for professional surveyor are;
a. Is suitably qualified
b. Has sufficient knowledge about risk management
c. Has adequate professional indemnity insurance coverage
d. Is well known within the insurance market and amongst other underwriters
e. Has sufficient experience to make recommendations that are in line with recognized international risk
management best practices standards.
A survey report is prepared at the end of the survey and would comprise of the following items.
 A review of the adequacy and capability of a fire suppression systems

 A Review on the adequacy of the electrical safety systems in place
 A Review on business interruption
 Classification of any inherent risk exposure
 If a risk involves machinery breakdown, the survey will include recommendations for
managing potential loss exposures
 An overview of the business interruption
 Risk rating summary of the overall risk i.e poor, average, above average or good
 An overview of the loss estimates for the risk. i.e Probable Maximum Loss (PML) or
Maximum Probable Loss (MPL)
A risk survey report is important because of the following
a. Provides an adequate description of the risk i.e buildings, stock, furniture etc
b. It aids the insurer in determining his risk acceptance appetite and retention
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c. Provides the insured and the insurer with risk improvement recommendations
d. It identifies areas of high exposure
e. Provides highlights on housekeeping aspects for the insured.

1. Differentiate between commercial property insurance and non- commercial property insurance
2. Identify and describe 4 main types of commercial property insurance
3. Identify and describe two major perils covered by the property insurance
4. Identify four key requirements of a good risk surveyor
5. List seven components of a goods risk survey report
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3. FIRE INSURANCE
3.1 INTRODUCTION
From the time of its discovery over a million years ago, Fire has played a central role in the development
and progress of Human Kind. But with its benefits, also came its detriments. The destruction of property
and lives all resulting from the uncontrolled spread of fire prompted the engineering of ways to mitigate its
after-effects on the individuals and business that suffered.
On such way was through the development of Fire Insurance. The Great London Fire of September 1666
marked the genesis of the Fire Insurance we know today. This Chapter covers what Fire Insurance is all
about, classification of fire, the scope of coverage for a fire policy, premium determination and risk surveys.
It also explores the different the clauses, conditions and exclusions that used in the generic fire Insurance
Policy.

By the end of this Chapter, the reader should be able to;
 Outline the general Causes of fire

 Explain the fire Tetrahedron
 Describe the scope of coverage for a fire policy
 Identify the different risks insured under a fire insurance policy
 Identify the underwriting factors for fire and allied perils insurance
 Identify and explain the general conditions used under a fire insurance policy
 Identify and explain the applicable clauses and the main exclusions in a fire insurance policy.
3.3 CAUSES OF FIRE

(wikipedia, n.d.) Describes a Fire as the Rapid Oxidation of a material in the exothermic chemical process of
combustion, releasing heat, light and various reaction products.
For a fire to occur, a combustible material such as dry wood is exposed heat in the presence of a sufficient
amount of an oxidizing agent such as oxygen. The heat should be sufficient enough to produce a chain
reaction that can sustain the heat and hence combustion. The combination of all these ingredients is
illustrated in what is known as a Fire Tetrahedron as shown below Source: (Spruce, 2016)
Figure 2: Fire Tetrahedron
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Example;
Let us consider cooking food using a gas cylinder. We already know that for a fire to exist, there
Should be three inherent elements i.e The Fuel, the Heat and Oxidizing agent (Oxygen). The flammable gas
in the cylinder is the fuel, the oxidizing agent is the oxygen within the kitchen and the heat is introduced
using a matchstick. When the gas nob is turned and the matchstick struck, the Heat introduced by the
matchstick ignites the fuel which is kept burning by the oxygen within the room.
The Chain Reaction from all the three elements produces the visible portion of the fire called the flame
which consists primarily of water vapour and carbon dioxide.
A fire wouldn’t just start by itself out of the blue, there should be items that bring about the combustions.
These items are the causes of accidental fires to property and include the following.
a) Arson: where individuals deliberately set a property on fire with to destroy it with the intention of
benefiting from the insurance policy.
b) Lightning
c) Faulty Electrical Wiring and Equipment. Broken wire and cause sparks which could potentially result in
fires.
d) Power Surges: Caused by the unstable electrical power supply
e) Flammable liquids such as
f) Smoking
g) Human error: for example, using electrical equipment improperly
3.4 CLASSIFICATION OF FIRE

Fires are all not the same. Depending on the type of fuel, fires can be classified into five categories as
illustrated in the table below;
Class of Fire Type of Fuel

Class A Ordinary Combustibles Such as Paper, Cloth and Wood
Class B Flammable liquids and gases such as Petroleum, Propane gas,
Butane gas
Class C Electrical Equipment such as Motors and Transformers
Class D Combustible Metals such as Sodium, Aluminum and
Magnesium
Class K Cooking oils and greases
Table 1: Classification of Fire
3.5 THE STANDARD FIRE POLICY

SCOPE OF COVER
Ordinarily, the basic fire policy covers only sudden or unforeseen physical loss/ damage to insured property
as a result of a fire. However, globally, the policy has been widened to also provide coverage for sudden
physical loss or damage to Insured property resulting from or occasioned by;
1) Explosions but excluding damage from;

a. Its Own Spontaneous Combustion or fermentation (This means that the items undergoing the self-
heating would not be covered, however, the resulting damage from the fire caused is covered)
b. Earthquake or other convulsions resulting from nature.
2) Lightning
3) Explosions from boilers or gas used for domestic use
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4) Riots and Strikes
5) Earthquake and Volcanic Eruptions
6) Aircraft damage or other aerial or space devices and articles dropped therefrom.
7) Malicious Damage
8) Busting or overflowing of water tanks and pipes
9) Automatic Sprinkler leakage
10) Impact Damage by any road vehicle/animal
Damage to the building by road vehicles or cattle of that do not belong to the insured or his agent is a
common occurrence, especially of the building, is located close to a road.
11) Bush Fires
Damages to the insured property as a result of smoke, falling walls, Scotching walls, including damage
resulting from smoke, is covered as well.
For damage by fire to the insured property to be admissible, there should be;
a. Actual Ignition
b. The damage to the property should be fortuitous or accidental. A Fire that is created or lit by a
deliberate act such as arson by the insured is not insurable because for the purpose of the insurance
contract because it is not accidental.
The Schedule of items covered in the policy would ideally include items such as;
a. Buildings and contents of the buildings including furniture, landlord’s fixtures and fittings, adjoining
buildings, boundary walls, gates, fences
b. Plant and Machinery
c. Stock such as Raw Materials, finished goods, works in progress, goods held in trust or commission for
which the insured is responsible.
The Listing can be modified by the underwriter to cover specific property depending on the requirements
of the insured.
For each of the items specified in the schedule of the policy, the extent of liability of the insurer is limited
to the value of that item i.e. the sum insured.
3.6 BASIS OF COVER/SETTLEMENT

The Basis of cover refers to the ways in which the insured will be compensated/indemnified in the event of
a claim. Sometimes also referred to as the basis of claims settlement, there are basically three bases of
cover for fire policies’ and these are;
Indemnity
Indemnity settlement refers to putting the insured back in the same financial position he was in immediately
before the loss. Under this, the insured is compensated for the value of the damaged property after
accounting for depreciation. Much as the sum insured is the value of the property, the extent of liability of
the insurance company would not exceed the value at the time of damage.
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For example, A Machine is insured on the 01/01/2017 for Ugx 27,000,000. The Machine is damaged
by fire on the 05/04/2017. Since the machine has been operational for the four months prior to the
loss, its value wouldn’t be the same as it was at the time the insurance policy was taken. Under this
basis of cover, the insured is compensated for the value of the property at the time of loss, the
Insurance Company would take into consideration the depreciation of the machine for the four
months. Assuming depreciation was 5%, the compensation value would be Ugx 25,650,000 less any
applicable policy excess.
Reinstatement Basis
With this Basis of cover, the Insured receives compensation on the basis of “new for old” without deduction
of depreciation. If a machine is destroyed, then it will be repaired or replaced with a new machine of the
same type and grade but not greater.
Reinstatement basis is used for Buildings and Machinery but is not applicable to stock. It is applicable to
buildings because in establishing the sums insured for the buildings, the value considered takes into
consideration the cost of repair or reinstatement. This settlement basis is governed by a clause known as
the reinstatement condition clause- see section 3.10
Key term:
Betterment- the degree by which a new machine is better than the old machine of the same design and
specs. Or a new building is better than the one it replaced in terms of layout or heat management
Due to rapid growth in technological development, Items that are manufactured could easily become
obsolete within a year. For examples phones. For such items, the preferred basis of cover is “Replacement
Basis”
Question
Why isn’t stock covered under on Reinstatement Basis and what would be the ideal basis of cover for
stock?
First Loss
The first loss is the maximum amount of loss that the insured would expect from damage to property
insured. The Sum insured is limited to a value less than the total value of the property. The First loss basis
of cover is rarely used but can be used in instances where there is no possibility of reinstatement.
3.7 UNDERWRITING FACTORS

In deciding whether a risk such as a building or stock should be insured for fire, an Underwriter would need
to assess the suitability of such risk for coverage. The measures used as a guide are known as the
underwriting/rating factors and these include;
a. The Nature of Construction of the Building. The type of construction material used for the walls of a
building or even its roof aid determining the extent to which a fire would spread. A building with a
makuti roof would easily catch fire and spread very fast. The type of cladding used on some buildings
also falls plays a key role.
b. The age of a building. Constructions practices improve over time as new and better methods of
construction are being discovered and better construction practices implemented by municipal
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councils. The age of the building would, therefore, an underwriter an idea of the type of level and
standard of construction.
c. The Accessibility of the Premises to Firefighting Services such as the Fire Brigade. A Building closer to
fire Brigade would give an underwriter confidence that in the event of a fire breakout, damage could
be minimized since reaction/response time would be shorter.
d. Moral Hazard. An Insured with a troublesome financial standing could easily commit arson so as to
recover from the Insurance Company. An underwriter would need to assess the likelihood of this
happening. The attitude of employers is also important. Are fire safety signs within buildings such as
“No Smoking” disregarded?
e. Fire Extinguishing appliances such as automatic sprinklers, water hoses, fire extinguishers etc.
f. The Estimated Maximum loss of the property to be insured also plays a vital role. (see section 3.9 for
further details on EML)
3.8 RATING OF A FIRE RISK

A rate is the amount charged for a given risk and is expressed as a percentage of the sum insured.
The rate that would be charged for a building is more often than not the same rate that would apply for the
building contents, stock, furniture and fittings. The rates usually vary from one risk type to another. The
Classification of a risk is dependent upon the nature of business of the occupier of the building or premises
It consists of a basis (Technical Rate) rate and rates for the special perils. Discount can be allowed for risk
protection measures such as having water hydrants, fire extinguishers, and the like.
The technical rate is expressed as a ratio of the losses to the premiums. Once obtained, it is then loaded
to cater for the insurer's other costs i.e.
 Management costs
 Reinsurance expenses
 Business acquisition costs
 Returns on property
The rating for a fire risk is guided by the minimum rating guidelines provided by the Insurance regulatory
authority (See Appendix I).
The rates provided are the minimum rates applicable for the best risk of the given category for a specific
industry. If in view of the underwriter's Judgment, a particular risk is sub-standard or riskier, then a higher
rate can be charged.
It is expressed as a percentage of the sum insured of the item and it applies to the buildings stock and
machinery to determine the premium payable.
Example:
A Cotton factory consists of a building valued at Ugx 2,000,000,000, Plant and Machinery Valued at Ugx
300,000,000 and Office Fixtures and Equipment Valued at Ugx 50,000,000
The rate applicable is a 0.3%
The Premium payable will be calculated as;
Buildings= 2,000,000,000 *0.3% = 6,000,000
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Plant and Machinery= 300,000,000 *0.3% = 900,000
Office Fixtures and equipment= 50,000,000*0.3%= 150,000.00
Total Premium= 7,050,000.00
3.9 MAXIMUM FORSEEABLE LOSS/ESTIMATED MAXIMUM LOSS/PROBABLE MAXIMUM LOSS AND

REINSURANCE.
It is a common practice to underwrite fire insurance policies on Estimated Maximum Loss, Probable
Maximum Loss Basis and or Maximum foreseeable loss. Depending on the fire protection mechanisms in
place for a given risk, underwriters with the help of qualified surveyor (see chapter 2) can estimate the
applicable EML (NLE)/PML or MFL.
It is an implied requirement/condition in insurance that the insured acts as though he was not insured. In
so doing, the insured is able to undertake reasonable practices to ensure that the property is safe. One of
such practices is the installation of fire protection equipment. These measures together with other factors
greatly influence an underwriter’s judgment in estimating the PML/EML or MFL.
The risk mitigation measures that are put in place including other factors such as demographic and
geographic profiles are useful in determining the loss estimates for a particular risk. With the loss estimates,
a prudent underwriter is able to determine his /her acceptance level for a given risk in light of the available
reinsurance arrangements and possibly the rate chargeable for cover to be granted for the property.
The risk mitigation measures mainly relate to fire protection equipment which can be broken down into
two types.
a) Active fire protection practices. Active fire protection involves an actual response to the fire.
Firefighting equipment that is used includes; fire hose reels, fire extinguisher, sprinkler systems,
smoke alarms, thermal detectors etc.
b) Passive fire protection practices. These don’t involve an actual response to a fire but rather fire
resistance measures. Passive firefighting items include; fire doors, fire breaks, flame shields,
dampers etc.
There are basically three measures of ascertaining Loss estimates. i.e.
1. Maximum Foreseeable Loss (MFL)
The full value of loss where no active or passive deterrents are in place. Represents total loss.
2. Probable Maximum Loss (PML)

It is the maximum percentage of risk that could be subject to a loss at any given point. It takes into
account passive safeguards such as the type of construction, materials used and position of walls.
PML assumes that part of the structure and contents could be salvaged due to the passive
measures. Under this loss estimated, it is assumed that the active fire protection systems are not
active. If a Fire breaks out at Rwenzori courts, what would be the maximum loss taking into
consideration that the fire alarms systems are not operational, or the fire brigade service fails to
arrive in time to put out the fire and the only measure of managing the loss is the nature of
construction of the building or the separation between the different blocks of the building
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3. Normal Loss Expectancy/ Estimated maximum Loss (EML)
This represents the highest claim a company would likely file for on best case loss scenario. It is
assumed that all protection systems worked correctly. This loss estimate does not take into
consideration for catastrophe losses. Consider a building like Bank of Uganda. The normal loss
expectancy would be the loss from a fire which was extinguished using the available risk
protection systems.
Note:
The Maximum Foreseeable Loss > Probable Maximum Loss > Estimated Maximum Loss
The concept behind the Loss Estimates is that, taking into consideration the various risk management
measures in place such as the nature of construction of a building, fire extinguishers and the like, in the
event that a loss event occurs, the extent of damage would not exceed the sum insured (value) of the
property.
Example:
An office complex has a sum insured of Ushs 1,000,000,000. The Underwriter inspects the complex and
determines that the building is separated into 3 different blocks A, B and C with sums insured of
500,000,000, 200,000,000 and 300,000,000 respectively. The underwriter also determines that buildings
are at a reasonable distance from each other and that in the event that a fire broke out, the total value of
loss wouldn’t exceed the value of Block A- 500,000,000.
With this knowledge, the underwriter considers his EML at any one time is 50% and not 100%. In
determining his appetite for the risk, the underwriter
For small buildings, the EML is usually equivalent to the sum insured of that building. For large risks,
however, the EML could be estimated at 40%- 50% of the total sum insured.
Of all the three loss estimates, the most frequently used loss estimate is the Probable Maximum Loss.
Factors considered in Assessing PML
Some of the key factors considered in assessing PML include
a. The nature of the construction of the building.

b. Occupation of the building. I.e. Commercial Building, Officer or Residential, multiple
tenancy etc.
c. Combustibility of the contents and packaging within the building.
d. Management of the risk and housekeeping
e. The complexity of the risks.
f. Fire protection and minimization appliances in the building such as automatic sprinklers,
fire extinguishers, water hoses, smoke detectors.
g. The proximity of the risk to fire brigade facilities.
h. The target risks:- building and any nearby building or property likely to be affected by a
fire or any other contingency
i. Any other contingencies to be insured such as explosions, subsidence, flood etc.
PML Calculation and Reinsurance Application
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There is no precise calculation formula for the determination of any of the loss estimates described above.
A loss estimate from one surveyor could easily differ from the loss estimate from another surveyor for the
same risk. However, these loss estimations have a commonplace in the heart of insurance particularly in
aiding underwriters to estimate their retentions and reinsurance determination.
In Calculating the Loss Estimate (Usually expressed as a percentage). The Formula used is as below
𝑉𝑎𝑙𝑢𝑒 𝑎𝑡 𝑅𝑖𝑠𝑘
Loss Estimate = ∗ 100%
𝑇𝑜𝑡𝑎𝑙 𝑆𝑢𝑚 𝐼𝑛𝑠𝑢𝑟𝑒𝑑 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑟𝑖𝑠𝑘
The PML estimations when used as described in the example above are useful to the underwriter in
determining for reinsurance purposes whether he has the capacity for a given risk.
ABC insurance company has a retention of Ushs 1,000,000 with 4- Line Surplus treaty with a total
underwriting capacity of 5,000,000. Among the different risks, it is insuring is factory located in Katwe with
a breakdown of values as given below
Description Sum Insured (Ushs)

Buildings 5,000,000
Office Equipment, Furniture’s and Fixtures 200,000
Plant and Machinery 3,000,000
The stock of Finished goods, work in progress 1,200,000
and Raw materials
Total Sum Insured 9,400,000
ABC insurance hires a risk management professional to Inspect and Survey Risk who makes the following
recommendations for PML.
Buildings 80%, Office Equipment, Furniture and Fixtures- 100%, Plant and Machinery- 60%, Stock of Finished
goods- 100%.
What would ABC’s overall exposure on the risk be?
Using the PML considerations for the various risks, the overall PML for the building is determined as follow;
Description Sum Insured (Ushs) PML % PML Value

Buildings 5,000,000 80% 4,000,000
Office Equipment, Furniture’s and 200,000 100% 200,000
Fixtures
Plant and Machinery 3,000,000 60% 1,800,000
Stock of Finished goods, work in 1,200,000 100% 1,200,000
progress and Raw materials
Total Sum Insured 9,400,000 7,200,000
In the View of ABC insurance company, therefore, in the worst case scenario, the maximum loss it can
envisage paying out is 7,200,000 (76.6%). It will, therefore, consider this as its sum insured instead of
9,400,000 and cede that to its treaty below.
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Retention: 1,000,000
Surplus: 4,000,000
Facultative: 2,200,000
The full premiums for the risk would be allocated in the same proportions as the sessions based on PML.
However, it is important for the underwriter to not that in the event that a total loss occurs, ABC is expected
to pay the primary insured the full lose value of 9,400,000 and not the EML estimate of 7,200,000.
The danger with using EML is that there is no scientific measure for it. It’s all left to the perceptions of the
surveyor and underwriter. The Underwriter always has himself exposed for the portion of risk that is not
reinsured. In this case the 2,200,000 (9,400,000- 7,200,000). Wrongly estimated PML would result into
what is referred to as PML error.
PML Error arises when the Actual loss is greater than the PML Estimate
In upside to it, however, is that the with the assumed reduction in sum insured at full original premiums,
the Underwriter gets to retain more premiums that it would if it ceded the risk to its treaty on using the
total sum insured.
3.10 POLICY TERMS AND CONDITIONS

The wording of the fire policy specifies what is covered, how it is covered and what is not covered. These
are detailed under the general conditions, clauses and exclusions in the policy. This section explores some
of the clauses commonly used.
GENERAL CONDITIONS IN A STANDARD FIRE POLICY
A condition in a policy requires the insured to perform a given action failure of which would mean that the
insured has breached the insurance contract. However, Breach of a condition wouldn’t prejudice the
insured’s right to a claim recovery. Some of the conditions used in fire policies include;
a. Average Condition
This condition ensures that the insurer is not biased by underinsurance. In a situation where there is
underinsurance, the insured bears a pro rata portion of each and every loss.
Average Clause
“If at the inception date of each period of Insurance the Declared value of the property covered
by such item be less than the cost of repair, replacement or reinstatement, then the Insurer's
liability shall be limited to that proportion thereof which the declared value bears to such costs
of replacement or reinstatement. Each item, if more than one, to which this clause applies shall
be separately subject to this condition.”
In calculating the amount of claim payable under the average condition, the following formula is used.
Amount Payable = (Sum Insured/Actual Value of property at the time of loss) * Loss
Example:
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A Building is insured at Ushs 50,000,000 for 12 Months. During the currency of the policy, the building gets
a damage as a result of flooding from heavy rains. The extent of damage is assessed and loss amount
estimated at 20,000,000. It is also determined that the actual value of the building at the time of loss was
85,000,000.
Calculate the proportion of claim payable under the average clause
 Sum insured of building at the inception of the policy; Ushs 50,000,000

 Total Value of building at the time of loss; Ushs 85,000,000
 Cost of Claim; Ushs 20,000,000
Amount of Claim Payable= (50,000,000/85,000,000) * 20,000,000 = Ushs 11, 764, 705- less any applicable
excess.
The Insured bears the remaining portion of the claim. This calculation of average is known as the prorate
calculation of average.
85% Special Condition of Average. In practice, a special condition of average is also used. Under this
method, the average condition will only apply if, at the time of loss, the sum insured of the property is less
than 85% of the actual value of the property.
Consider the example above:
If 85% special condition of average was applicable then;
85% of the value of building = 85% *85,000,000.00 = 72,250,000.00
Since the value of the building (50,000,000) is less than the 85% average condition, then, the average will
apply.
b. Cancellation Notice
This Condition requires that the insured notifies the insurer of intention to cancel cover within 30 days.
Likewise, if the insurer intends to cancel cover, then a 30-day period is given during which time the insured is
notified. The premium for time on risk will be charged and refund allowed to the insured on either prorate basis
or short period rates. The circumstances under which the insurer may cancel cover can include non-payment
of premium or significant material change in the risk.
A Cancellation Clause would read as below.
“This insurance may at any time be terminated by the Company by sending 30 days’ notice by
registered letter to the Insured at his last known address and in such event the premium shall be
adjusted pro rata for the portion of the Period the Policy has been in force. Similarly, the Policy may
be cancelled at the request of the Insured by sending 30 days’ notice to the Company and in such
event, the premium shall be adjusted pro rata for the portion of the Period the Policy has been in force
- but subject also to the terms of any Long-Term Agreement if applicable.”
c. Jurisdiction Clause
This condition specifies which courts of law are be mandated/ authorized to listen to cases involving
disputes between the insured and the insurer.
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“The indemnity shall not apply to the judgment which in the first instance are delivered or obtained
from any courts outside Uganda.”
d. Arbitration.
From time to time, disputes may/will arise between the insured during the currency of the policy. This
condition identifies how these disputes can be resolved.
“Should any difference arise between the Insured and the Insurer, as to the amount of any claim
under this policy, the same shall be referred to arbitration in accordance with the statutory
provisions for the time being in force applicable thereto and the obtaining of any award shall be a
condition precedent to any right of action against the insurers”
e. Fraud
Fraud is an intentional act to obtain an advantage. If the insured uses fraudulent means to obtain any benefit
under a policy, then such benefit shall not be granted.
“If any claim under this Policy is in any respect fraudulent or if any fraudulent means or devices are
used by the Insured or anyone acting on his behalf to obtain any benefit under this Policy or if any
loss damage or liability be occasioned by the willful act or with the connivance of the Insured all
benefit under this Policy in respect of such claim shall be forfeited.”
f. Subrogation
This condition makes it possible for the insured to give permission to the insurer to make recoveries
from a claim when required.
“Any claimant under this Policy shall, at the expense of the Company do, and concur in doing and
permit to be done all such acts and things as may be necessary or reasonably required by Insurers for
the purpose of enforcing any rights and remedies, or of obtaining relief or indemnity from other parties
to which the Company shall be or would become entitled or subrogated, upon their paying for or
making good any loss or damage under this Policy, whether such acts and things shall be or become
necessary or required before or after their indemnification by the Company.”
g. Contribution
With this condition, If the insured happens to have more than one insurance cover in place for a similar
property, then, in the event of a claim, they cannot claim twice from each of the policies. This condition
permits the insurer to only make one payment to the insured.
“If at the time of any loss or damage happening to any property hereby insured, there be any other
subsisting insurance or insurance’s whether effected by the Insured or by any other persons,
covering either such loss or any part of it or the same property the Company shall not be liable to
pay or contribute more than their rateable proportions of such loss or damage.”
GENERAL POLICY EXCLUSIONS
Among what is not covered under the policy unless expressly stated include;
Loss or damage occasioned or in consequence of
a. Fire or explosions resulting from an earthquake or other convulsions of nature
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b. Riot, strike and civil commotion
c. Theft during and after the occurrence of a fire
d. Pollution
e. Ionizing radiation
f. The Excess stated in the policy. The Excess is that portion of a claim for which the insured is responsible
for. The Insurer is therefore not responsible for the excess stated in the schedule to the policy
g. Terrorism Exclusion Clause
In the past, Terrorism was considered an un-insurable risk but over the years especially after the 2001
bombings of the twin towers in New York, it has become global practice for terrorism to be insured and
as such is is covered under its own standalone policy and as such is not an insured period under the fire
policy.
“Notwithstanding any provision to the contrary within this Policy or any endorsement thereto,
including any exclusion, exception or extension or any other provision not included herein,
insurance cover by this Policy excludes loss or damage to property or expense of whatsoever
nature, directly or indirectly caused by, arising out of or in connection with any act of terrorism,
regardless of any other cause or event contributing concurrently or in any sequence to the loss,
damage or expense.
For the purpose of this exclusion, an act of terrorism includes, without limitation, the use of violence
or force, including the use of chemical or biological substances, or the threat thereof, whether as an
act harmful to human life or not, by any person or group of persons, whether acting alone or on behalf
of or in connection with any organisation or Government, or any other person or body of persons,
committed for political, ethnic, religious, personal or ideological reasons or purposes, including any act
committed with the intention to influence any Government, or for the purposes of inspiring fear in
the public or any section thereof.
If the Company alleges that by reason of this exclusion, loss, damage, cost or expense is not covered
by this Policy, the burden of proving the contrary shall be upon the Insured.”
h. War, invasion, the act of foreign enemy hostilities, civil war
Acts of war or civil war are considered fundamental risks (refer to chapter 1) and as such are considered
un-insurable
“Notwithstanding any provision to the contrary within this Policy or any endorsement thereto, it is
agreed that this Policy excludes any loss or damage occasioned by or through or in consequence,
directly or indirectly, of any of the following occurrences, namely:
1. war, invasion, the act of foreign enemy, hostilities or warlike operations (whether war be declared
or not), civil war;
2. abandonment and/or permanent or temporary dispossession resulting from detention,
confiscation, seizure, restraint, commandeering, nationalisation, appropriation, destruction or
requisition by order of any government de jure or de facto or by any public authority;
3. mutiny, civil commotion, military rising, insurrection, rebellion, revolution, military or usurped
power, martial law or state of siege or any of the events or causes which determine the
proclamation or maintenance of martial law or state of siege;
4. any act, including but not limited to labour disturbance, lock-out, riot or strike, which is
calculated or directed to bring about loss or damage in order to further any political aim, objective
or cause, or to bring about any social or economic change, or in protest against any State or
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Government, or any political or local authority, or for the purpose of imposing fear in the public
or any section thereof;
5. the act of any lawfully established authority in controlling, preventing, suppressing or in any other
way dealing with any occurrence referred to in clause 1, 2, 3 and 4 above;
6. plundering, looting, war pillage in connection with civil commotion or any of the activities referred
to in clause 4 above.
For the purposes of clauses 4, 5 and 6, any loss or damage occasioned directly by a labour disturbance,
lock-out, riot or strike in order to bring about any social or economic change which is not politically
motivated as envisaged in clause 4 shall not be excluded.
In any action, suit or another proceeding in which the Company alleges that by reason of this exclusion,
any loss or damage is not covered by this Policy, the burden of proving that such loss or damage is covered
shall be upon the Insured.”
POLICY CLAUSES AND WARRANTIES
Some of the clauses commonly used In fire policies include the following. The Clauses described below are
not exhaustive
a. Definition of Buildings Clause
This clause clearly describes what encompasses the building structure under the policy for which the inured
will be indemnified in the event of damage.
“Buildings and outbuildings inclusive of landlord's fixtures and fittings attached thereto and all inside
and outside appurtenances attached therein and inclusive of boundary walls, gates and fences,
foundations, fire escapes and steps and stone flagging and underground electricity distribution system.”
b. Adjoining Building Clause.

This Clause allows the insured to cover annexes or extensions to the main building that may not
specifically be mentioned in the policy schedule. For example, the main building with Servants Quarters.
The Servants quarters can be considered as an adjoining building.
“Except where such property is more specifically insured the Items on the Schedule of this Policy
extend to small outside buildings, extensions and annexes adjoining or communicating with the
building to which such Item relates.”
c. Debris Removal Clause
The remains of destroyed or damaged property are referred to as Debris. This clause allows the insured
to be reimbursed for the costs of clearing or dismantling the debris after damage by an insured peril.
The cost will usually be sub-limited to a value not exceeding 10% of the sum insured.
“It is hereby declared and agreed that cover by this Policy extends to include costs and expenses
reasonably incurred by the Insured as a result of damage in: -
a) removing debris or
b) dismantling and/or demolishing
c) shoring up or propping of the portion or portions of the property and/or
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d) removing debris of contents of any premises forming part of the property, such contents not
being the property of the Insured.
The Liability of the insurer under this clause shall not exceed Ushs ………………….
d. Reinstatement of Value Clause.
The Basis of coverage provided under property policies is reinstatement. The Reinstatement clause
solidifies this basis of cover by stating how the amount payable under the claim will be determined.
“It is hereby agreed and declared that in the event of any loss of or damage to any Item the basis
upon which the amount payable under this Policy is to be calculated shall be the reinstatement of
the Item or Items lost or damaged, subject to the following special provisions and subject also to
the terms and conditions of the Policy except in so far as the same may be varied hereby.
For the purposes of the insurance under this memorandum "reinstatement" shall mean:
a) Where property is lost or destroyed, its replacement by similar property in a condition
equal to but not better or more extensive than its condition when new.
b) Where property is damaged, the repair of the damage and the restoration of the damaged
portion of the property to a condition substantially the same as but not better or more
extensive than its condition when new.
special provisions
1. When any Property insured under this memorandum is damaged or destroyed in part only
the liability of the Company shall not exceed the sum representing the cost which the
Company could have been called upon to pay for reinstatement if such property had been
wholly destroyed.
2. No payment beyond the amount which should have been payable under the Policy if this
memorandum had not been incorporated therein shall be made if the Insured is unable or
unwilling to replace or reinstate the property lost or damaged.
3. If at the time of reinstatement, the sum representing the cost which would have been
incurred in reinstatement if the whole of the property covered had been lost or damaged,
exceeds the sum insured thereon at the commencement of the event causing any loss or
damage to such property, then the Insured shall be considered as being his own insurer
for the excess and shall bear rateable proportion of the loss accordingly.
4. No payment beyond the amount which would have been payable under the Policy if this
memorandum had not been incorporated therein shall be made if at any time of any loss
or damage to any Property insured hereunder such property shall be covered by any other
insurance effected by or on behalf of the Insured which is not upon the identical basis of
reinstatement set forth herein.
Subject otherwise to the terms provisions and conditions of this Policy.”
A fire occurs at a factory with a sum insured of 2,000,000. An adjuster is appointed to value the
claim and it is determined that the policy is on reinstatement basis (i.e. No deduction for
betterment or appreciation),
The Loss amount on indemnity basis is determined as 100,000
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After the repair works have been done, the loss amount on reinstatement (taking into
consideration betterment is 120,000
The Claim Payable to the insured would be:
Reinstatement Claim 120,000.00

Less indemnity amount 100,000.00
Balance of loss payable 20,000.00
The claim payment on indemnity basis is treated as a payment on account.

If there was average applicable and it is found out that the amount of claim payable under the
reinstatement is basis is less than the amount payable under the indemnity, then the insured
has the right to opt for whichever method provides the maximum benefit payable to them.
e. Automatic Reinstatement of Loss
The Purpose of a fire insurance cover is to indemnify the insured for loss or damage to property from
the insured perils covered under the policy but up to a maximum limit known as the Sum Insured. When
a building, for example, is damaged by fire, the coverage provided by the policy also reduces by the
amount of claim.
A Building of Ushs 2,000,000 is insured for fire and allied perils and the coverage runs for 12 months.
During the second month of cover, the building is damaged by floods as a result of heavy rains. The loss
is estimated at Ushs 400,000. So ideally the value of the building insured is Ushs 1,600,000.
If another flood loss happens while the initial claim is still covered, the coverage provided under the
policy wouldn’t be insufficient. In essence, meaning that the building is being underinsured.
So to ensure that the coverage provided under the policy is always adequate throughout the policy, the
automatic reinstatement clause is used. This Clause automatically resets the Sum Insured to its initial
value after every loss.
“In consideration of the Insured undertaking to pay an additional premium at the agreed rate on
the amount of loss calculated on a pro-rata basis from the date of such loss to the expiry of the
current Period of Insurance, it is agreed that in the event of loss the insurance hereunder shall be
maintained in force for the full sum insured.”
f. Capital Additions Clause

During the currency of the policy, the insured may make alterations or additions to the building or
property covered that would increase the value of the property from what was initially declared. To
ensure that the coverage is seamless, the capital additions clause enables the increase in value provided
by the improvements to be covered and notification sent to the insurer regarding the improvement.
The increase in value is usually limited to 10% of the sum insured of the property.
“The insurance by this Policy extends to cover alterations, additions and improvements (but not
appreciation in value in excess of the sums insured) to property specified in the Policy for an
amount not exceeding ten per cent of the sum insured on such property it being understood that
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the Insured undertake to advise the Company each quarter of any such alterations, additions and
improvements and to pay the appropriate additional premium thereon.”
g. Tenants Clause
Where the insured property is being used by tenants, the actions of the tenant may
Breach the conditions or warranties of the policy thereby increasing the likelihood of a risk occurring.
The tenant’s clause allows such actions of the tenants Not to void the policy as long as (a) the Insured
notifies the insurer as soon as they became aware or knowledgeable of the action.
For example, A Tenant in a commercial building such as a Plaza could start flammable fuel such as
petrol without the knowledge of the Insured (landlord). If the Insured or owner becomes aware of this,
then he should notify the insurer as soon as possible. Nevertheless, if a fire were to erupt, then it would
be covered.
“It is hereby declared and agreed that should a tenant of the Insured in the within insured Buildings
do or omit to do, without the knowledge or consent of the Insured, anything which would vitiate
the within Policy Conditions and/or Warranties, this Policy will not be held to be void on that
account provided that the Insured shall notify to the Company the happening or existence of such
act or omission as soon as the same shall come to his or her knowledge and shall on reasonable
demand pay the additional charge for an increase of hazard thereby created according to the
established scale of rates, for the time such increased hazard may be or shall have been, assumed
by the Company during the continuance of Insurance.”
h. Rent Payable Clause: (Owner non-occupier of premises)
In an arrangement where the insured is renting given premises (s) and as a result of fire or damage from
any of the insured peril, the building is untenable for the currency of the policy. The rental payable
clause indemnifies that landlord/owner of the premises for the amount of rent payable to the landlord.
An example of the wording is given below;
“This Company will be answerable for payment of the Rent as specified in the Schedule but in no case exceeding
the actual Rent Payable by the Insured to the owner or Landlord of the said Premises in the event of the same
being untenable during the whole term specified in the Schedule in consequence of damage or destruction by
fire or any other peril hereby insured against. The amount payable under this Policy shall be in the proportion
which the amount insured bears to the actual Rent of the Premises; and, in case of the Premises not being
untenable during the whole of the term aforesaid, the Company shall be liable to pay to the Insured such
proportion of the amount so payable as aforesaid as the Period of time during which the said Premises may be
untenable bears to the whole time which would be required by a builder to put the Premises into tenantable
condition.
i. Rent receivable Clause (Owner-Occupier of premises)
This clause is a lot similar to the “rent payable clause” with the difference being that the insured owns
the premises being insured and occupies it.
j. Vehicle Load Clause: With this clause, the insured is indemnified for loss or damages to the vehicle and
items whilst it has been left overnight within the premises of the insured. “
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“In the event of any of the Insured's vehicle being left overnight whilst in and/or on the premises described in
the specification hereto, the Company shall indemnify the Insured in respect of such load in the event of loss or
damage by any perils insured against by this Section.”
k. Other Clauses:
There are so many other clauses that can be used and the list is not exhaustive. Some of these include;
 All other contents clause
 Land lord’s fixtures and fittings
 Architects, quantity surveyors and other fees clause
 Municipal Plans scrutiny fees
 Cost of re-erection
 Breach of Conditions Clause
 Cost of demolition
 Alterations and Repairs Clause
 Fire Brigade Clause
Common Warranties used in fire insurance policies.
A Warranty is a condition precedent to the existence of cover. A contractual promise that the insured has
to perform, breach of which will make the contract void from the date of that breach or make a claim
unpayable. Like any other insurance policy, warranties are also used In fire policies mostly to reduce the risk
of a particular type of loss.
Some of the warranties used in fire policies include the following.
Petrol and Mineral Oil Warranty (PMOW)
This warranty puts a condition on the inured to have up to a maximum amount of any petrol or mineral oil
within the insured’s premises during the currency of the policy. The petrol and mineral oil warranty is
broken down into three categories. POMW I, POMW II and POMW III.
Petrol and Mineral Oil Warranty I: - This limits the amount of petrol or mineral oil kept within the insured’s
premises to two (2) gallons
Petrol and Mineral Oil Warranty II: This limits the amount to twenty (20) gallons
Petrol and Mineral Oil Warranty III: limits the amount to eighty-eight (88) gallons
Depending on that nature of business being carried out by the insured, the POMW should be set not to
prejudice the insured. If one the type of risk being insured is a fuel station or a fuel depot, a POMW wouldn’t
be ideal because the nature of risk dictates that large quantities of petrol or mineral oil are usually held at
any given time.
“Warranted that during the currency of this Policy not more than twenty gallons of Mineral Oil, Mineral Spirit, or
Liquid Fuel (vegetable or Mineral and by whatever name known) giving off inflammable vapour below 100 degrees
Fahrenheit (such as Petrol, Naphtha, Benzine, Gasoline, or the like) be stored, deposited or kept in any building
referred to in this Policy or in any building or buildings communicating therewith, and that not more than sixty gallons
in all or such maximum quantity as is permitted by the Rules of the Local Authority, whichever is the less, of Mineral
Oil and/or Liquid Fuel giving off inflammable vapour not below 100 degrees Fahrenheit but below 150 degrees
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Fahrenheit (such as Paraffin or the like) be stored, deposited or kept in any building referred to in this Policy and in
any building or buildings communicating therewith.”
Electrical Clause:
Earlier in this chapter, we noted that fires can also result from faulty electrical wiring and equipment. These
types of fires are classified as electrical fires. In as much as the fire policy covers electrical fires, it has to be
accidental. For manufacturing risks and workshops where electrical equipment is often used, it is more likely
that loss or damages by fire are would more often be caused by over running, excessive pressure, short-
circuiting, self-heating, arching or leakage of electricity. As such loss or damage wouldn’t be covered under
the fire policy. This is because such perils are classified as electrical breakdown risks and are excluded under
the fire policy. To extend coverage for damage to such electrical machines/appliance, the electrical clause
is used.
The electrical clause is subdivided into three categories. i.e. electrical clause I, II and III
Electrical Clause I:- This excludes damages to the particular electrical machine or apparatus from the perils
described above including lightning. However, damage to other electrical machines and apparatus by the
fire would be covered.
“This Company is expressly declared to be free from liability for loss of or damage to any electrical machine,
apparatus, or any portion of the electrical installation arising from or occasioned by over running, excessive pressure,
short-circuiting, arcing, self-heating or leakage of electricity from whatever cause (lightning included) arising.
Provided that this exemption shall only apply to the particular electrical machine, apparatus or portion of electrical
installation so affected, and not to other machines, apparatus or electrical installation destroyed or damaged by a
fire set up by such particular machines apparatus or electrical installation.”
Electrical Clause II: This clause excludes damage to the electrical machine/apparatus from the perils
described above excluding lightning. However, damage to other machinery from the resulting fire is
covered.
“This Company is expressly declared to be free from liability for loss of or damage to any electrical machine,
apparatus, or any portion of the electrical installation arising from or occasioned by over running, excessive pressure,
short-circuiting, arcing, self-heating, or leakage of electricity from whatever cause (other than lightning) arising.
Provided that this exemption shall only apply to the particular electrical machine, apparatus or portion of electrical
installation so affected, and not to other machines, apparatus or electrical installation destroyed or damaged by a
fire set up by such particular machines apparatus or electrical installation.”
Electrical Clause III:- This clause covers loss or damage to the electrical installation and or apparatus
specified in the schedule of the policy from the period described above. But excludes loss or damage from
any electrical machine or apparatus unless caused by fire or lightning.
“Loss or damage by fire to the electrical apparatus or machinery specified in the schedule of the policy arising from
or occasioned by over-running, excessive pressure, short-circuiting, arcing, self-heating or leakage of electricity,
including all loss or damage by lightning to the property insured, is covered, subject to the terms and conditions of
this policy, but is expressly understood that no liability exists under this policy for loss of or damage to any electrical
installation unless caused by fire or lighting.”
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It is a rarity that electrical clause 1 is used. Usually insurer’s use either Electrical Clause II and III referring
to them as electrical clause A and Electrical clause B respectively.
Hazardous goods warranty
This warranty limits the amount/quantity of hazardous goods stored in the building described in the
schedule of the policy. The quantity is usually limited to 5% or 10% of the sum insured of the value of
goods.
“It is hereby declared that a small number of Hazardous goods (subject to such limitations or prohibition as may
be imposed by the Warranty or otherwise herein or by Official Regulations) may be stored in that portion of the
building within described which is in the occupation of the Insured, but it is nevertheless Warranted by the
Insured that during the currency of this Policy the value of such permitted Hazardous Goods shall not exceed 5
per cent of the value of all goods stored therein.”
The different types of goods that are deemed hazardous include the following;
Acetylene (liquid) Copper Sulphide Naphtha Straw
Barium Sulphide Copra Cake Nitric Acid Sulphuric Acid
Benzine Copra Meal Nitrate of Soda Sulphur Dyes or colour (excluding
Benzoline Cordite Nitro Glycerine those packed
Bisulphide of Carbon Bitumen Cotton, whether in fully in Oil and/or paints air-tight metal vessels labelled with
Brimstone (Sulphur) Calcium Pressed bales or otherwise Paraffin a certificate by the manufacturers
Carbide Crackers Percussion Caps that the dyes (or colour) contain at
Calcium Sulphide Explosives of any kind Petroleum and/or its Liquids least 10 per cent
Camphine Fulminating Powder products of inert inorganic salts)
Camphor Fireworks Petrol Tallow (manufacturers and
Candles Ghee Phosphorus un-manufactured)
Cartridges Gunny Bags other than fully Pictric Acid Tar and/or Tarred ropes
Celluloid and Xylonite pressed ironbound Potash And/or Tarred canvas
And other similar Bales Potassium Sulphate Turpentine
Substances Grasses of all kinds Rags Vanish
Charcoal (Powered) Gun Powder Resin Vegetable Fibres, of any
Chlorate of Potash Hay Rockets Kind
Chlorate of Soda Hemp Rock Oil Waste of any Kind.
Chloride of Lime Hessian, other than fully Saltpetre
Cinematograph Films Pressed ironbound Shoddy
(other than safety Films) Bales Sisal bags and Sisal Cloth
Coconut and other Kerosene other than in fully pressed
Vegetable oils Lampblack Iron bound bales
Coir Lime Spirits of any kind not in
Coir Yarn Matches of any kind Bottles
Mungo Stearine
Other Warranties are used in fire policies include;
Premium Payment warranty:- Spells out the premium payment requirement i.e the number of days within
which premium should be paid for the policy to remain in force.
No Smoking Warranty:- Indicates that smoking shall not be done in areas designated as smoking areas.
Safe and Books Warranty: requires that the inured’s books of accounts, stock sheets and stock books are kept
in a fireproof safe.
Regular Inspections Warranty:- Requires the insured to carry out regular inspections for machines or other
materials.
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 Restriction of merchandise warranty
 Vacant risk warranty
 Silent risk warranty
The interest of a Financial Institution in a Property Cover
When borrowing from a financial institution such as a bank, it is a requirement that the property pledged
as security is insured. With the financial institution taking up the property as a security, it would have an
insurable interest in the policy.
In such cases, the policy will have two insured persons i.e. the Assignee- Who is the borrower of the loan
and the Assignor- Which is the financial institution.
The Financial Institution is treated as the first loss payee. In the event that a claim is payable under the
policy with a financial institution’s interest, loss if any that is payable is first paid to the financial institution.
A Lien Clause would have to be included in such policies.
“Notwithstanding anything contained herein to the contrary, It is hereby declared and agreed that Loss if
any, shall be payable to XXX Bank Ltd who interest shall be a valid discharge.
Other clauses that are included in policies with financial interest include;
 Loss Payee Clause

 Mortgagor Clause
 Cancellation of Notice Clause
 Reinstatement of Value Clause
Activity
Select four clauses from the list above and find out what they cover and the wording for the clauses
selected.
3.11 SUMMARY OF CHAPTER

A Fire is defined as the Rapid Oxidation of a material in the exothermic chemical process of
combustion, releasing heat, light and various reaction products. For a fire to occur, the following
ingredients should be present
- Heat
- Oxygen
- Fuel
The causes of accidental fire Include; Arson, Lightning, Faulty Electrical Wiring and Equipment
Power Surges, Flammable liquids such as petrol Smoking, Human error
A standard fire policy covers the insured against loss or damage resulting from Fire, lightning, and
explosion of boilers. Coverage can also be extended for other perils such as riot and strike, impact
damage, wild animals, Aircraft and Malicious Damage.
The type of property covered in a standard fire policy include the following;
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a. Buildings
b. Fixtures and fittings
c. Plant and Machinery
d. Stock
The basis of settlement/valuation can either be replacement basis or reinstatement (indemnity

basis)
The underwriting factors for fire insurance policy include;
- The nature of the construction of the building

- The age of the building
- Accessibility to firefighting services
- The Moral Hazard
- The Estimated Maximum Loss
The rating of a fire risk is depended on the classification of the industries. The rates vary depending
on the occupier of a building or primes. It will usually consist of a Basis rate and the rates for the
special peril risks. The sum of these gives the rates gives the rates applicable for the specific
industry. The Rate is expressed as a percentage of the sum insured.
The rating for a fire risk would be as per the rating guideline circulated by the insurance regulatory
authority see appendix I
Estimated Maximum Loss is defined as the estimate of monetary loss which could be sustained on
a single risk as a result of a single fire or explosion considered to by the underwriter to be within
the realms of probability.
Factors that affect the determination of PML/EML
 The nature of the construction of the building.

 Occupation of the building. I.e. Commercial Building, Officer or Residential
 The complexity of the risks.
 Fire protection and minimization appliances in the building such as automatic
Sprinklers, fire extinguishers, water hoses, smoke detectors.
 The proximity of the risk to fire brigade facilities.
 Other Moral Hazards and Physical Hazards that can be assessed.
A Condition in a fire policy enforces the insured to perform a certain action. The conditions used in
fire policies include;
a. Average condition
b. Arbitration
c. Fraud
d. Notice of cancellation
e. Jurisdiction Clause
f. Subrogation
Clauses applicable to Fire Insurance Policy wordings include;
a. Definition of buildings
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b. Adjoining Building Clause
c. Debris Removal
d. Reinstatement of Value
e. Capital Additions
f. Tenants Clause
g. All Other Contents
h. Cost of demolition and re-erection
i. Automatic Reinstatement of loss
An Exclusion in a policy refers to that which the policy will not offer coverage for. The exclusions
applicable to fire policies include;
a. The Excess applicable under the policy

b. Loss or damage arising from theft during and or after the occurrence of a fire
c. Loss or damage caused by ionizing radiations
d. Loss or damage caused by war, invasion of a foreign enemy
e. Loss or damage caused by pollutions.
3.12 REVISION QUESTION

1. What is fire Insurance
2. Identify six causes of accidental fires
3. Differentiate between Reinstatement and Indemnity Basis of cover as used in a fire policy
4. Identify six factors considered when underwriting a fire policy
5. Identify Six common exclusions found in a fire policy
6. Differentiate between reinstatement and replacement basis of valuation
7. Identify and briefly explain four factors that affect the rate charged under a fire insurance
8. Discuss the application of the 85% average clause in a fire policy
9. Explain the application of the 30 days un-occupancy clause in a fire policy
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4. BUSINESS INTERRUPTION/CONSEQUENTIAL LOSS
4.1 INTRODUCTION
For most if not all business, the chain of loss does not only stop after the occurrences of an insured peril for
example damage to property such as a building from a fire. The damaged caused affects the normal
operations of a business and as such. Such losses are known as consequential losses. In business, for
example, the income earned from the activities of a business is essential in ensuring that the business keeps
on functioning. However, damage to property as a result of an insured peril can cut short the income stream
causing a loss in earnings. In this chapter, we look at how the income for a business can be protected
through a policy known as a Business interruption/Consequential Loss Insurance policy.

 Describe the scope of cover of business interruption/consequential loss

 Differentiate between Gross Profit and Annual Turn Over are calculated
 List and explain the various clauses used in business Interruption
 Identify the exclusions applicable under the business interruption cover
4.3 SCOPE OF COVER

Damage to property after the occurrence of a major insured peril has cost implications for businesses such
as loss in earnings from sales, Loss of earnings for the employees of the business, ET cetra.
Read about the 09th March 2015 Fire to the Crest Foam Factory in Ntinda and List some of the effects the
fire would have on the operations of the business.
To ensure that the insured is able to maintain their expected trading position after the occurrence of loss
until such a time when they able to resume operations normally, the Business Interruption Cover was
designed. Unique to each kind of business, the cover will consist of items such as Gross Profit, Annual
turnover, Indemnity period which are discussed later in detail.
Definition:
The business interruption basically indemnifies the insured for the loss in gross profit and resulting costs
from the interruption resulting from damage to property caused by an insured peril.
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•Perils Such as •Property
fire, Lightning Destroyed by the
and Explosions Insured Perils
1 2
Insured Damage to
Perils Property
4
3
Loss
Business
Resulting
Interruption
from BI
•Gross Profit Lost •Interruption to
as a result of the the business
Business activties as result
Interruption of the damage
Figure 3: The Business Interruption Chain of Loss
In arranging a Business interruption cover for a particular business, it is important that the insured and the
insurer clearly identify;
a. the sections or parts of the business that may be affected by the interruption
b. The Insured to be compensated in the event of a loss. For example, for most policies that have a bank
interest, the bank is named as Join insured in the property damage policy but cannot be a Join insured
in the business interruption cover. This is because, in the event of a loss, indemnification for loss of
earnings would be attributed to the primary insured since it is the one that has a direct correlation to
the loss. The bank wouldn’t lose any earnings because it would make a recovery for the loan from the
property damage coverage.
c. The Premises affected as a consequence of the interruption.
Loss of earnings is the foundation of a business interruption cover. It is the basis upon which the level of
coverage desired by the insured is determined. Over the past century, there are two primary methods that
have been used to calculate the loss of earnings.
a. Loss of Turn Over Basis

The Loss of earnings under this method is determined by comparing the turnover lost in the months
of interruption to the turnover during the same period in 12 months prior to the damage. For
example, if a building is damaged by fire causing an interruption in the months of January and
February 2018, the turn over lost can be ascertained through comparison with the turnover in the
months of January and February 2017.
The Indemnity provided by the policy is calculated based on the rate of gross profit. From the
amount of turn over lost during the period of interruption, the policy pays the insured the
proportion (percentage) of the gross profit on the turnover of the previous year.
Example;
A hypothetical extract for ABC Plastic Manufacturing Company.
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The rate of
6 Months Prior to Fire (Ushs) Gross Profit
Turnover 700,000
Fewer Purchases (100,000)
Gross Profit 600,000 85.71%
Fewer Expenses
Salaries and Wages 300,000
Variable Costs 55,000 - 355,000
Net Profit 345,000
6 Months after the Fire

Turnover 300,000
Fewer Purchases (100,000)
Gross Profit 200,000 66.67%
Fewer Expenses
Salaries and Wages 300,000
Variable Costs 55,000 - 355,000
Net Loss - 55,000
The Reduction in Turn Over = Ushs 400,000

The Rate of Gross Profit from the preceding 6 Months = 85.71%
The Indemnity amount will thus be 85.71% * Ushs 400,000 = Ushs 342,840
Business Interruption policies will most often be written on “difference basis”. This means that the
gross profit is arrived at by subtracting the variable charges from the turnover.
However, the cover can also be granted on an “additions basis”. Under this Basis, the Gross Profit
is arrived at by getting the sum of the net profit and standing charges.
In an effort to minimize the loss of turnover as a result of interruption caused by an insured peril,
the insured will incur extra costs so as to get the services of the business up and running as soon as
possible. Such additional expense is referred to as ICOW- Increase in Cost of working.
The Calculation of Indemnity also extends to include, therefore;
a. Loss of Turnover (Actual Turnover less any variable charges)
b. Increase in Cost of Working (ICOW)
b. Gross Revenue Basis
It is important to note that the terms gross profit as used from an accounting perspective is not the
same as that used in insurance. The accounting gross profit factors in all components involved in the
production process such as raw materials, labour and overheads which are deducted from the turnover
to arrive at the gross profit. With the insurable gross profit, however, only expenses that vary in
proportion to the revenue are the ones deducted to arrive at the gross profit
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PERILS COVERED UNDER BUSINESS INTERRUPTION
A business interruption policy comes into action consequent upon damage in the primary policy. The perils
that trigger that occurrence of a loss in the primary policy as the same perils that will be covered under the
business interruption cover. These perils fall into two categories i.e. Named Perils and All Risks Perils.
a. Named Perils
The perils covered are similar to those in the primary cover. In a fire policy, for example, the perils
stated such as Lightening, earthquake, spontaneous hearing, Malicious Damage, flooding etc. are the
same perils covered under the BI cover.
b. All Risks Perils

Under this, All Risks as specified in the material damage policy are covered except what is excluded
under the policy.
The Limit of liability of the insurer is expressed in terms;
(i) The Sum Insured which comprises of the gross profit and/or Annual Turn over
(ii) Indemnity Period
These two items move concurrently with each other and describe in section 4.4 and 4.5 below.
4.4 GROSS PROFIT AND ANNUAL TURN OVER

The sum insured for Business Interruption is determined from the Gross Profit and/or Annual Turn Over of
the business. Before we can look at how the sum insured is determined, let us examine some of the key
terms used
a. Turn Over: This is the total revenue due to the business for goods sold/and or delivered and for service
provided during the operations of the business at the premises.
It consists of three main components i.e.
- Variable Charges-: These are charges which vary in proportion to the volume of business done. For
example, the cost of purchasing raw materials, packaging materials etc.
- Standing Charges: These are charges incurred by the business that are fixed and do not vary
regardless of the amount of the volume of production. They can also be referred to as fixed Charges
and can include salaries and wages for permanent and temporary staff, rent, Insurance Premiums,
Electricity bills, water bills etc.
- Net Profit: Actual Net Trading profit left after deductions for Variable and Standing Charges have
been made.
Net Profit is calculated from;
NP= Total Turn Over – Total Costs (Variable Charges+ Standing Charges)
b. Gross Profit: This is the sum of the total turnover including the amounts for closings stock and works in
progress less the amounts for opening stock and working in progress + uninsured working expenses.
The uninsured working expenses are those expense that varies in direct proportion to the turnover such
as purchases.
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4.5 INDEMNITY PERIOD
The Business Interruption Policies are written with an indication of the indemnity period. The Indemnity
period represents the period it will take for the business to get back to operation/or the profitability it had
enjoyed before the occurrence of the loss.
Definition:
(Roberts, 2011) Defines the Indemnity period as “the Period beginning with the occurrence of the
incident and ending not later than the maximum indemnity period thereafter during which the results of
the business shall be affected in consequence thereof.
Policy Period
Resumption of
Inception of Policy Date of Loss Expiry of Policy Business Operations
Indemnity Period
Figure 4: Illustration of the Indemnity Period
The Insurer undertakes to compensate the insured for loss during the indemnity period. It usually varies
between 6 Months to 36 Months
Determining the appropriate indemnity Period is very important in a business interruption cover. Since it
represents the time it will take for the business to recover, if it is too short, then the business may not
receive an adequate indemnity. If it is set too high, the insured may find himself paying high premiums for
a cover that he won’t require. Some of the factors that determine the length of the indemnity period are
given below.
Factors that Determine the Indemnity Period
a. Nature/Type of Business: A Manufacturing Industry would require a longer indemnity period to regain
back its gross profit in comparison to the service industry.
b. Availability of Alternative Premises
c. The speed of Repair of Damaged Premises
d. How long it would take to order and re-stock raw materials, machinery
e. How long can the buffer stock last for?
f. How long it would take to get approval from municipal authorities for the sight plans, designs etc.
g. Seasonality.
Rating for Business Interruption
The rate charged under a business interruption cover is composed of two components i.e.
1. Basis Rate
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2. Profits Rate
The Basis rate reflects the contingency peril that brings about a loss under material damage and causes a
subsequent loss under the business interruption. It is derived from the material damage rate.
The Profits Rate is a reflection of the interruption risk during the indemnity period. Since there are various
factors which determine the interruption, the profits rate takes into consideration the length of the
maximum indemnity period and is adjusted using what is known as profits scale.
The profits rate is a multiple of the Basis rate and the Multiplier of the corresponding indemnity period.
Profits Rate: = Basis Rate * Multiplier
The Profits Rate obtained is applied to the sum insured to obtain the premium chargeable for business
interruption.
The Multipliers for the different indemnity periods are illustrated in the table below as provided in the rating
guidelines by the insurance regulatory authority.
%age of Fire Rate

S.no Indemnity Period (Multiplier)
I) Up to 3 Months 50%
ii) 3< ≥6 Months 75%
III) 6< ≥9 Months 90%
iv) 9< ≥12 Months 100%
v) 12< ≥15 Months 95%
vi) 15< ≥18 Months 90%
vii) 18< ≥24 Months 80%
viii) 24< ≥30 Months 75%
ix) 30< ≥36 Months 65%
Table 2: Rating Scale for Different Indemnity Periods
(Source: Insurance Regulatory Authority- Minimum Rating Guidelines)
Using the table above, the rate charged on the sum insured for Business Interruption can be calculated as
per the table below.
S. No Indemnity Period Fire Rate Multiplier Business Interruption Rate/

Profits
1 Up to 3 Months 0.15% 50% 0.075%
2 9< ≥12 Months 0.15% 100% 0.15%
3 15< ≥18 Months 0.15% 90% 0.135%
4 30< ≥36 Months 0.15% 65% 0.0975%
Table 3: Calculation of BI Rate for different indemnity Periods.
Example:
The gross profit for Bakery with a 13 Month indemnity period is Ushs 13,000,000. Calculate the
premium charged for business interruption for the risk. The Rate charged for Property Damage was
0.3%
Basis rate: 0.3%
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Indemnity Period: 12 Months
Multiplier (from the rating scale) is 95%
The Profits Rate: 0.3% *95% = 0.285%
Premium: Gross Profit * Profits Rate

= 13,000,000 *0.285%
= 37,050.00
4.6 BASIS OF INDEMNIFICATION

Having looked at the key components of what Business Interruption cover is and some of the key items,
how are claims settled in such a cover?
Indemnification under a BI cover can be done in two ways;
1. Gross Profit Basis

The loss gross profit under this basis can be calculated from;
(a) Reduction in Turnover
And or;
(b) Increase in Cost of working (ICOW).
With the Reduction in Turn Over, the sum is produced by applying the rate of gross profit to the difference,
in turnover, over during the indemnity period. The Difference is the amount by which the turn would fall
during the indemnity period i.e. The Actual Turn over that would have been achieved less the turn over
actually achieved during the indemnity period.
The Increase in cost of working is the cost refers to the additional expenditure incurred by the insured in
reducing the loss in gross profit which would have occurred during the period of indemnity as a result of
the property damage but not exceeding the sum for the reduction in turn over.
Such additional expenditure may include;
Overtime Costs: Where workers are paid for work beyond their usual working hours.
Rental Costs for alternative accommodation: In case of damage to the main property of the business,
alternative accommodation would need to be sought and with this comes the rental charges payable to the
new landlord.
Advertising Costs: The Business would need to notify its customers of its temporary new premises through
advertising.
Question:
What additional costs would a Manufacturing Plant like Mukwano Industries face in the event of damage
to its main production site?
Key Definitions;
The rate of Gross Profit: The Rate of gross profit earned on the turnover during the financial year
immediately before the date of occurrence of the event.
(Gross Profit/Turnover) %
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Standard Turn Over: The Turn Over during the period in the twelve months immediately before the date
of the occurrence of the incident which corresponds to the maximum indemnity period.
Annual Turn Over The turn over during the twelve months immediately before the date of the incident.
In the determining the claim payable, the turn over earned during the period of the interruption is compared
with that of the calendar year just before the interruption.
The Gross Profit Basis is mainly used for the business involved in manufacturing. This because the expenses
such as raw materials for such business have a direct correlation with the production. If the business decides
to cut down its productions, the direct expenses will reduce for example its purchases of raw materials will
go down.
From Section 4.4;
Gross Profit= (Turnover + Closing Stock and Work in Progress) - (Variable Costs + Opening Stock
And work in progress)
Example:
The Gross Profit for ABC manufacturing plant with is calculated as below (Own Source);
Description Value (Ushs)

Turn Over 500,000,000.00
Closing Stock and Work in Progress (85,000,000.00)
415,000,000.00
Opening Stock and work in Progress 55,000,000.00
Variable Costs (Uninsured working expenses 60,000,000.00
115,000,000.00
Gross Profit 300,000,000.00

Table 4: Calculation of Gross Profit
The Sum Insured is a multiple of the gross profit. From the above example, for an Indemnity Period of 12
Months, the Sum Insured for gross profit would be 300,000,000.
If the indemnity period was 24 Months, the Sum Insured would be 300,000,000 * 24/12 = 600,000,000.
For a 6 Month Indemnity Period, the Sum Insured would remain at 300,000,000
2. Gross Revenue Basis

Under this basis, the indemnity is calculated from;
(a) Loss of Gross Revenue.
This is the amount by which the gross revenue shall fall short of as a result of the property damage
during the period of indemnity
and/or
(b) Increase in Cost of working. The amount incurred by the insured in reducing the loss of gross
revenue during the indemnity period as a result of the property damage.
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Key Definition:
Standard Gross Revenue: The Gross revenue during the period before the calendar year preceding
the date of occurrence of the incident which corresponds to the maximum indemnity period.
In determining the sum to be insured under the gross revenue basis, what the insured needs to first
determine if the annual turnover of the business. This is then multiplied by the proportion of 12 Months to
the indemnity period.
For example, if the Annual Turnover of a supermarket is Ushs 100,000,000 and the maximum indemnity
period is 36 Months,
The Sum Insured = 100,000,000* (36/12) = 300,000,000
This method is mainly employed for firms in the service industry such as Insurance Companies, Audit Firms
and the like.
4.7 THE TIME EXCESS

The use of excess in insurance is common practice. An excess refers to that portion of the claim that the
insured bears on their own. For example, for an insurance policy with an excess of Ushs 100,000, every
claim would be paid less or equal to the excess would be borne by the insured. For Instance, if a fire policy
with a claim of Ushs 500,000 had an excess of 100,000, then the insured would bear the first 100,000 of
the claim and recover 400,000 from the insurer.
In most insurance policies, the excess is expressed as a monetary value. However, in business interruption
policies, the excess in terms of time i.e. Hours or weeks and is referred to as a Time Excess.
A policy with an excess of 7 days would mean that in the event there is a business interruption claim, the
insured would bear the loss in income corresponding to the first 7 days from the date of loss.
Example:
A Factory is gutted by a fire and is closed down for 6 Months whilst repairs are being carried out. As a
result of the closure, it is determined that the loss of income over the 6 Month Period is approximately
500,000. The Business Interruption Policy of the 7 days.
If from the indemnifiable amount, the excess per day is calculated as 11,000.00, then for 7 days, the
excess would be 11,000*7 = 77,000
The Insured would be indemnified for 500,000-77,000 = 423,000.00
4.8 THE SUMS INSURED UNDER BUSINESS INTERRUPTION

The main objective of the business interruption is to cover the insured for the loss in revenue/Gross profit
as a result of the loss damage under the Material Damage section of the primary policy.
As such the Gross profit is a key component of the items constituting the sums insured under this section.
Sections 4.2 and 4.3 have shown us the gross profit can be determined i.e. difference basis or additions
basis.
In addition to the gross profit, the sums insured can also comprise the following
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- Increase in cost of working
- Auditors Fees
- Wages
4.9 POLICY CONDITIONS AND CLAUSES

Some of the common extensions and clauses used in business interruption covers include the following;
a. Material Damage provision

The purpose of this provision is that the business interruption policy will register a BI claim only and
only if at the time of damage;
 The peril/contingency that caused the loss was insured by the insured for property damage
to the said property
 The responsible insurer (property damage insurer) has admitted liability under the policy
and undertaken to pay the claim if at all it is payable.
In the circumstance that the claim for material damage is not payable, then the Business
Interruption cover will not respond.
b. Denial of Access Clause

This extension indemnifies the insured for the loss that results from inaccessibility to the premises
as a result of property damage. For example, Smoke resulting from a fire in a building may make it
difficult for workers to continue working.
Interruption can also be caused not by damage to premises but damage from a property within the
immediate vicinity. A fire at Rwenzori towers could necessitate the closure of Nakasero road hence
impeding access to Rwenzori Building.
In some instances, especially when dealing with retail shops, the crop of customers they get could
be a result of a nearby prestige mall. Take for example Acacia Mall at Acacia Avenue, the presence
of the mall acts as a magnet to draw in customers for the other surrounding shops next to it. A
damage to the Mall could result in a loss of customers for the surrounding shops. The cover
provided by the basic denial of access extension can be widened to cover such losses. This is known
as denial of access- Loss of attraction cover.
The Cover provided by this extension is limited of course limited to loss resulting from damage by
an insured peril. Denial of access as a result of bad weather events or civil unrest (riots and civil
commotions) is ideally excluded.
To limit the insurer’s exposure, the interruption is limited to a set time for example 24 consecutive
hours.
The Insurer will not indemnify the insured for any interruption lasting less than 24 hours
c. Automatic Reinstatement of Loss

In consideration of the insured agreeing to pay an extra premium, the sums insured stated at the
beginning of the policy are not reduced by the amount of claim unless advised by the insured.
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Consider for example that a major loss happens at the beginning of the policy period and is paid off
before the policy expires. The sum insured stated at the beginning of the policy reduces by the
amount of settlement. If there is a second loss, then the already reduced sum could be insufficient
for the second loss. So with this extensive clause, the sum insured is maintained as it was, however,
the insured is charged an additional premium prorate to the loss amount.
d. Salvage Sales Clause

If the insured holds a salvage sale during the indemnity period stated in the policy schedule, the
turn over produced attained by the salvage sale shall be reduced from the turn over during the
period of indemnity in determining the reduction in turn over.
e. Alternative Trading/Premises Clause

This extension allows the insured, in calculating the turn over during the indemnity period to
incorporate revenue from sales of goods or services carried out from other premises other than
the insured premises as a result of the damage.
f. Departmental Clause
Under this clause, if the insured’s business is run in departments, the calculation of gross profit and
increase cost of working will apply independently to each department.
g. Professional Accountants Clause:

This clause covers the insured for the extra cost incurred by the insured in hiring professional
accountants to verify the books of the insured for the purpose of investigating the claim payable
under the Business interruption section of the policy
The Limit of liability should not, however, exceed the limit stated in the policy or up to a specified
amount.
h. Uninsured Standing Charges

With this clause, the increase in the cost of working takes into account the standing charges that
were not reduced in proportion to the reduction in turn over.
i. Customers and supplier’s extension.

Some businesses can be affected or vulnerable to interruptions caused by damages at premises of
another business. For example a supplier. Property damage at the premises of a supplier could
prevent the supply of critical materials to the premises of the insured and hence result in a business
interruption. Take for example Hot Loaf Bakery. One of the essential raw material for the
production of bread is sugar. Assuming that Kakira Sugar are the main suppliers of sugar. Damage
at the premises of Kakira Sugar would affect the operations of the Hot Loaf since they would not
be receiving one of their essential raw materials. With the material damage provision, Hot loaf can
only claim for the interruption under their BI cover if there had an insurable interest in the property
of Kakira Sugar works.
As such the Supplies extensions cover allows such claims to be picked up under the BI cover.
Similar to the supplier’s extensions, the customer’s extensions where there is damage at the
customer’s premises, as a result, the insured could lose the customer and a resultant interruption
to their business could arise.
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The customers and suppliers extension are subject to monetary limit or an agreed percentage. For
both extensions, the insured is required to specify in the schedule the customers and suppliers
whose operations would result into an interruption to the insured.
Other Clauses and Extensions applicable to this section include;

 Payment Account Clause
 Premium Adjustment Clause
 Fines and Penalties
 Public Utilities
 New Business Clause
 Uninsured standing charges clause
Revision
Read about the premium adjustment clause and with an example, describe how it operates.
4.10 EXCLUSIONS
The indemnity provided under the business interruption section of the policy does not cover loss
resulting from interruption as a consequence of;
a. Any restrictions or reconstructions imposed by public authority

b. Loss of Business due to causes such as suspension or cancellation of license
c. The deductible state in the schedule
WHEN DOES A BUSINESS INTERRUPTION CLAIM BECOME VALID
For a claim under business interruption to be considered, the following provisions should apply.
 The Property Should be insured under the material damage policy and stated in the policy
schedule.
 Loss or damage to the property under the material damage policy should be caused by a perils
insured against.
 The Resulting damage to the property insured should cause interruption with the insured’s
business in the premises specified in the schedule of the policy.
CONTINGENT BUSINESS INTERRUPTION
In business, sometimes, it is not only the premises of the insured that would result in business
interruption losses.
In some instances, loss or damage in the premises of a third party can lead to business interruption losses
for the insured. As part of the Business Continuity Plan, the insured can institute measures to avert the
effect of losses or damages at a third parties premises on their revenue and/or gross profit.
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Such measure is through taking up what is known as a contingent Business Interruption Cover.
This covers extends coverage to insured for business interruption losses arising from insured physical
losses at a 3rd party premises- Munich Re
Example:
FIT Boutique gets all its supplies for Men’s Clothes from Nyanza Textiles Uganda Limited. If there is a Fire
at the Nyanza Factory that destroys the production line, it won’t be able to manufacture clothes. As a
result, FIT Boutique won’t be able to get its regular supplies of Men’s Clothes from Nyanza.
Revenue/Gross Profit it would have earned from selling men’s Clothing would decrease and as a result,
affect its overall gross profit/revenue. To manage such a scenario, FIT Boutique would have to take up a
Contingent Business Interruption Cover.
Types of Contingent Business Interruption Covers include;

- Suppliers and Customers Extensions
- Denial of Access/Ingress/Egress
- Utility Failure/Service Interruption
- Loss of attraction
4.11 SUMMARY OF CHAPTER

Business Interruption Insurance indemnifies the insured for the loss in gross profit and resulting
costs from the interruption resulting from damage to property caused by an insured peril.
There are two primary methods upon which Loss of earnings for a business can be calculated;
 Loss of Turn Over Basis
 Gross Revenue Basis.
The Cover provided under business interruption is consequent upon the perils under the material
damage policy. The perils can be grouped into two;
 Named Perils
 All Risks Perils
The sums to be insured are determined from the gross profit and/or annual turnover.
The Turn over consists of the total revenue due to the business for goods sold/and or delivered
and for service provided during the operations of the business at the premises. The three
components from which the turnover can be derived include; variable charges, Standing Charges
and Net Profit.
Gross Profit is the sum of the total turnover including the amounts for closings stock and work in
progress less the amounts for opening stock and working in progress + uninsured working
expenses.
The Indemnity Period in a business interruption policy is the time it will take for the business to get
back to operation after the occurrence of loss.
The Factors that Determine the Indemnity Period include;
 Nature/Type of Business:
 Availability of Alternative Premises
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 The speed of Repair of Damaged Premises
 Seasonality
There are bases of indemnification under business interruption. These are;
a. Gross Profit Basis: the indemnifiable amount is calculated from the (a) Gross Profit and (b)
Increased Cost of working
b. Gross Revenue Basis: The Indemnifiable amount is calculated from (a) Loss of Gross Revenue
and (b) Increased Cost of working
Like any other policy, an excess represents the portion of the claim that insured bears. In Business
Interruption, the excess is expressed in terms of time i.e. days, weeks, months and is referred to as
a time excess.
The Sums insured can also include; increased cost of working, wages, auditor’s fees etc.
Principle Extensions under a business interruption policy include;
a. Denial of access
b. Salvage Sales
c. Alternative Trading
d. Department Clause
e. Customers and Suppliers Extensions
f. Professional Accountants Clause
The Policy does not cover losses from;
a. Any restrictions or reconstructions imposed by public authority

b. Loss of Business due to causes such as suspension or cancellation of license
c. The deductible state in the schedule
Contingent business interruption covers this covers extends coverage to insured for business
interruption losses arising from insured physical losses at a Third party’s 3rd party premises- Munich Re
4.12 REVISIONS QUESTIONS

1. Differentiate between Gross Profit and Annual Turnover
2. What are the two bases on which indemnification under business interruption can be carried out?
3. Differentiate between Annual Turnover and standard turn over
4. Explain what is meant by the term Indemnity Period when used in a business interruption policy
5. Identify and 5 Clauses used in Business Interruption Covers
6. Outline the conditions for making a valid business interruption claim
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5. NON-COMMERCIAL PROPERTY INSURANCE
5.1 INTRODUCTION
Non-Commercial Property Insurance includes classes of insurance that designed specially to cater to
the property needs of individuals. Under this chapter, the reader will get an insight into the two
property covers that fall under non-commercial property insurance i.e. Domestic Package insurance
and private motor insurance.

 Explain what a home owner’s policy is.

 Identify and explain the different sections of the homeowner’s policy
 Identify and explain the underwriting factors for a homeowner’s insurance cover.
 Describe the different add-on covers that can be provided under the homeowner’s policy
 Describe what private motor insurance is
 Identify the underwriting factors and applicable clauses under private motor insurance.
5.3 DOMESTIC PACKAGE (HOME/HOUSE OWNERS) INSURANCE

We cannot talk about a home owner’s policy without first understanding what a home is.
What is a home?
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Wikipedia describes a home as a dwelling place used as a permanent residence or semi-
permanent residence for an individual, family or Household.
These dwelling places could be a house, an apartment, or even a shelter from which individuals living
within it can seek comfort, sleeping facilities. There is always a psychological connection between the
individual living in the home and the home itself. It is something that is treasured. Like any other thing
in life, homes too are vulnerable to damages that could impact the people living in it
A home can be damaged by natural disasters such as earthquakes, weather events such as heavy rains
and flooding. Thieves could also break into a home and steal the valuable contents in it.
Activity:
Look around your home and (a) identify the different ways in which it can be damaged. (b)
Think about how the potential damages could affect you.
Not only do these upheavals have a psychological effect on the homeowner and residents of the home,
but also a financial implication. If there is a heavy rain that causes a flooding in an area like Banda, the
homes of the residents leaving in an area like Kyambogo could be decimated by the floods. The loss of
their home will leave them in misery and they would have to think about the cost of either purchasing
a new home or reconstructing the damaged one.
With the Home owner’s insurance cover, the individual homeowner would have a peace of mind that
in the event that his home is damaged, he has a safety net.
So what is a Home Owners Insurance Cover?
This is a comprehensive insurance cover that compensates the insured for loss or damage to
his home or contents. It also extends to provide coverage for legal liability to the insured and
accident to his workers within the home.
Commonly referred to as domestic package insurance cover. It covers the dwelling (home of the
insured) including the within the home belonging to the insured or his family members.
To be Eligible for coverage, the homeowner should ideally fall under three primary categories. These
Categories are;
a. Private Home Owners: These are individuals or families who rightful owners and reside in their
own private homes. These could be the typical two (2) to four (4) Bedroomed houses.
b. Rental Occupants: Theses are individuals or families that reside in rented homes or premises. The
premises usually do have a rightful owner who is the landlord. A rented home can be a private house
belonging to someone or even an apartment.
c. Condominium Owners. These are individuals or families that reside in their own private
condominiums.
Note: - Housing consisting of a complex of dwelling units (as an apartment house) in which each unit
is individually owned- (source-Word web).
Question:
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Can a Mobile Home be eligible for coverage under the homeowner's policy
Underwriting Factors for Homeowners Policy
It is not sufficient that once a homeowner falls under the three categories, then he/she is entitled to
coverage under the homeowner’s policy. Insurance companies do have guidelines they follow in
assessing the insurability of a given home. These underwriting guidelines are what referred to as
underwriting factors and they include the following.
a. The Location of the building or premises. Is the building located in an area that susceptible flooding,
earthquakes, landslides? With this information, the underwriter would be able to ascertain within
reasonable probability the expected level of damage to the premises.
b. The Age of the house. The structural density of an older house is less compared to that of a newly
constructed house.
c. The proximity to skilled firefighting services such as the police firefighting brigade or any other
professional firefighting services. In case of fire, how long would it take for the firefighter to
respond? The closer the firefighter to the home residence, the shorter the response time.
d. The Type of construction. The structure of home the home is key in determining eligibility. Are the
structures of the building able to withstand a fire or flooding? Is the roofing of the homemade of
makuti (grass thatched), iron sheets or is the roof tiled? An underwriter under normal
circumstances wouldn’t consider a grass thatched home as eligible for insurance because of the
potential of loss. It the drainage system will be constructed that it can be able to properly drain
water in case of heavy rains?
It is common practice that most of the private homes are constructed using mud bricks and not
blocks because of the costs involved. An underwriter would require such information in
ascertaining the eligibility of a homeowner for coverage.
e. The Valuation of the building. To avoid the possibility of under insurance, it is important the way
or the type of value used in determining the insurable value of the building. With the ever-
increasing costs or goods and services, the replacement costs of a building may be much higher
than the insured value of the building
f. The Use of Premises. It is becoming increasingly common for homeowners to run a business from
home. Understanding what kind of business is run and the nature of inventory is kept is for the
underwriter.
g. The Age of the home is also a key underwriting factor. The older the home, the riskier it is to insurer
since the possibility of damage is quite significant because the structures of the building have
weakened.
h. The Claims history of the homeowner. If the Homeowner has had similar insurance covers
elsewhere, the underwriters would be keen to know the how the claims were.
Forms Available
A Standard Homeowners policy has three categories under which coverage is provided. These are;
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Property
Home
Owners
Policy
Liability Accident
The Primary coverage provided for the property i.e. the Home and its contents. Coverages for liability
and accident can be purchased at the request of the insured.
PROPERTY COVERAGE
This section indemnifies the insured for losses/damages to the property of the insured. It primarily
comprises of three sections. (a) Buildings (b) Contents (c) All Risks
Section A: Buildings
This section covers the dwelling I.e. Residential Home Including its fixtures and fittings. Fixtures and
Fittings include items such as the windows, permanently fixed wardrobes, electrical wiring, etc.
The Home can also include other structures such as the garages, storage structures, Boundary walls,
fences and gates and other adjoining structures of the like. The Buildings section of the homeowner’s
policy extends to cover these as well.
The indemnification to the insured under this section is for losses or damages resulting from named
perils. These may include;
a) Fire
b) lightening
c) Earthquake
d) Explosions: Resulting from boilers or gas kept in the building and used for domestic use like cooking
will are covered. There are no restrictions on the type of boiler or gas but rather on the use of these
two.
e) Subsidence and Landslip of the land on which the home stands.
f) Windstorm
g) Impact damage
h) With this peril, damage to the home on impact by vehicles and animals is covered
i) Malicious damage
j) Riot, Strike and Civil Commotion (RSCC)
k) Flood, inundation, storm, typhoon, tempest, hurricanes, tornado etc.
EXCLUSIONS
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The insurer will not cover losses that result but are not limited to;
a) War
b) Nuclear Hazard
c) Wear and Tear
d) Mechanical and Electrical Breakdown
e) Excess Stated in the policy
f) Willful Neglect
g) Faulty workmanship
Section B: Contents
This section covers the contents in the building belonging to both the insured and their family members
while living within the premises. Some of the contents that could be covered include; Kitchen
Appliances, Television Set, Clothes, Shoes, Furniture and many others.
Loss or damage to contents as a result of theft would be covered in addition to the perils listed under
section A above.
The money would be covered but only up to a limited amount which amount would have to be notified
to the Insure
The Insured will usually provide a schedule of all the items covered under the policy.
Section C: All Risks

This section of the homeowners is designed to cover portable items such as mobile phones, I-pads,
Cameras and the like belonging to the insured.
COMMON CLAUSES APPLICABLE TO THE PROPERTY SECTION
Some of the common clauses that would apply to this section of the homeowner’s policy include;
a. Designation of Property
If the Insurer is unable to properly identify under what category a particular item should be insured
under, then the insurer will go by how the Insured has described the property in its books.
This clause could read as follows
“For the purpose of determining where necessary the column heading or Item under which any
property is insured the Company agrees to accept the designation under which such property has
been entered in the Insured's Books.”
b. Automatic Reinstatement of Sum Insured

The Insured can only be compensated up to the maximum limit of the sum insured. Every time a claim
occurs and the insured compensated, the sum insured reduces by that proportion of claim. With the
automatic reinstatement clause, the insured allows the insurer to automatically restore the sum insured
every time a claim occurs at an additional premium.
This clause could read as follows
“In consideration of the Insured undertaking to pay an additional premium at the agreed rate on
the amount of loss calculated on a prorate basis from the date of such loss to the expiry of the
current period of insurance, it is agreed that in the event of loss the insurance hereunder shall be
maintained in force for the full sum insured”
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c. Capital Additions
An Insurance cover would normally run for twelve months and at the start of the insurance period, the
Insured would declare the sums insured for a given property. However, it is within reasonable
expectation that during the currency of the policy, the insured would ideally make alterations or
improvements to the property for example addition of an additional garage to a home building or even
a new fence. With these improvements, the sum insured of the building that was initially declared to
the insured at the time of policy issuance would not match the current value hence pointing to under-
insurance. To ensure that the insurer is protected for this increase, the underwriter uses the capital
additions clause. This clause extends coverage for the increase in the value of the property. The
percentage of increase is usually between to 10-15 % of the Sum Insured initially declared.
The clause will always include a condition that requires the insured to advise the insurer of this addition.
Example:
Clay insures his building for Ushs 5,000,000. His policy has a capital additions clause for 10%. (10% of
5,000,000 = 500,000). Joseph can make alterations or improvements to his building up to a maximum
of 500,000. The Assumption would thus be that Joseph is insured for up to Ushs 5,500,000. If it so
happens that the time of claim, Joseph’s building was 5,400,000.00, then he wouldn’t be underinsured.
If however, the value is higher than 5,500,000.00, then He will his own insurer for the difference.
This clause could read as follows;
“The insurance by this Policy extends to cover alterations, additions and improvements (but not
appreciation in value in excess of the sums insured) to property specified in the Policy for an
amount not exceeding ten per cent of the sum insured on such property it being understood that
the Insured undertake to advise the Company each quarter of any such alterations, additions and
improvements and to pay the appropriate additional premium thereon.”
You should note that this clause does not apply to stock items.
d. Debris Removal Clause;

This clause allows the insured to be compensated for the cost of it occurs in cleaning up debris. If a fire
guts a residential home, and contents within the building are burned and probably sections of the
building burned to the ground as well. To clear this debris, the insurer will incur costs obviously. What
this clause does is reimburse the insured for these extra costs incurred in cleaning up.
This clause may read as follows;
“Insurance by this Policy extends to include: -
Costs and expenses reasonably incurred by the Insured as a result of damage in:-
a) removing debris or
b) dismantling and/or demolishing
c) shoring up or propping of the portion or portions of the property and/or
d) Removing debris of contents of any premises forming part of the property, such contents not
being the property of the Insured.”
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e. Temporary Removal
This extends coverage to the insured for accidental damage to property that has been moved from the
risk address indicated in the policy to another address. The coverage also extends for damages to the
said property whilst in the course of transit.
The fact that the property is temporarily removed means that the insured intends it is only moved for
a short period of time and the insured intends to return it to the original address.
“Subject to the following provisions the Property Insured, other than stock-in-trade or
merchandise and Employees' Effects, by this Policy is covered whilst temporarily removed for
cleaning, renovating, repair or other similar purposes to any premises not in the Insured's
occupation and in transit thereto and therefrom by road, rail, air or inland waterway all in Kenya
Uganda or Tanzania.
The amount recoverable under the extension in respect of any Item shall not exceed (a) 10 per cent of the
amount of the Item after deducting from the sum insured the value of any stock-in-trade or merchandise
insured by the said Item nor (b) the amount which would have been recoverable had the loss occurred at
the premises from which the property is temporarily removed.”
This extension does not apply to:
a) Motor Vehicles and Motor Chassis.

b) Property held by the Insured in trust, other than machinery and plant.
c) Property if and so far as it is otherwise insured. “
f. Seventy-Two (72) Hours Clause

A Home owner’s policy extends to cover Some Acts of Gods perils such as earthquake, volcanic eruption,
flooding and the like. The damages from such perils could go one for days. To be able to determine the
level of damage and extent of the insurer’s liability a seventy-two hours’ clause is used. It aggregates
the damage over a period of 72 hours to determine the loss
This clause may read as;
“All damage occurring within 72 (seventy-two) consecutive hours of an earthquake and arising
solely from the seismic activity is deemed to be one event for the purpose of determining Insurers'
liability.”
g. 85% Average Condition Clause

If at the time of a claim, it is found that the actual value of the damaged property is higher than what
was declared in the schedule of the insurance policy, this would constitute underinsurance.
“When a sum insured is declared to be subject to the special condition of average then, if such
sum shall at the breaking out of any fire or at the commencement of any destruction of or
damage to the property by any other peril hereby insured against, be less than 85% of the value
of the Property Insured in that amount, the Insured shall be considered as being his own Insurer
for the difference between the sum insured and the full value of the Property Insured at the
time of such destruction or damage and shall bear a rateable share of the loss accordingly.”
Other Clauses include;
j. Cost of Re-Erection
k. Fire Brigade
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l. Errors and Omissions Clause
m. Payment on Account
n. Riot, Strike and Civil Commotion
o. Waiver of Subrogation
BASIS OF SETTLEMENT:
The Basis of settlement in a homeowner’s policy refers to the way in which the loss following a claim
would be calculated. In a home owner’s policy, there primarily two bases of settlement. These are;
a. Indemnity Basis.
b. Reinstatement Basis
Reinstatement Basis: This basis of settlement provides for the determination of the payable amount
from a claim by identifying the cost of replacing the damaged item with a similar item and deducting
for wear and tear. A common phrase used is “like for like”
If for example a Samsung TV set Model AB is damaged, the insurer will determine the cost of the same
TV set Model from the market and deduct depreciation to cater for wear and tear to come up with the
claimable amount.
New for Old Basis: With this basis of settlement, the insurer provides for replacing the damaged item
with a new item of the same model without taking off depreciation.
In the example, the Insurer will replace the damaged Samsung TV Set Model new Samsung TV set,
Model
Under the Building Section of the homeowner’s policy, for damage to the wall, the insurer will have to
build a new wall for the insured.
LIABILITY COVERAGE
Even within a home setting, a Homeowner can be liable for damages as a result of injuries to
persons/visitors on the premises. It is not uncommon that homeowners or dwellers will have visitors
and or guests to their premises from time to time. The owner or occupier of the premises owes a duty
of care to such visitors to ensure that the premises are not dangerous or a potential source of injury.
There are two types of liability that can be covered under this policy
a. Occupiers Liability
b. Owners Liability
Occupiers Liability
This covers the persons occupying the premises for injuries or damage to a third party that they may
be liable for. An occupier is a person who has control over a premise or section of a premise. For
example, a tenant in a rented premise is an occupier.
Example:
Grace invites her friends for a house party at her apartment in Bweyogerere. Food and drinks
are served to all her guests. After eating one of the cakes, Jane, one of the guests falls ill with
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food poisoning. After recovering from the illness, Jane sues Grace. This is where the occupier's
Liability cover steps in to aid Grace.
Owners Liability.
This covers the Owners of the premises for injuries or damages to a visitor/guest on the premises. The
owners refer to the Landlords of the building. Just like in occupiers liability, the owner of the premises
owes a duty of care to the visitors or guest to the ensure that the premises are free from any potential
or foreseeable source of danger to the visitors/guest such as dangerous machinery, animals or toxic
substances. The Liability to the owner of the premises need not necessarily be to the visitors only. The
Owner of an apartment building is liable for damages to his/her tenants as a result of injuries for
sections of the building that are not occupied by the tenant.
For example: if a tenant in an apartment complex sustains an injury on the staircase or elevator then
the landlord is liable since he is in effect the occupier of that space.
RATING FOR HOMEOWNERS//DOMESTIC PACKAGE POLICY
The rates chargeable for a homeowner policy are standard as per the minimum rate guidelines
provided by the Insurance Regulatory Authority. The rates applicable for the different sections are as
per the table below;
Section Rate
i. Buildings 0.125%
ii. Contents 0.75%
iii. All Risks 1.5%
iv. Portable Items like cameras, laptops, cell 3%
phones, and items of the like.
v. Domestic Workers
vi. Liability 0.25%
0.2%
Minimum Premium- Ushs 100,00
Excess: 5% of Claim Amount, Min Ushs 100,000
2.5% of the Sum Insured for earthquake Claims
Table 5: Rates applicable for a Homeowners Policy
Source: Insurance Regulatory Authority of Uganda- Minimum rating guidelines
Example:
Peter just moved into his newly constructed home and wishes to purchase a homeowner’s policy. A
breakdown of the different items is provided below.
Description of Items Value (Ugx)

Building 2,000,000,000
Contents
Furniture consisting of Chairs and Tables 5,000,000
Televisions Set- LG 1,700,000
Mens Clothes 400,000
Women’s Clothes 600,000
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Children’s Clothes 200,000
All Shoes 700,000
Home Desktop Computer 2,000,000
Fridge 1,500,000
Kitchen Items (Cutlery and other similar 500,000
items)
Other Items
2 Dell Laptop Computers 4,000,000
2 Samsung Galaxy Notes 2,000,000
LG Camera 800,000
How much premium would Peter have to pay for this cover?
The cover will have three sections i.e. Buildings, Contents and the All Risks
The premium computations will be as below
Buildings – Ushs 2,000,000,000 * 0.125% = Ushs 2,500,000

Contents- Ushs 12,600,000 * 0.75% = Ushs 94,500
All Risks- Ushs 6,800,000 * 3% = Ushs 204,000
Total Premium Payable = Ushs 2,798,500
GENERAL CONDITIONS
Some of the conditions in a home owner’s policy include;
 It is a requirement that the insured takes all reasonable precautions to prevent loss or damage and
maintain the building in a proper condition.
 The Insurance cover can be cancelled by either party giving notice of cancellation to the other. The
Standard period is 30 days. Upon cancellation, pro rata premium will be paid.
ENDORSEMENTS
The Home owner’s policy can be modified to provide extra in addition to the primary perils covered.
This extra coverage is provided through endorsements.
5.4 PRIVATE MOTOR INSURANCE

Private Motor Vehicle insurance covers vehicles of insured persons from loss or damage to vehicles
specifically used for private purposes i.e. social, Domestic and Pleasure purposes.
Coverage is also extended to cover legal liability for bodily Injury/Death to a third party and or Property
damage to a third property.
The type of cover described above is known as a Motor Comprehensive Insurance policy. Other covers
that can be purchased include the; Statutory third party insurance; which only covers legal liability for
death or bodily injury to a third party by the insured vehicle up to the statutory limits, Third party fire
and theft cover.
Types of Vehicles classified as Private
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The log-book of the vehicle will state whether a given vehicle is a private vehicle or a commercial
vehicle. That said, the vehicles usually classified as private vehicles include the Single Cabin Pickups and
Double Cabin Pick-ups, Station Wagons such as the Toyota Land Cruiser, Pajero etc.,
There could be instances where the log-book of a vehicle states it's used/purpose as commercial and
yet the owner of the vehicle only uses it as a private vehicle, for example, a Toyota Hiace. In such cases,
the owner of the vehicle (the Inured can still take up a private motor vehicle insurance cover but clearly
specify to the insurer that the vehicle is for only social, domestic and pleasure purposes.
Underwriting and Premium Calculation for Motor Private Insurance
In determining whether to offer or decline cover for private motor insurance, there is a number of
factors that the underwriter would have to examine. These items should be captured in the insurance
proposal form and include the following;
a. The Age of the vehicle

b. The Mileage of the vehicle
c. The Age of the driver or Insured Person
d. Driving experience (Number of years the proposed insured has been driving
e. Claims experience
f. The frequency of servicing the vehicle
Activity
Identify any other underwriting factors that a prudent underwriter would consider in assessing the
insurability of a motor vehicle
The above underwriting factors give a prudent underwriter the basis on whether they should decline
or accept a given risk. The Minimum premium rate charged for any private motor vehicle regardless of
the brand or type is 4%
Premium Calculation
Joseph’s Motor Vehicle is valued at Ushs 200,000,000. How much premium would Joseph have to pay
for an insurance cover?
Premium = Sum Insured * Rate

= 200,000,000 * 4%
= 8,000,000
Benefits Covered under Private Motor Insurance
The motor cover can be extended to provide cover for additional benefits such as
 Medical expenses following an accident
 Towing Charges
 Wreckage Removal Charges
 Protection charges
 Windscreen and driving mirror replacement
 Locks and keys, among others
Clauses applicable under Private Motor Insurance
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Applicable clauses that can be found under a motor private insurance policy include;
a. Replacement of parts clause

b. Cross Liability Clause
c. Motor Trader Clause
d. Vicarious Liability Clause
e. Passenger Liability Clause
5.5 Chapter Summary

A Domestic Package Insurance policy is a comprehensive insurance cover that indemnifies the
insured for loss or damage to his home or contents. It also extends to provide coverage for legal
liability to the insured and accident to his workers within the home.
Homeowners can be categorized into three sections. These are; Private Homeowners, Rental
Occupants and Condominium owners.
The underwriting factors considered in underwriting a home insurance policy include;
 The type of construction

 The Location of the building /premises
 The proximity of the home to firefighting services
 The Age of the home
 The use of the home
A homeowners policy has three principal sections; a) Buildings b) Contents c) All Risks
Other sections covered include; d) Workers Compensation e) Owners/Occupiers Liability
The principal clause under the home owner’s policy include;
 Designation of the property clause

 Debris Removal Clause
 Capital Additions Clause
 Adjoining Building Clause
 Automatic Reinstatement of Sum insured
The rating of homeowners policy depends on the section covered and is guided by the
minimum rating guide provided by the Insurance regulatory authority.
Private Motor Insurance cover indemnifies the insured for loss/ damage to the vehicle from
any loss except as excluded. The Coverage provided also covers the insured for legal liability
for loss of death or bodily injury to a third party and property damage to third party property.
Some of the underwriting factors considered in rating a private motor vehicle insurance
include;
a. The Age of the vehicle

b. The Mileage of the vehicle
c. The Age of the driver or Insured Person
d. Driving experience (Number of years the proposed insured has been driving
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e. Claims experience
f. The frequency of servicing the vehicle
The Benefits provided under this policy include but are not limited to;
 Medical expenses following an accident

 Towing Charges
 Wreckage Removal Charges
 Protection charges
 Windscreen and driving mirror replacement
5.6 Revision Questions

1. What the classes of insurance offered under non-commercial property insurance
2. Differentiate between homeowners policy and householders policy
3. Identify and describe the different sections of a domestic package insurance cover
4. What are the underwriting factors considered in underwriting a private motor insurance policy
5. Identify and describe some of the clauses applicable under a domestic package insurance
policy
6. COMMERCIAL PROPERTY INSURANCE
6.1 INTRODUCTION
In this chapter, we shall deal with Commercial Property Insurance. This principally means insurance
covers that are appropriate for property owned and hired for business purposes. The property or
use of the property must be subjected to prevailing economic cycles to fall under this category.
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 Explain the underwriting process for an industrial all risks policy (Assets All Risks)
 Describe the purpose of Theft and Burglary insurance for SME establishments
 Explain the underwriting considerations for Money In Transit, Goods In Transit and Commercial
Motor Insurance
6.3 INDUSTRIAL ALL RISKS

This is the most recommended class of business for risks whose values are large with sum insured
in excess of UGX 5Bn. Most appropriate for manufacturing entities. The naming will change to
Assets All Risks for the organization in non-manufacturing industries that require a package policy
e.g. banks, telecommunication companies etc.
The possible sections under the Industrial All Risks Policy include
Sec I: Property (Material) Damage (PD)
Sec II: Machinery Breakdown (MB)
Sec III: Business Interruption following PD and MB
The number of sections will depend on the assessed need of the client and of course affordability
or budget/cost implications
RISK SELECTION AND ASSESSMENT
Because industrial All risks policy is a package policy for large entities/establishments usually the
risk selection and assessment will require the most recent survey report where the risk underwriter
will be expected to look out for the moral and physical hazards, nature of trade, fire risk protection
measures.
Research: What are the major underwriting considerations at this stage?
Activity: illustration of a manufacturing entity e.g. Mukwano Industries or Kinyara sugar factory
We can also look at the option of an Asset All Risk Policy for Non-manufacturing company e.g. MTN
Uganda, Stanbic Bank Uganda etc.
 Risk criteria
 Risk/insured indices
 Moral hazard
 Physical hazard; fire, theft, others
 Size of insurance
 Trade
 Acceptance category
 Risk/insured indices (re-checking of)
CLASSIFICATION AND RATING
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Following the assessment, the underwriter should be able to plot the risk on the matrix to be able
to classify as Class 1, class II and Class III. With the classification and rating factors, then the
appropriate rate can be applied to make use of the Industry Rating guide (loading factors)
Illustration and application of the risk matrix
Rating
 Premium rating will depend on the type of occupancy-whether industrial or otherwise

 All property located in an industrial complex will be charged one rate depending on the product
(s) made with variations along the housekeeping measures.
 Facilities outside industrial complexes will be rated depending on the nature of occupancy
(nature of business/trade) of at an individual location
 Storage areas will be rated based on the hazardous nature of the goods held
 An additional premium is charged to include “Add-on” covers
 Discount in premium may be given based on past claims experience and fire protection facilities
at the premises (These must be as per rating guide of the market and in consultation with the
Rating committee for high-value risks)
Illustration using the rating guide (appendix)
Methods of calculation of a premium;-Demonstration using a risk note from a brokerage firm for a
beverage manufacturing entity e.g. Crown Beverages limited
Most property and pecuniary insurance premiums are based on the following formula:
Sum X Rate = Premium
Sum insured is fairly obvious. It is the maximum amount the insurer can be called upon to pay if
the property insured is lost or destroyed (or the business is interrupted for the whole of a maximum
indemnity period to such an extent that no turnover was earned). It should represent the full value
at risk on the basis of the settlement agreed in the policy.
The rate is the price per……………or ………….to be applied to the sum insured. It is the total of all the
risk factors. For example
 Fire; normal rate and addition for non-standard construction, hazardous heating, plural tenure,
and so on.
 Theft; rate based on the attractiveness of the property to be insured at risk in the geographical
area concerned.
However, there are variations which apply factors which the insurer recognizes as:
 Increasing the risk

 Reducing the risk
 Reducing every claim
 Reducing the maximum (total) amount payable
 Likely to retain business
 A reward for past absence of claims
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 Likely to reduce the total amount payable as the business of the insurance develops and
becomes more competitive and sophisticated in the analysis.
SCOPE OF COVER/POLICY DOCUMENTATION
As earlier noted, IAR will usually have at least two sections i.e. Material Damage and Business
Interruption section
The scope of cover will majorly be dependent on the classification of the risk. Class, I would have
the widest coverage since the risk will be considered as VERY good. Class III is a substandard risk
will call for any of the following three approaches
MATERIAL DAMAGE SECTION
Seek detailed notes from the other material
This is the main section of the policy. It provides cover for loss, damage and destruction to the
assets of the insured/owner of the factory or property.
Note: Assets of the insured are generally used to generate income for the owner of the business
and it is the non-current (fixed) assets that are covered under this section excluding those that have
or will be covered under specific policies like motor vehicles
These assets range from Buildings, Stocks of Materials (Raw Materials, Work in Progress and
Finished Products), Plant and machinery, Office contents and any other insurable items
The coverage will be taken against loss or damage occasioned by fire and special perils including
but not limited to perils like
 Lightning
 Explosion
 Aircraft and articles dropped therefrom
 Impact damage due to rail/road or animal
 Riot, strike, malicious damage and terrorism damage
 Subsidence and landslide
 Storm, cyclone, typhoon, tempest, hurricane, tornado, flood and inundation, damage caused
by sprinkler leakage, overflow, leakage of water tanks, pipes etc.
The cover can be extended to cover earthquake, deterioration of stock in the cold storages
following power failure as a result of an insured peril, municipality fees, additional expenditure
involved in the removal of debris, architect, consulting engineer fees over and above the amounts
in the policy. Each of these extensions will carry a limit which must be a small percentage
(preferably below 5% of the total sum insured under the section)
The basis of cover must be stated. Whether it is on replacement or reinstatement or both

depending on the desired coverage by the insured.
BUSINESS INTERRUPTION SECTION
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Business interruption was also known as Loss of Profits or Consequential Loss. It relates to the
financial loss incurred when the operations of the business are interrupted by a peril insured by a
fire policy, such as fire, or storm or explosion. In the event of a fire, the damaged property will be
replaced or repaired by the operation of the fire policy.
During this time of interruption, the premises may need to be closed and temporary premises
rented. Even without closure there could be a loss of production leading to a reduction in turnover,
yet many costs are maintained, and additional ones incurred. After all of this, the business will be
faced with a drop in the profit earned. Business Interruption cover was designed for these costs
and losses.
The purpose of a Business Interruption policy, subject to an adequate sum insured and indemnity
period is to;
I. Reimburse those charges which continue regardless of the reduction in turnover;

II. Pay net profit which would otherwise have been earned; and
III. Meet such additional costs as are incurred to enable the business to recover more quickly
or reduce the loss.
It is normal for the cover under a Business Interruption policy to follow all those events insured
under the fire policy. The insured can elect not to insure against some of the insured fire perils but
cannot insure for perils that have not been covered under the fire policy. The fire cover can be
under the fire section of the standard policy or any other fire policy covering the interest of the
insured. Damage insured under a fire policy will, for the balance of this section, be referred to as
Material Damage. Machinery Loss of Profits is mentioned later on.
A business interruption insurer insists on there being material damage cover in force as;
1. The insurer is protected by all the terms and conditions of the material damage policy; therefore,
these do not have to be repeated in the business interruption policy. Therefore, if an insurer
declines to meet a material damage claim, by reason of the terms and conditions, the business
interruption claim also falls way. The mere fact that the material damage falls within the First
Amount Payable is not a barrier to the Business Interruption claim;
2. Through having material damage cover, the damaged property will be reinstated promptly, so
reducing the business interruption period. Otherwise, the necessary finance might not be available.
It is preferable that business interruption and material damage insurance be with the same insurer
to avoid any conflict of interest.
The Cover
Basically, the policy compares the results of the business during the period after damage (the
indemnity period) with those in the corresponding period of the previous year. Adjustments are
made to allow for special circumstances and trends in the business. This s called the reduction in
turnover in consequences of the damage. To this is applied the rate of gross to determine the loss.
These items and expressions are further explained below.
Indemnity period
A feature of Business Interruption Insurance is that the insured chooses what is known as an
Indemnity Period this being the length of time that he calculates will be long enough for every
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business to recover from even the moos serious fire, or other insured loss. This may vary from a
few months to some years.
A common error is to underestimate the time needed. There are delays in supply of machinery and
it may take time to regain lost markets. Remember that the indemnity period bears no relation to
the period of insurance.
Standard turnover
The turnover during that period in the twelve months immediately before the date of the damage
which corresponds with the indemnity period. For example, if damage occurs just before the
Christmas season and affects the year-end holiday trade, we must compare the figures for
corresponding months of the previous year, duly adjusted for trends in the business and other
special circumstances.
Most businesses are subjected to seasonal fluctuations- the damage might not occur during a peak
period, or, conversely just before the business would normally have virtually shut down for its quiet
season.
Alternatively, used where they are more appropriate to the type of business, are;
 Standard revenue-where businesses gain their income from providing services, rather than
from trade.
 Standard gross rentals. Unlike the material damage, cover continues during the indemnity
period until gross rentals reach their previous level, that is, the premises are not only
tenantable but have been re-let. Some business would need both a Gross Profit item, on
turnover, and Gross Rentals item.
Gross-profit
This may differ from an accountant’s understanding of the expression, and is defined in the policy
as;
 Difference Basis- sales less uninsured costs;
Or
 Additional Basis –Net Profit Plus Standing Charges.
(Standing Charges are not defined in the policy wording but see 2.8.4 and the next chapter).
Net profit
Net trading profit (excluding items of a capital nature) after provision for standing charges, but
before profits tax.
The rate of gross profit
The rate, or percentage, of Gross Profit, earned on the turnover during the financial year
immediately before the date of damage.
As has been said, this percentage is applied to a reduction in turnover, in order to determine the
actual loss suffered.
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The increased cost of working
The policy might be expressed to cover Gross Profit, Gross Rentals or Revenue- subsection (a), but
in each case, there is a subsection (b), is the additional expenditure necessarily and reasonably
incurred in order to mitigate the loss. Examples include renting alternative premises, staff overtime
and use of alternative supply sources.
However, under this subsection there must be a saving or at least a break-even – the expenditure
may not exceed the rate of Gross Profit applied to the amount of reduction avoided.
An additional increase in the cost of working
This is a separate item with a specific sum insured. It is for those cases where the indemnity payable
in respect of the increased cost of working would be insufficient for maintaining the operation of
the business. The indemnity is payable in addition to that allowed under the main item, Gross Profit
and Increased Cost of Working.
Example
Newspaper proprietors must continue printing elsewhere, even at a loss, to maintain circulation,
and bakery concerns must continue production, perhaps uneconomically, in order to retain regular
customers.
Circumstances may arise on rare occasions where it appears that insured is unlikely to lose any
turnover as a result of a fire but will necessarily incur an additional cost of working. An example of
this would be an office where alternative premises are readily available but at a higher cost. They
may wish to incur only for Additional Increased Cost of Working.
Wage items
In the past, distinctions were made between salaries and wages.
Salaries referred to permanent staff, usually paid, in administrative or executive roles. They were
considered essential to the running of the business; accordingly, salaries were included in the gross
profit item. Wages were regarded as a variable charge since the labour force could be reduced in
proportion to reduced activity.
This is no longer the case-the wage-earners may be more necessary to the continuance of the
business, than the so-called salary earners.
Modern factory production lines often call for the same number of workstations, whether working
at 100%capacirty, or less. Stores, canteens and maintenance departments’ may not reduce at all.
Any reduction in the same labour force may be costly and take time. In many businesses (especially
the smaller concerns) the relationship of the employer to an employee is such that there is a moral
responsibility to maintain their welfare, and dismissals arise only where this forced by a major
stoppage.
The recommended approach is to include both salaries and wages in the Gross Profit sum insured.
Alternatively, the insured may choose to;
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1. Insure wages for notice period only;
2. Have an item in respect of wages for a period of four weeks or more, under which Insurers pay
in full the wages of the employees whose services cannot be used at all, and a proportional
part of the wage of those who can only be partially employed;
3. Insure on a sliding scale, allowing for payment of all wages for a limited period, and an agreed
percentage of the wage bill thereafter (Dual Basis Wages Cover). A rate of wages is established
in much the same way as a rate of Gross Profit.
This option is available where the indemnity period is twelve months or longer.
TURNOVER FIGURE
Notice that we are concerned with;
 Post-loss turnover- the turnover during the indemnity period.
This is compared with;
 Standard turnover- the turnover during the corresponding period in the 12months immediately
before the loss;
 Annual turnover during the 12months immediately before the loss, used for the calculation of
Average;
 Financial year turnover-during the financial year immediately before the loss, used to calculate
the rate of Gross Profit.
ADDITIONS/ DIFFERENCE BASIS
There are two ways of arriving at the Gross Profit; the choice is made when the cover is taken out.
1. Additions Basis- the net profit plus the standing charges.
2. Difference basis –the sales (the difference between the opening and the closing stock) less the
uninsured costs, that is, those which will reduce in proportion to turnover. Uninsured costs are
the direct opposite and will reduce proportionately. Examples are bad debts, discounts
allowed, packaging and delivery costs, sales commission)
Standing charges are added to net profit to arrive at the sum insured. Uninsured costs are deducted
from sales. If the figures are correctly extracted from the insured’s books either basis will give the
same result, see below.
RISK CONTROL AND REINSURANCE
As a principle, the insured must behave like they did not take up insurance and make reasonable
steps in having the best housekeeping practice for the premises to avoid the occurrence of perils
or if they operated then there are loss mitigating measures in place
The underwriting process is never complete without proper and adequate reinsurance of the risk.
Industrial All Risks policies tend to carry high values and therefore it is a portfolio that must
consistently be reviewed for proper reinsurance.
In the next section, we must demonstrate the application of reinsurance in different scenarios
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Using the Crown Beverage slip with slight modifications, demonstrate the reinsurance
allocation/placements based on EML, PML basis
EMLs and acceptance limits
 Estimated maximum loss

 PML and NLE
- Probable maximum loss (PML)
- Normal loss expectancy (NLE)
 Acceptance limits
Co-insurance and reinsurance
6.4 THEFT/BURGLARY INSURANCE

With changing demands in the market for insurance, it hard to come across a purely theft and burglary
cover as a separate and independent policy
The trend is to have Theft and Burglary as a chargeable extension under the fire and allied perils policy.
It can be charged based on Total Declared Value at Risk or on First Loss Sum insured basis especially for
items that are susceptible to theft e.g. stocks.
For small business establishments, the cover is taken under the Business All Risks policy which has a
wide coverage than the strict Theft/Burglary policy.
UNDERWRITING AND RATING
Like any other insurance cover, it is important to have all material facts disclosed for proper
underwriting of the risk.
The following are considerations for the underwriter. The list is only a guide
 Nature of the risks including area, type of property and security

 The pattern of a theft loss, examples of patterns of theft, theft statistics and histories of theft
 Nature of perimeter protection, surveillance, access control and security guards
 Nature of door and window construction and protection
 Selection and use of safes e.g. free-standing safes, wall safes, under-floor safes. Their selection could
also depend on
 The maximum value to be protected.
 The volume which the valuables will occupy.
 The position of the safe; preferably in an internal lockable office with a solid floor for an under-floor
safe or with masonry walls for a wall safe.
 Key or combination locking and security for keys/combination notes.
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6.5MONEY INSURANCE
Under this, the student is drawn to the value of money in a business entity. We all know that money is
the lifeline of any business venture and therefore as a property or asset must be well protected for the
sustainability of the business.
The approach would be to obtain all relevant information through the proposal form or any other
convenient way.
Under classification, this can vary from insurer to insurer but generally, the classification of the risk
could be based on the amounts of money held and this is also dependent on the nature of the business
Generally speaking, financial institutions by all definitions as long as they are involved in the business
of handling money will be covered under special circumstances since as far as money is concerned they
are considered to be a good risk
To provide a broad coverage to the financial institutions the underwriter will offer a blanket policy that
has a section for the money
Other than financial institutions, the money insurance policy will be designed to cover any forms of
money that are legally recognized in the economy
A risk of money will be bad or good depending on the risk management measures -checks and controls
being implemented by the insured
From the proposal form, the underwriter is able to pick out the level of exposure and that should help
in the assessment of the risk
Money Proposal form
What are the general and specific questions in the proposal form?
Illustration: use companies in the same sector with varying checks and controls (existence of a strictly
implemented risk and crisis management policy, corporate governance and ethical matters)
RISK CLASSIFICATION AND RATING
Again, as earlier stated, the higher the exposure (Bad risk), the higher the premium charged. The market
practice has largely relied on the existing rates as per IRA minimum rates guide
The features of the money policy for purposes of rating will include
 Money/cash in transit to and from the office and bank

 Money in the hands of authorized officials
 Money on the premises during working hours
 Money on the premises after working hours
 Value of the safe (as an extension)
 Estimated Annual carryings
How are the amounts under each section determined?
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The rate applicable to sections will tend to vary with the perceived risk or level of exposure with a higher
rate under transit. The rate on EAC is usually justified to charge an equitable premium for the exposure
since the number of transits may not be accurately determined at underwriting stage.
Example
POLICY DOCUMENTATION/SCOPE OF COVER
The money policy is largely an All Risks Policy. The scope of coverage will be defined by the
exceptions/exclusions as expressly stated in the policy. The cover is for loss of money (what is money)
during transit from office premises to the bank and from the bank to the office premises, loss of money
whilst in the hands of authorized officials, loss of money at the premises during and after working hours.
An extension is customarily done for damage to the safe or strong room and any receptacles used to
keep the money.
The current practice has several extensions including hold up and bodily injury to personnel and damage
or loss of their belongings
As a principle, any extensions that will tend to increase the exposure must attract an additional
premium
Policy schedule can be added…………………………………………………………………….
Important to note that each section of cover will have to have an insuring clause to define the liability
that the underwriter carries in the event of a loss under that section
RISK CONTROL AND REINSURANCE
The responsibility to control the risk rests with the insured who must behave like no insurance in place.
The existence of an operational manual in relation to the handling of many is usually a big stride in the
right direction.
6.6 Goods in Transit

Under this section, we will deal with Goods in Transit Insurance that is specifically designed to cover
loss or damage to goods whilst in transit on land either by road or rail.
It is important to note that Goods in transit policy has similar features to the Marine Cargo insurance
except for a few differences in coverage
Whilst Marine Cargo insurance covers loss or damage to cargo or goods whilst in transit from one point
to another by any means say Road, Rail, Water and Air, Goods in transit tends to be restricted to land
(Road and Rail)
For prudent underwriting, it is proper that material facts are disclosed by the proposed through the
most appropriate means. The information desired can be obtained through a proposal form. The
information could range from
 The nature of the goods with full description

 Point of departure and destination of the goods including the route to be used
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 The packaging of the goods
 Type of conveyance for the goods, whether by Road or rail
 Value of the goods (trading documentation like invoices should be helpful), sum insured, and type
of cover required etc.
Based on the assessed exposure of any given shipment or consignment, then the risk can be charged
an equitable premium
The rating under goods in transit is usually based on the nature of goods that will determine the
applicable rate.
In Uganda, a range of rates has been provided for single and annual transits. Because of the volumes
on annual transits, the standard rate tends to be lower than for the single transit
Nature of Goods Annual Transit Single Transit

Pharmaceutical Products 0.4% 0.5%
Steel Products 0.25% 0.35%
Motor Vehicles 0.5% 1.00%
Agricultural Products 0.75% 1.25%
Note: the above are hypothetical rates to help demonstrate the rating for Goods in Transit risks
Example
ABC limited is a pharmaceuticals supply company operating in Uganda and supplying medicines to
a number of private and government-owned hospitals in Uganda including the wholesale
pharmacies
The company intends to transport a consignment worth Ushs 100M from Mombasa to Kampala
through containerized packages.
Using the above rates in the table, determine how much premium will be paid for annual transit
with an Estimated annual carry of Ushs 1.2Bn and single transit of Ushs 100M
Activity
POLICY DOCUMENTATION/SCOPE OF COVER
Goods in transit policy are written on an “All Risks” basis where everything is covered except that
which is expressly stated in the policy document as excluded
During land transit, the goods may be lost or damaged by the derailment of railway wagons or
collision of motor goods vehicles
During transit and whilst in storage incidental to transit, the goods may catch fire or may be stolen.
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These hazards or causes of loss are referred to as perils or risks of insurance. They could result in
any of the following losses
Total Loss- eg an entire shipment may be lost due to an accident of the vehicle say oil tankers and
catches fire. It will not only destroy the entire consignment but also the vehicle and consequential
third-party liabilities depending on the location or scene of an accident
Partial loss- goods in one container or wagon could be damaged through the derailment
Expenses- The insured may incur certain expenses to prevent aggravation of loss or damage (could
this be treated under claims preparation expenses or separately as per the wording of the policy)
The purpose of the policy is to indemnify such losses. The types of losses paid for and the extent of
payment depends on the terms and conditions of the policy
Therefore, the Goods in transit policy undertakes to indemnify the insured in the event of a loss
caused by the insured perils during the currency of the policy. The goods are exposed to various
perils from the time it leaves the supplier’s warehouse till received at the final warehouse of the
consignee. The minimum extent of cover is against the total loss or damage to the goods.
NOT ALL RISKS CAN BE INSURED
It is important to appreciate that insurance caters for occurrences of an accidental nature.

Inevitable events are not insurable. Insurance does not cover any loss caused by wear and tear,
inherent vice of the goods- the tendency of the commodity to deteriorate e.g. fruits, vegetables,
decaying in course of time, ordinary leakage or evaporation e.g. certain liquid cargoes suffer natural
loss by evaporation which is termed as Ullage- loss of market due to delay in voyage
There are, however, extraneous perils that can be covered as extensions to the standard cover for
an additional premium. These could include
 Loss of damage to the goods caused by malicious damage

 Leakage or contamination
 Breakage- common to consignments of machinery, spare parts and fragile items
 War & Strikes, Riots & civil commotion
DURATION OF COVER
This varies with the mode of transit employed (Road or Rail). Cover attaches from the time the
goods leave the warehouse at the dispatch point and continues during the course of transit. Any
period of storage unconnected with the transit should be excluded.
The cover continues until the point the goods are discharged at the point named in the policy and
for an extra agreed number of days say 7 days from the date of arrival of the truck /wagon at the
destination town.
Any extension of time beyond the agreed above, will require specific notification and request to
the underwriter
If the insured transit is terminated at a place other than the destination as per policy, the insurance
will also terminate unless prompt notice is given to the underwriters and could choose to charge
an additional premium
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If the destination is changed after cover attached, the client’s interests will be held covered subject
to prompt notice.
What are the different types of policies?
A. Specific Policy- it is issued to cover single transit/consignment

B. Cover note- it is an unstamped document, which is issued in advance of the policy to grant
provisional cover pending issue of policy
C. Open policy/open cover- Merchants and big companies with high volumes of trade
throughout the year require insurance protection on a permanent and automatic basis
The OPEN POLICY is a stamped document issued for a sufficiently large amount of insurance for a
period of 1 year. The open policy will cease to operate at the expiry of the policy period or on
exhaustion of the sum insured under the policy. Premiums may be payable in full on the sum
insured when the policy is issued or if the sum insured is not declared, the premium is collected on
each declaration made
The OPEN COVER is another automatic arrangement for goods in transit. This is however not a
stamped document. It is an agreement issued in the form of a letter, whereby the insurer
undertakes to insure all shipments declared by the insured. Since the document is not stamped,
specific certificates are issued for each consignment which is then stamped to authenticate the
transaction and existence of cover for that consignment.
The open cover will usually have no sum insured which is reduced by the declarations made.
Premium is payable on each declaration.
Note: the open policies and open covers are agreements expressed in general terms and are subject
to specific provisions and clauses in the master policy/documentation
RISK CONTROL (REINSURANCE/ACCUMULATION MANAGEMENT)
The claims on the goods in transit/marine portfolio can be infrequent but are subject to high moral
hazards especially in countries like Uganda where it is still difficult for the underwriter to track
goods from the point of dispatch to the destination.
It is paramount for the underwriter to implement certain measures- Warranties and Conditions to
help limit the extent of losses.
The underwriter can make use of
Excesses and Franchise
Depending on the nature of goods, the highly fragile or susceptible to risks of thefts will usually
carry a higher excess than goods like steel etc. The excess is usually stated as a percentage of each
and every loss incurred e. g 10% each and every loss, Min Ushs (5% of the total sum insured)
Reasonable Despatch
Reasonable care must be taken during the currency of the policy. Any aggravation of loss due to
any act of omission or deliberate negligence on the part of the insured will adversely affect the
claim under the policy
Loss prevention and Minimization
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The insured has to take precautionary steps, anticipate the areas of losses and prevent the same
by adopting effective preventive measures. The numerous facets of packaging, handling,
transportation, discharge storage etc. influence the prevention and minimization of losses. A
detailed account of the factors giving rise to a claim and which accentuate the same once a loss has
taken place are too vast and extensive to be dealt with here
The insured will have to act in consultation with the materials’ management department, clearing
and forwarding agents and also experts in packaging.
Efficient and sturdy packing, proper tallying, careful and appropriate storage, strict supervision and
careful handling at all stages of transit are a few useful hints for prevention of loss of goods
Reinsurance
For the underwriter, the last line of defence is reinsurance. At the underwriting stage, the risk must
be properly reinsured to protect the company’s balance sheet. Goods in transit policy will usually
be arranged under the Excess of Loss treaty given the volumes and relatively low sums for individual
risks. The accumulation is better protected with a non-proportional treaty.
The appropriateness of the reinsurance cover will largely depend on the risk profiles and desire of
the underwriter in consultation with the reinsurance broker (if any) and of course the input of the
other departments- claims, finance and business development.
6.7 MOTOR INSURANCE

Motor insurance is a leading portfolio of general insurance and contributes over 35% of the
Industry’s Gross Written Premium. It is the most popular product in the market and probably the
easiest to sale in Uganda since the public is not only aware of it but also it is has a compulsory
element (Third Party Insurance)
The stated factors above give the product a unique position in the portfolio and no general
insurance company can afford to ignore motor insurance for purposes of penetration and
profitability if well underwritten
Generally, under motor insurance, the owner of the vehicle will be required to submit a fully
completed proposal form to the underwriter. The purpose of the proposal form at this stage is to
fulfil the principle of utmost good faith on the part of the proposer. It is expected that the proposer
discloses/ declares all material facts relevant to the reasonable assessment of the risk in
comparison to the underwriting guide of the insurer
Under this section, we will deal with the general questions that cut across all types of vehicles
meaning that the specific questions will vary with the type and use of a vehicle to try and capture
as much information to aid the assessment of the risk posed by the vehicle
 Proposer’s Name
 Address of the proposed
 Occupation of the proposed
 Date of Birth/Age
 Physical Disabilities and infirmities
 Previous Convictions
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 Vehicle Details
 Garage/ where it is kept after use
 Ownership and Hire Purchase
 Cover Required
 Previous Insurance History
 Past claims experience
 Use of the vehicle
 Declaration
What is the purpose of each of these questions? Do they have a bearing on the level of exposure
for each risk?
We should be able to use the answers to the general and specific questions in the proposal form to
determine whether the risk/vehicle is a good or bad risk as per insurer’s criteria and then determine
the next course of action or underwriting decision
Add: Proposal forms for Motor Private and Motor Commercial
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ABC INSURANCE COMPANY LIMITED
PRIVATE MOTOR CAR INSURANCE COVER REQUEST FORM
Full name of the proposer (in block letters)…………………………………………………...
Physical address (in block letters) .……………………………...
Mobile…………………………………
Email:…....….............................................................
Business or profession …………………………………
Name of intermediary & code:……………………………………………………
Period of insurance from: …………………………………to: ………….……………………………
specify cover required a) third party statutory b) third-party enhanced c) ordinary motor
comprehensive d)Simba e) diva
sum insured or proposer’s estimate of the vehicle value including accessories and spare
parts……………………………………………………………………………………………………
will the car be used exclusively for social, domestic and pleasure purposes? yes no
if no, state for what purpose it will be used
…………………………………………………………………………………………………………………………
a situation where the car(s) will be garaged ……………………………
are you the owner of the car and is it registered in your own names? if not attach sales
agreement and/or transfer form……………………………………..
any anti-theft device fitted to the car? if yes provide details……………………………………….
is the car likely to be driven by another person? if so then they must hold a valid driving license
or permit for that category of vehicle………………………………………..
attach the following documents
 copy of driving licence
 copy of the log book
 photos (front, rear, & sideways)
 payment mode: please specify cash cheque others if the policy is not fully
paid to specify the payment plan in 60 days
note: credit will be granted upon payment of 50% of the total premium
declaration
i/we declare that to the best of my/our knowledge and belief:-
a) the above answers are true
b) all material particulars affecting the assessment of the risk have been disclosed
c) The vehicle(s) is/are in a sound and road-worthy condition.
 I/we agree that this request form and declaration shall be the basis of the contract
between me/us and ABC General Insurance Company and shall be deemed to be part
of such contract.
 The duty of disclosure applies to each insured before we accept your request form and
whenever you renew, extend, vary or reinstate a policy of insurance.
date …………………………………… signature ………………………….

note: no insurance cover is in force until the request form has been accepted by the company
and a policy document issued
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Classification
For a proper and equitable rating of the insurance portfolio, the insurable units have to be divided
into homogeneous groups, which is referred to as risk classification. The purpose is to make sure
that the units in each group present the same exposure to the pool of the underwriter/insurer.
Motor insurance is largely divided into
• Motorcycles
• Private cars (Not used for carrying passengers for hire or reward)
• Commercial vehicles (including private cars carrying passengers for hire or reward)
• Motor trade Road Risk
• Motor Trade Internal Risk
Motor Cycles
This category includes motorcycles with or without sidecars, pedal cycles or mechanically assisted
pedal cycles and motor scooters with or without sidecars.
Private Cars
This class comprises of cars of the private type including station wagons used for social, domestic
and pleasure purposes and business or professional purposes (excluding the carriage of goods other
than samples)
Commercial Vehicles
All vehicles other than private cars or motorcycles excluding vehicles running on rails come under
this category
Motor Trade Road risk
This can be treated as a subclass under commercial vehicles. This covers the road risks for motor
traders before the vehicles are sold to the final customers.
Motor Trade Internal risk
This class covers the risk that the motor trader is exposed to while the vehicles either brand new
or belonging to customers which are on his premised for servicing or repair
Besides this broad classification, each class can further be divided into subclasses of homogenous
risks depending on the market demands and preference of the respective underwriters/insurers.
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RATING OF MOTOR INSURANCE
Despite the existence of tariff guide in the market, the rating of motor insurance risks is still an
uphill task for many underwriters. It is important to note that the rating guide only provides a
minimum rate for the standard/normal risk. It is therefore expected that depending on the
assessment of the individual risks/units, the underwriter should charge an equitable premium
The task of arriving at an equitable premium is currently daunting because of the bad claims
experience in the motor insurance portfolio; both private and commercial. The deteriorating claims
experience can be related to increasing moral hazards at the underwriting and claims settlement
stages (claims leakages)
 Additional to the above is the ever-increasing traffic with more vehicles on the same
narrow roads in the cities especially Kampala and surrounding suburbs, that has seen the
number of accidents increase on the road.
 The latest trend that has seen the number of accidents increase is the use of the mobile
phone while driving. This will see the frequency of minor accidents increase and there will
be a need for today’s underwriter to start thinking of ways of managing this new risk.
 The increasing awareness of accident victims about their rights of liability claims has seen
the number of motor liability claims shooting through the roof.
If every insurer was allowed the freedom to charge any premium depending on the claims
experience, the rating of motor risks would not be such a challenge given the off shelf and
customized pricing models. However, this is not possible in a very competitive relatively small
motor insurance market
The insurer has then to maintain a balance between the actuarial price and market price to remain
competitive and relevant in the market.
Note: In the pricing of the motor risks, it is important to make use of the various guides to maintain
compliance with the existing regulations.
Rating factors
The main rating factors for motor risks include
 Value of the car

 The geographical zone
 Capacity
 Age of the vehicle
 The desired scope of cover
Illustration/Diagram: Motor Insurance Business classification in Uganda
The Value of the Vehicle
This is the exposure base for all the motor risks in Uganda. The established premium rate is applied
to the value of the vehicle which is considered as the Sum Insured.
What is the difference between the Insured’s Estimated Value (IEV), Insured’s Declared Value (IDV)
and Market Value especially in the event of a Total loss claim?
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Geographical zone
This is the zone where the vehicle is mostly used. The wider the area of operation the need for a
higher charge as the area is believed to have a direct relationship with the level of exposure
Most of the motor insurance products on the market in Uganda have extended the geographical
zone to East Africa region for Full Material Damage But will need the COMESA Yellow
card/certificate to take care of the Third-Party liabilities beyond the country of registration of the
motor vehicle.
Capacity
Although not a common rating factor in Uganda, Capacity is an important factor for different
classifications. Capacity could mean
For private cars- The engine capacity, For Goods carrying vehicles- Gross Vehicle Weight and for
Commercial Vehicles- permitted number of passengers
Age of the vehicle
The older the vehicle, the higher the premium. Usually, insurers will not want to grant
comprehensive motor insurance for very old vehicles. Many insurers have set a minimum sum
insured that seems to have a relationship with the age of the vehicle taking into consideration the
market value of a specific mode of the vehicle. This also resonates with the Year of Manufacture of
the vehicle
Scope of Cover
The wider the coverage, the higher the premiums. This is true for comprehensive covers. Any
extensions from the standard or normal coverage will tend to attract some loading on the premium
Apart from the above, there are other rating factors that should be considered by a prudent
underwriter and these include (this is a listing that is meant to be a guide and not exhaustive in
itself). Meaning the underwriter is still expected to do a reasonable assessment of the risk to arrive
at an equitable premium
 Driver’s age
 Driving experience
 Past claims experience
 The area where the vehicle kept overnight
It is important to note that prudent underwriting will require or demand that the rating factors are
fitted into a “point matrix” with some points allotted to each rating factor. Favourable features
should attract smaller points (even discounts) while unfavourable features attract higher points.
The total score calculated should determine the loading that is applied to the basic tariff rate.
The underwriting of a motor risk can be a challenge as already mentioned. It takes an experienced
underwriter to appropriately rate the risk especially in a market where the focus seems to be on
the volumes and not technical results of the motor portfolio
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Although there can be laid down rules and parameters to help underwriters judge whether a
particular risk is GOOD or BAD, the guides cannot beat the intuitive judgement of an experienced
underwriter.
POLICY DOCUMENTATION AND SCOPE OF COVER
Irrespective of the type of vehicle involved, motor insurers usually will grant one of four main types
of policy covers and these include
 Statutory Motor Third Party Liability Cover

 Extended/Enhanced Motor Third-Party Cover
 Third Party, Fire and Theft
 Comprehensive Motor Insurance
Need to discuss the coverage under each of the four. What should be included in this book?? How
deep can we go into the coverage??
Risk Control/Reinsurance
The insurer must consistently review and audit the level of exposure in the motor book to avoid
accumulation and adverse effects to the balance sheet. The underwriter must have a caution for
higher than normal exposures there must be appropriate reinsurance programme for the exposure
From experience, most insurers will arrange motor reinsurance on Excess of Loss Basis given the
high frequency of claims and relatively high amounts (cumulatively) on the severity of claims.
The risks that are excluded from the treaty can be written on a facultative basis. For instance,
commercial/PSV buses are usually written on the accommodative basis by many insurers and they
will tend to retain a small share for their net account and share out the balance to the market
Sometimes High-Value Vehicles could also be written or reinsured on a facultative basis.
End of Chapter Questions
Possible Answers to End of Chapter Questions
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7. ENGINEERING AND CONSTRUCTION INSURANCE
7.1 INTRODUCTION
Learning Outcomes
When you completed this chapter, you should be able to
 List the headings under which machinery and plant is generally grouped;
 Explain the cover available under engineering policies;
 Give the main difference between machinery loss of profits insurance and business interruptions
insurance;
 Explain the cover and the operation of construction insurance policy and underwriting
considerations.
Origin and Development
The origins of engineering insurance go back to the 18th century in the period which became known as
the Industrial Revolution in Great Britain. At the time, steam became the main source of power and
energy. By the 19th century, the safe working of steam boilers and steam pressure plant was marred
by inadequate engineering and metallurgical skills with a result that was frequent explosions of
disastrous proportion as well as steam plant failures.
Quality of material, safe working pressure limits, adequacy of design and manufacturers specification
became of real concern which led to the formation of a private association in 1850called The
Manchester Steam Users Association in Manchester, England. For a fee, specialized engineers
undertook detailed inspection and reporting upon steam boilers initially followed by steam engines
piping valves, and subsequently all types of electrical and mechanical machinery.
Once established and contributing to the safe working conditions within the industry, financial support
was given to clients who conformed to the standards laid down by the engineers, should such inspected
plant breakdown, hence the establishment of specialist engineering insurers.
In South Africa, engineering insurance was imported in the early part of the mid-20th century from
Britain and also from European reinsurers. The relationship between companies and reinsures grew
harmoniously with frequent inter exchanges of knowledge and experience largely derived from parent
companies based in Europe.
Inspection services by qualified engineers did not become part of the insurance company’s activities in
South Africa although some of the larger companies did employ specialist engineers. Their skills were
mainly confined to technical surveying, risk identification and to some extent risk measurement. They
were also extensively used in claims work by confirming in liaison with the underwriter that an event
did conform to the interpretation and intention of the policy.
In 1967, the International Machinery Insures’ Association was founded with its Secretariat based in
Europe. This is a non-profit making association representing as at 2010, some 23 countries, and
including South Africa from 1992.
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A valuable exchange of knowledge is ongoing with many benefits being derived from the worldwide
experience of member countries of member countries of the ever-increasing advancements in
technology in all types of individual plant and industry in general-from nuclear or fossil fuel power
generations to chemical, petrochemical, mining, refining, manufacturing industries, and repairers as
well as users.
7.2 MACHINERY AND PLANT

For the purposes of engineering insurance there are five headings under which machinery and plant is
generally grouped;
 Boilers and pressure vessels;

 Electrical and mechanical plant;
 Lifting machinery;
 Plant all risks;
 Computers.
7.3 BOILERS AND PRESSURE VESSELS

In southern Africa, the risk of explosion whether it be pressure explosion, flue gas explosion or any
other form of the explosion is a standard peril insured for within fire insurance policies. The exception
to this rule is when boilers and pressure plant are insured under a construction insurance policy.
None the less, this group of the plant is insurable within a standard breakdown policy as it is still quite
possible that damage can arise from overheating, collapse (implosion) and accidental extraneous
causes.
Certain types of boilers and pressure plant may also experience sudden failure of joints, cracks,
fractures and the like and whilst gradually developing events may not constitute a claim, the subject
comes within the parameters of a standard breakdown policy.
Most companies in South Africa could if necessary, issue a boiler explosion policy but rarely is this
promoted. The boiler explosion policy covers three distinct risks;
I. damage to the boiler itself from explosion or collapse;

II. damage to surrounding property of the insured;
III. Third party death or injury to persons or to third party property.
It is usual for policy to show one overall sum insured for all three risks combined.
Explosion means the sudden and violent rending of the permanent structure of the plant by force of
internal steam or fluid pressure, other than the pressure of ignited flue gases, causing bodily
displacement of any part of the structure together with the forcible ejection of the contents.
Collapse means the sudden and dangerous distortion, whether or not attended or not attended by
rapture, of any part of the plant caused by crushing stress –by force of steam or other fluid pressure,
other pressure of ignited flue gases.
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The following defects do not themselves constitute explosion or collapse, even though repair or
replacement may be necessary-
I. wearing away or wasting of the material of plant by leakage, corrosion, the action of fuel or
otherwise;
II. slowly developing deformation or distortion of any part of the plant;
III. cracks, fractures, blisters, laminations flaws or, grooving even when accompanied by leakage;
IV. failure of joints;
But explosion or collapse arising from any such defect is not excluded.
Electrical and Mechanical Plant
Electrical plant falls into two categories, an example is;
 Rotating plant, for example, motors generators, alternators and the like;
 Stationary plant, for example, transformers, switchgear, condensers, and batteries.
Mechanical plant, examples are;
 Steam gas, oil or diesel engines;

 Air compressors, pumps, hydro extractors, gas producing plant
 Refrigeration plant
Breakdown policies as they are known do not just cover electrical or mechanical breakdown but are to
be considered as All Risks policies excluding specific risks such as fire. The operative clause shows
insurance cover to be sudden and foreseen physical damage. The correct name should be engineering
but, since those terms embrace other specific type insurance such as Plant All Risks, the word
breakdown remains.
A Breakdown policy can, therefore, be looked as covering a multitude of different hazards –it is not the
type of peril that is being insured but rather the nature of the insured object and what can go wrong by
way of damage to it internally or externally, for example, extraneous damage such as impact.
Breakdown itself can arise from many reasons, for example
Poor maintenance leading to parts working loose, or lack of lubrication;
 Impurities and foreign bodies entering;

 Overspending through the failure of the governor;
 Shock loads;
 Dampness in electrical windings;
 Power surge;
 Electrical insulation deterioration causing a short circuit.
Note;
1. Damage to bearings by leakage or overheating or by extraneous damage is included.

2. Replacement of transformer oil or refrigerant from a refrigerator by reason of an indemnifiable
event is also included within the sum insured for the item.
3. A power surge from any case resulting in the breakdown is covered but lightning strike damage is
not covered as this is a standard peril as covered by a fire policy. Failure to demonstrate that power
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surge results from lightning event allow the breakdown event to be considered under the
breakdown policy.
4. Inevitable damage to sound parts of insured machinery and plant to gain access to parts involved
in indemnifiable damage is covered.
Machinery and plant is insured at the insured’s premises, whilst it is at work or rest. It also automatically
includes any dismantling, resettling and re-erection at the same premises but it does not provide for
transit away from the declared physical address nor the positioning or erection at another location
within the terms of policy.
Lifting Machinery
This includes mobile or static or overhead cranes, forklifts, passenger and goods lifts, and escalators,
hook hoists or teagles.
The cover is the same as for electrical or mechanical breakdown, i.e. sudden and unforeseen physical
damage. An extension of the cover is available to include damage to any property owned or within the
custody or control of the user being lifted or lowered as a consequence of indemnifiable damage to the
lifting machinery.
Computers and Electrical Equipment
The equipment can be divided into types of insurance.
a) For the small PC’s –mini or microcomputers, laptops and note books-being fully portable or
permanently installed at one address.
b) For the larger computer installations, the entire system including file servers, printers, modems
cabling, a standby generator and more substantial specialized electronic equipment such as that
used in the medical profession-clinics, hospitals and the like.
c) The smaller type computer and the working range of laptops, notebooks are insurable for All Risks
normally anywhere, for example, in transit at the office, at home, or even when taken out of the
country.
The exposure to damage by dropping or impact and theft is very high.
The cover includes hardware and licensed pre-programmed media on the hard drive disc, floppies
but not loss or damage to information of the insured captured and stored in the system.
Reinstatement cost of data which has been lost or destroyed by an insurable event is also included,
usually based on an increase in the cost of work to return to normal by retrieving or recreating lost
data.
d) The cover is also All Risks including breakdown but confined to insuring the equipment at one
address.
Values are usually high, so a survey is normally undertaken to look into fire and lightning protection,
security and likely damage from water or flood.
The policy would also extend to include reinstatement of data and increase of data and an increase
in the cost of working.
7.4 PLANT ALL RISKS

A variety of covers is available but normally three are common for:
a) Plant owned and used by the insured;
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b) Plant hired out by the insured;
c) Plant hired in to be used by the insured with or without a driver\operator.
The plant can also be subdivided into 3 different types;
a) Mobile cranes, tower cranes and lifting appliances

b) Concrete mixers excavators, bulldozers, shovels, back acting diggers;
c) Scaffolding, site huts, instruments, tools, wheelbarrows, safety equipment, theodolites.
Plant Hired In or Out is normally the subject of conditions of hire, the most common being CPHA
conditions (Contractors Plant Hire Association). The user is held responsible for loss or damage unless
resultant upon a preexisting defect or breakdown not otherwise caused by the user.
Some other conditions of hire are far more onerous with the hirer\user being contractually held
responsible for virtually all events even if the unit was defective in the first instance and not known to
the parties. Great care is necessary by the underwriter to understand what responsibilities lie with the
insured Party.
The cover is All Risks of loss or damage to the object itself, but it does not extend to include electrical
or mechanical breakdown or the consequences thereof.
Owned and used plant of the insured can at times be also insured for the breakdown, sudden and
unforeseen damage, but this cover is not available normally for Hired In or Hired Out plant and
equipment.
Sums Insured
It is normal practice reflecting the new replacement value of the plant and machinery to be insured and
an average clause exists. It is also acceptable to reflect one group sum insured for the like items on the
schedule and this should also reflect the total of new replacement values.
Often the question is asked, “why to insist on new replacement values when the policy is one of the
indemnity only paying out current market values as maximum indemnification?” the main reason is that
apart from total losses all repairs, within economic limits, are paid for as new, i.e. current labour costs,
import duty costs and the new costs of parts required in the repair. A lesser sum insured expressed as
a limit of liability would not be unreasonable, but the premium would stay the same, unless the chosen
limit is well below the maximum possible claim on the plant insured, even then there would be little
saving as all repairs are insured at full costs and repairs are far more commonplace than total
replacement.
7.5 MACHINERY LOSS OF PROFITS INSURANCE

The business loss will only be indemnified following an indemnifiable insured event under a breakdown
policy with the same insurer. The Loss of Profits policy is made subject to the definitions, extensions
and conditions of the material damage policy. The general principles of cover largely mirror that of a
fire policy for Business Interruption but there are several differences. Under a machinery Loss of Profits
policy;
The insured may select the plant and machinery for which cover is to attach;
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I. Consideration of the risk looks at the effect on production, following an insured event, for each
item of the selected plant and machinery. This is the basis for building up a rate for risk ;
II. A time excess is usually introduced, for individual items if necessary, to eliminate short
stoppages which could normally be expected in the course of the year and which may, for
example, be maintenance related;
III. The selection of an indemnity period is usually geared to the time it would take to undertake a
major repair to replace the object completely allowing for manufacture, shipment time in
customs, transit, and erection and commissioning.
A flow chart is normally created and is included as part of the survey detail passed to the underwriter.
Over the years considerable technological advances have resulted in a range of systems becoming
available to constantly measure the state of large machinery, either heat or pressure or even by
assessing the level of vibration in the machine while working, thereby considerably addressing this risk.
7.6 CONSTRUCTION INSURANCE

These notes do not consider a declaration/floater policy but give consideration to a one-off type
contract only.
Contractors are engaged to undertake a project whether it be –
 Civil construction, roads, dams, reservoirs, earthworks, tunnels, concrete bridges, piers runways;
 Buildings, hospitals, office blocks, shopping malls, hotels;
 Machinery resiting, factory relocation, machine movement, the plant being dismantled, machinery
transit by road or rail;
 Machinery erection, turbines boilers process plant, transformers, switchgear, engineering type
industry or box girder or suspension type bridges.
Contractors are often engaged under a contract in which it is stated precisely who takes responsibility
for what and to what extent insurance protection is to be purchased.
The contractor would normally be required to take out an approved insurance and note the interest of
the principal (employer) for the works. Sub-contractors to the main contractor may also be included in
the insurance.
The principal (employer) may decide to control the insurance and arrange a policy also protecting the
contractor and their sub-contractors, all of whom will be working on the site. This is known as a Principal
Controlled Insurance (PCI).
The Insurance Policy
The policy of insurance is All Risks and can cater for physical loss or damage in transit, other than by
sea or air, during the period of construction which may include site preparation, earthworks,
foundations, buildings installation, testing and commissioning of machinery and plant until the work is
handed over to the principal by way of a completion certificate, and if required, for a period usually 12
months thereafter to cover loss or damage during that period resultant upon prior defects in
construction, workmanship, material or even design, by agreement.
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The insurance itself is designed to cover loss or damage which is fortuitous or accidental and should not
respond to the costs to be incurred normally on contract site for example –resultant upon expected
rain, seasonal storms which could involve water damage or wash ways. The policy is expected to provide
indemnification for the truly unexpected to provide indemnification for truly unexpected loss or
damage.
It is important to realize that construction insurances are not cancellable. A contract is entered into
between the principal and the contractor and sub-contractors for the fulfilment of the works to the
satisfaction of the principal. Accordingly, the insurance must likewise last for the duration of the
contract.
There are of courses exceptions should be abandoned the site be abandoned or prolonged cessation of
work occur due to some legitimate but unexpected reason. Standard policies do not normally have this
cancellation option but it is not unusual to allow for this by negotiation.
With the non-cancellable features in mind, it is therefore important that the underwriter makes the
effort to know the risk in some detail.
The Contractor
 What is the track record over a 3 to 5 year period by way of events (including thefts) which occurred
whether or not insurance related?
 Have similar works been successfully undertaken by this contractor before?
 How do they tackle site management and actually handle loss prevention on their sites?
The site
 How exposed is the site or part of the site including the access road?
 Investigate the topography with nearby rivers.
 What are the soil conditions and effect of the water table at what depth?
 How deep are the site excavations to reach?
 Is piling and shoring up the required and extensive is this?
 What security will be undertaken and at what stage?
 What on-site storage facilities will exist and if they are adequately protected against fire, storm and
theft?
 At what stage will adequate firefighting be in place?
 Is there an adequate training programmer for on-site contractors to act and react to fire events?
7. Transit
 Determine what is to be obtained locally.

 Establish that imported machinery and plant will be delivered onto the site under Marine
Insurance.
 Ensure that delivered imported items are examined on arrival to determine whether any damage
has already occurred.
Construction
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Establish if there will be anything unusual in the method of construction or if the nonstandard design
will potentially cause construction problems.
Will the contractor have to deal with any object of building, roofing, design, machinery or plant which
involves new or untried features, for example, prototype / unproven /bigger and better than ever done
before.
How will difficult lifts be undertaken, for example, two or more cranes used to lift one object because
of size, weight or difficulty of access?
Methods to be employed in the bridge construction, whether coffer-dams or caissons are to be used in
the construction of the piers.
The extent of on-site-work of preparing storage tanks plates or casting beams.
Commissioning and Testing
Machinery and plant and certain other type property such as load-bearing structures require
undergoing tests, for example, to ensure;
a) Electrical connections have been made correctly;

b) Cranes will not collapse given certain predetermined weight under certain operating conditions;
c) Welding has been undertaken correctly;
d) That alignment of units is correct;
e) That moving parts are correctly installed to rotate or move freely within the design specification.
Such activities are referred to as cold tests and are automatically covered for physical loss or damage
without any specification.
When it comes to hot testing or when energized with electrical power or steam or gas or liquid pressure,
in a working mode and during load working conditions, then limitations are the normally commonplace,
for example;
a) If the property has previously been used as a working item whether previously owned by the
Insured or purchased second-hand, then electrical or mechanical breakdown explosion or collapse
would normally be excluded;
b) If the property is new and of known design, manufacture without untried or prototype inbuilt
features, then insurance would provide for the electrical or mechanical breakdown, explosion or
collapse but only for the predetermined time period, for example, 30 days.
One of the main reasons for this time limitations is that a constructor will usually continue to be
responsible for the contractor works property until such time as the principal (employer) is satisfied
with the works, this could be, in the case of a process, this might involve an unusually long period of
commissioning, many stop-staring conditions and adjustments which then may never react design
criteria.
So, a time limitation protects insurers, but of course, this can be extended if the underwriter is well
satisfied that technically the risk of breakdown or explosion is not enhanced by working conditions.
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A suitable operational premium should be obtained for the risk as full value is exposed and pro-rata
extension rating to be construction insurance policy will be totally inadequate for this type of extension.
Surrounding Property
Existing property of the principal may be exposed and if any part is taken within custody or control of
the contractor, the risk of damage must be assessed, and suitable premium obtained.
This is surrounding the property and not third-party property because it is taken into custody and care
of an insured party and may be insured under the construction insurance for physical loss or damage.
Maintenance
This often referred to as Prior Defects cover but it does include damage caused whilst back on site in
the period.
The cover is only for the contractors and not the principal (employer).
There are other alternatives to cover, but these are not usually encountered;
a) Restricted cover to sites visits by the contractors only-no prior defects cover;
b) A wider type covers to provide for costs in rectifying the not only damage caused by defects but to
the part also, with only redesign costs being excluded. It must be noted that this is specialized cover
and only available under very strict underwriting conditions.
The Period
Many contracts last over a considerable period particularly the erection of housing estates or large
industrial/manufacturing plants, the creation of major dams, reservoirs, power stations and the like.
Certain portions of the property may be handed over in some stages throughout the overall period of
the contract. To this extent, the exposure for the taken-over property is limited to the period during
which it was being erected, commissioned and until handed over and does not extend to the full period
of the contract. Some concessions in rating would be justified.
A motorway contract lasting some 3 years may include the construction of one bridge. The erection
until completion of the bridge may only take 9months so the rating for the bridge component should
reflect the shorter period of its construction and then allowed for non-construction rating for the bridge
component for the remaining period until the motorway is totally handed over.
Planned progress charts are available to an underwriter and values at risks likewise throughout a
contract. These are useful for a longer contract in determining when risks attach, the buildup of values
and the planned takeover or commissioning periods.
The period of the maintenance is usually for 12months and starts contractually as and when the
property is officially handed over to and accepted by the principal (employer) by way of a signed
certificate of handover.
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Sum Insured
This is the replacement value of the property and all the costs entailed to complete the project.
The contract price (or value) may not be the appropriate sum insured, for example, a contractor may
be engaged to erect an object which has already been delivered to or made on the site by the principal
(employer) or another party. The contract price would be for the labour cost to undertake the erection
job and possibly the hiring in costs of a crane to assist in work. The value of the object being handled is
therefore not reflected in the contract price. The object would normally be referred to as Free Issue
material and its value must be ascertained and added to the contract price for some insured purposes.
The sum insured would include VAT on the local purchases, but this may not be present for the directly
acquired foreign property. Any claim payment, however, on such important plant would have to include
VAT. Due allowance must be made either in the value at risk or rating for adequate premium.
A declaration of the final value of the contract is required and if different from that for which a premium
was charged an adjustment premium is calculated. The final value should include all the escalation in
prices awarded throughout the contract and actually landed values of imported property and the price
actually paid for the locally acquired property, labour and costs of hired in construction equipment, site
equipment, i.e. all that is charged to the principal plus any value of Free Issue Material.
Extensions
Examples of extensions often required are as follows.
I. An automatic escalation in the value of the works so as to ensure adequate indemnification

following a catastrophic event. A realistic escalation is usual.
II. Expediting costs or overtime working costs allowing the insured parties to speed up the
recovery and lessen the impact of the delays otherwise caused. A limit of 50% of the costs had
such additional expenses not been incurred would apply.
III. Reasonable costs in the removal of debris following indemnifiable damage may be provided
and such should be confined to such debris removal work on the contract site. A limit may be
imposed.
IV. Removal of debris from the contract site may also be provided when physical damage has not
occurred. For example, it could be that a mudslide could envelop part of the site and requires
removal –or rubble may be deposited onto the site from a flood but from which no physical
damage to the works ensued. For this extension, a limit should be applied. It is important that
the insurance will not continue to pay for costs in dewatering following the ingress of water
from any naturally occurring underground source as this would have no limit other than by way
of the extension limit.
V. Off-site storage may be necessary when the storage area on one site is not yet ready or is
already fully utilized, fire protection and security would require investigation.
VI. Surrounding property-property under Custody and Control
To some of the contractors this maybe third-party property but what is intended in this extension
is to protect the insured parties for physical damage to existing property of the principal which is
taken into the custody and control of any of the contractors, to join up piping-to receive steam or
power for testing purposes. A realistic limit would be imposed.
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vii. Third party insurance
It is usual to extend the policy of the insurance to indemnify the insured parties for liabilities that
may arise in consequences of-
 Accidental death or injury or illness to Third Parties- persons who are not employees of the
insured;
 Accidental loss or damage to the Third Party Property.
NOTE
Loss or damage claims from one insured party against another for the insured contract works
property covered by the underlying contractor’s policy is not covered and must be specifically
excluded.
Also to be excluded specifically is any liability for removing, nullifying or cleaning up seeping,
pollution and contamination substances, and any fines, penalties, punitive or exemplary damages
resulting from pollution or contamination.
It is also important to note that Third Party liabilities will not attach for vehicles which the insured
is required to affect insurance by legislation nor to any property within the custody or control of
the insured.
Premium /rating
The calculation of a premium for construction insurance is built up according to the risk exposure
for various sections of cover, for example, the construction type and period or commissioning and
period. In addition, extension required all add to the premium cost.
Extensions
 Transit
 Surrounding property
 Expediting costs
 Removal of debris (damage)
 Removal of debris (no damage)
 Sum insured escalation
 Maintenance type and period
 Third party
Annual Policies
Renewable policies are available for contractors or principals who regularly undertake similar type
construction work as with building contractors, but for the larger property risk or construction of
industrial / manufacturing work, bridges, dams, tunnels, motorways, docks, warehouses, refineries
etc. a one-off policy is more usual.
Annually renewable policies are cancellable but would normally allow insurances which have
attached to run through until expiry.
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Premiums are normally levied by applying an agreed rate to the estimated turnover. A deposit
premium is paid at renewal based on the estimated turnover and adjusted annually according to
the actual turnover of the values of contracts entered into or completed.

1. Give the five main headings under which machinery and plant are generally grouped.
2. Why is it rare for South African companies to issue a boiler explosion policy?
3. Explain when a power surge would be covered under a breakdown policy and when this would fall
under the fire insurance.
4. What do you understand by the CPHA conditions?
5. Suggest why the contract price (or value), may not be appropriate as a sum insured in a
Construction Insurance policy.
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8. POLITICAL VIOLENCE AND TERRORISM INSURANCE
8.1 INTRODUCTION
The September 2011 Attacks on the World Trade Center in the USA demonstrated to the world how
significant the level of damage on property and loss of lives caused by terrorism can be.
Over the past 10 years, with the exception of the July 2010 Terrorist Attacks at Kyadondo in which
scores of people lost their lives and property worth millions of shillings destroyed, Terrorism activity in
Uganda has been rather limited. However, the threat of terrorism remains ever present from militant
groups such as the Al-Shabab and the Allied Democratic Front (ADF)
With the increase in construction of high valued property and buildings worth billions of shillings,
Property owners are increasingly becoming wary of the fact that these could be potential targets for
terrorist activities. The West Gate Mall Attach in Kenya in 2013 by the Al-Shabaab Militant group is an
example of this which the insurer and reinsurer pay out more than 5bn Kenyan Shillings in
compensation.
With the looming threat of Loss or damage as a result of political risk and terrorism, having protection
from such losses is of key importance to the property owners. However, with the planned and
deliberate nature of acts of terrorism, insuring such losses can be quite difficult and border on the edge
of non-insurable losses. Because of the non-accidental nature of such damage, most property policies
usually exclude coverage for political violence and terrorism.
To address this concern, Political violence and Terrorism Insurance Product has been developed as a
tool to mitigate property owners and individuals against the losses caused by the adverse actions of
governments and/or individuals.
This chapter highlights and discusses the perils covered by the policy, the extensions of cover and the
exclusions.
8.2 OBJECTIVES
 To identify and describe the perils covered under a political violence and terrorism policy.
 To identify factors and considered in underwriting political violence and terrorism cover
 To describe the key policy definitions and conditions.
 To identify and describe the main exclusions for terrorism insurance
8.3 SCOPE OF COVER

Before we can examine the scope of cover under the political violence and terrorism policy, it is
important that we first understand what is meant by political violence and terrorism.
Political Violence
Demonstrations and Protestations by the public against certain acts of government are part and parcel
of every society. The Constitution itself allows for the public to freely express their grievances through
peaceful demonstrations. However, it is also not uncommon that such demonstrations often politically
motivated could turn into riots, looting and destruction of property.
A Case in point is the Walk to Work Demonstrations organized by one of the political parties in 2011.
These demonstrations which should have been peaceful often culminated into acts of violence and
destruction of property. The destruction of property within a country can also stem from a difference
in ideologies between different factions in a country resulting into civil war.
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Further Reading!
Read about the civil war in Southern Sudan and examine its impacts on the economy of the
country.
The violence perpetrated by individuals and governments with the sole aim of attaining a political
objective is what can be termed as political violence. The resulting damages from such acts are what
can be covered under the political violence and terrorism policy.
Terrorism
There is no globally accepted definition of terrorism and what constitutes it. The definitions vary from
institution to institution and from government to government. For the purposes of this study text, we
shall confine our definition to the Acts of Uganda.
According to the Anti-Terrorism Act 2002, Terrorism is defined as;
“An act intended for purposes of influencing the Government or intimidating the public or a
section of the public and for a political, religious, social or economic aim, indiscriminately
without due regard to the safety of others or property.”
For a violent act to be classified as a terrorist incident, there are three principal criteria that should be
met. The Global Terrorism Index Report -2016 identifies these criteria as;
g. The Incident should be Intentional
h. The Incident should contain some level of violence or threat of violence including
property damage and violence against people.
i. The Incident (violent) act should be aimed at attaining a political, religious, economic or
social goal.
Terrorism can be classified into six categories;

a. Official or State Terrorism: Also referred to as structural terrorism, this category of terrorism
refers to terrorist activities carried out by the government in order to achieve political
objectives.
b. Quasi-Terrorism: These are crimes of violence that are similar in form and method to a
genuine terrorist activity.
c. Limited Political Terrorism: Acts of terrorism committed for ideological motives but are not
part of a concerted campaign to capture control of a state
d. Political Terrorism: Terrorist activity perpetuated for political reasons.
e. Non-Political Terrorism: - a form of terrorism not aimed for political purposes but rather
aimed at creating fear for the purpose of individual or collective gain.
f. Civil Disorder: Violence that interferes with the peace and security of a community.
Political Violence and Terrorism often impact on the economic development of an economy. It affects
the economic growth and trade flows and reduces economic activity from the risk it poses. Because of
its effects, governments have a role in managing both the perceived risk as well as the impacts of the
actual risk. This could be through improving security or setting up terrorism pools.
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The Private sector and individual business also have a role to play in managing terrorism risk through
offloading the risk to a third party through insurance.
With that simple background into the aspects of political violence and terrorism, what is terrorism
insurance?
An Insurance cover that Indemnifies the insured for loss or damage to the property specified in
the schedule of the policy as a result.
Abuilding destroyed as result of the war
Source: https://blog.willis.com/2015/11/guide-to-political-violence-and-terrorism-insurance-for-
financial-institutions/
The insurance provided under terrorism covers material damage to the property and business
interruption (if required). The perils covered under business interruption are given below.
Material Damage: - This section covers the insured for loss or damage to property owned by the
insured or for which the insured is legally responsible caused by the following perils.
Item No. Peril Covered

1 Acts of Terrorism
2 Sabotage
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3 Insurrection
4 Riots, Strikes and Civil Commotion
5 Malicious Damage
6 Insurrection, Rebellion or Revolution
7 Mutiny and Coup d’état
8 Sovereign War and/or Civil War
Business Interruption: - This Section covers loss the loss of gross profit during the period of
indemnity as a result of damage from the perils covered under material Damage.
The can be classified into three categories. These are;
1. Sabotage and Terrorism Insurance (S&T):- Under this, only loss or damage from Sabotage
and Terrorism are covered
2. Sabotage, Terrorism and Strikes Riots and Civil Commotion Insurance: With this type of
cover, only loss or damage as a result of terrorism, sabotage and SRCC will be covered. Loss
as a result of any other peril is excluded from the cover.
3. Political Violence Insurance (PV) Insurance: This type of cover is comprehensive in nature
and indemnifies the insured for loss or damage as a result of all the perils.
Some Key Definitions in a Terrorism Policy
 Act of Terrorism: refers an unlawful act, including the use of force or violence, of any person
or group(s) of persons, whether acting alone or on behalf of or in connection with any
organization (s), committed for political, religious or ideological purposes including the
intention to influence any government and/or to put the public in fear for such purposes.
 Coup d’état: refers to the sudden, violent and illegal overthrow of a sovereign government
or any attempt at such overthrow.
 Insurrection, Revolution and Rebellion: refers to a deliberate, organized and open
resistance, by force and arms, to the laws or operations of a sovereign government,
committed by its citizens or subjects and/or arising against a sovereign government or other
authority.
 Malicious Damage: refers to all physical loss or physical damage resulting directly from a
malicious act by anyone during a disturbance of the public peace where such malicious act is
perpetrated for political reasons by a known or unknown person(s).
 Mutiny: a willful resistance by members of legally armed or peacekeeping forces to a
superior officer.
 Sabotage:- Violence unconnected to strategy, violent acts seeking to reduce capabilities of
others
 Sovereign War- Contest by force between two or more sovereign nations
 Civil War – War carried out by opposing citizens of the same country
 Civil Commotion- Substantial disturbance of public peace by political, religious or ideological
groups
TERRORISM LIABILITY
While the terrorism market has largely been focused on exposures from property damage, there has
been a recent rise in covers for terrorism liability.
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For an organization, the responsibility to explore all available protections mechanisms to mitigate or
prevent the impact of a terrorist act is now than ever so great. This is because the financial impact to
an organization as a result of liability arising from negligence can threaten the financial standing of the
organization.
In the Supreme Court Case of the Port Authority of New York, A six-member Jury in the state of in
October 2005 found the Port Authority guilty of not heeding warnings that the world trade centre
underground garage was vulnerable to a terrorist attack. According to the Jury, this allowed the
bombing to occur in which six people were killed in 1993. The Estimated Cost of the claim to the New
York Port Authority was $2 billion dollars.
Activity
Read about the New York Port Authority Case
The Victims of the terrorist attack attempt to seek compensation from the organization that is negligent
in preventing the attack.
What does Terrorism Liability Cover?
Terrorism Liability Cover indemnifies the insured for financial costs that they may be liable for
arising from death or bodily injury to third parties and/or employees injured in a terrorist attack.
Coverage also extends for third party property damage.
8.4 UNDERWRITING CONSIDERATIONS

In ascertaining whether to offer coverage and determine the appropriate price to charge, there are
many factors that underwriters including the following;
 Occupation i.e. is it a school, an industrial complex, an Embassy etc.
 The Location of the property including the surrounding property
 Security information i.e. is the building guarded by the police, army, and private security
guards etc.
 Type of coverage
 Claims history if any
 A breakdown of the sums insured if the cover required is for property damage and business
interruption
8.5 MAIN EXCLUSIONS

Like all other insurance policies, the policy exclusions under a terrorism policy would especially be
applicable to the Material Damage section include;
a. Loss or damage caused by a nuclear detonation and nuclear reaction

b. Loss or damage directly or indirectly caused by seizure, confiscation, naturalization, requisitions
etc.
c. Consequential Loss or damage
d. Loss or damage caused by insects or vermin
e. Third Party Liability
f. Any loss as a result of fines for breach of contract and penalties of any nature
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g. Loss or damage directly or indirectly caused by burglary, housebreaking, theft or larceny, looting,
the mysterious or unexplained disappearance of property
Activity.
a. Look out for a Terrorism Wording and identify any other exclusions applicable
b. Exclusion (g) doesn’t cover loss or damage as a result of burglary or theft. In the event
of a riot, in the event that there is a riot, how would such losses be
c. .indemnified?
8.6 Terrorism Reinsurance

Most insurance policies exclude coverage for terrorism. Mainly because of the unpredictability of the
nature of the terrorist attacks and also potential huge losses.
More often than not, reinsurance coverage provided for terrorism covers issued by the primary
insurer on a standalone basis are reinsured facultatively or on a fronting arrangement (A fronting
arraignment is where the local insurer retains none of the risks and cedes out 100%
Reinsurers do provide treaty coverage for up to Ushs 3,000,000,000 under a combined quota share-
surplus treaty program.
Terrorism Coverage in the US and UK Markets
Terrorism Insurance Act (TRIA) in the United States
As a result of the massive losses from the 9/11 attacks on the world trade centre, most reinsurers
declined to offer coverage for terrorism on commercial property. As a result, it became
increasingly difficult for individuals and enterprises to obtain mortgages from Banks as it was a
requirement that they had a terrorism cover in place.
To close this gap, the united states government, in 2002, enacted a law primarily to focus on losses
from terrorism incidents. The Terrorism Insurance Act or TRIA as it is known enables the
government to share costs for costly insurance losses together with the insurance companies and
the policyholders.
Insurance companies are required to offer coverage on the same terms and conditions as other
property insurance perils but have the liberty to determine their own pricing.
In the event that there are losses from a peril covered under the policy, the policyholders meet the
deductibles as specified in the policies. If the industry losses do not exceed US$ 100bilion, these
losses will be met by the respective insurance companies for their share. The Federal government
meets up to a percentage specified in the act of all losses over and above US$ 100Billion
Terrorism Coverage in the UK Market

In the United Kingdom, terrorism incidents such as the bombing of the Baltic Exchange in the
1990’s led to the establishment of Pool Re. An Initiative between the insurance industry and Her
Majesty’s Treasury.
The exposures current underwrote by Pool Re currently are in excess of £2Trillion Pounds
Source (www.poolre.co.ik)
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8.7 Chapter Summary
Political Violence refers to the violence perpetrated by individuals and governments with the sole aim
of attaining a political objective.
Terrorism defers from individual to individual. According to the Insurance Act, Terrorism can be
defined as;
“An act intended for purposes of influencing the Government or intimidating the public or a section of
the public and for a political, religious, social or economic aim, indiscriminately without due regard to
the safety of others or property.”
There are three principal criteria for the violence Act to be classified as a terrorist act and these are;-
a. The Incident should be Intentional

b. The Incident should contain some level of violence or threat of violence including property
damage and violence against people.
c. The Incident (violent) act should be aimed at attaining a political, religious, economic or social
goal.
The six categories of terrorism include;
 Official or State Terrorism:

 Quasi Terrorism:
 Limited Political Terrorism
 Political Terrorism:
 Non-Political Terrorism:-.
 Civil Disorder:
The section covered under a terrorism policy are;
 Property Damage
 Business Interruption
The perils covered under the property damage section of the policy include
 Acts of Terrorism
 Sabotage
 Insurrection
 Riots, Strikes and Civil Commotion
 Malicious Damage
 Insurrection, Rebellion or Revolution
 Mutiny and Coup d’état
 Sovereign War and/or Civil War he Perils covered under property damage include;
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8.8 Revision Question
1. What is Terrorism?
2. Identify five factors that an underwriter would consider when underwriting a Terrorism Risk.
3. Differentiate between Civil war and Sovereign war
4. Identify and describe the different classes of terrorism insurance.
5. Identify six main exclusions under the terrorism policy
6. Identify the underwriting factors considered in writing a terrorism risk
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9. PROPERTY CLAIMS
9.1 INTRODUCTION
The chapter provides high-level matters regarding the claims in property insurance. The specifics of the
claims process and settlements will be handled out of this book in more specialized
sessions/sections/books

At the end of the chapter, the student should be able to
 Understand the claims process for the major classes of property insurance
 Explain the application of the principle of contribution and average for property claims
9.3 PROPERTY CLAIMS PROCESS

(Should this be generalized or highlights per class of property)
Common features of the claims process for any property class will include
 Claims notification within agreed timelines agreed in the underwriting policy

 The engagement of service providers depending on the nature of loss. The role played by the loss
investigator, assessors, property adjusters and mechanics etc.
 Constant and consistent communication between the insured and insurer
 Validation of the claims and third-party opinion
 The issue of arbitration and litigation where the parties do not agree to the quantum
 Most important the application of the terms and conditions in arriving at the amount of the claim
settlement
 What factors would the claim to be declined for property insurance
9.4 CALCULATION OF PROPERTY AND ENGINEERING CLAIMS

We will need to demonstrate the computation for claims amounts for different types of property
insurance. Of interest at this level will be the role of reinsurance since the claims are usually large in
magnitude and will many times require the immediate support of the reinsurers in form of cash calls
The basic or fundamental principles of insurance shall be explained starting with the application of the
principle of contribution and apportionment under property insurance.
The Principle of Contribution
It sometimes happens that an insured has two or more insurances on the same property. The principal
of indemnity prevents him from recovering more than his loss so that the several insurances contribute
proportionately among themselves. Contribution can be said to be a corollary of indemnity.
Of course, if a total loss claim exceeds the total of all the insurances taken together, each will pay its
own sum insured. The shortfall will be the insured’s responsibility.
The Contribution Condition
In the standard policy, this is called other insurance.
“if at that time of any event giving rise to a claim under this policy an insurance exists with other insurers
covering the insured against the defined events, the company shall be liable to make a good only a
rateable proportion of the amount payable to the insured in respect of such event.”
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A further proviso to the standard commercial policy states that the Company will not be liable under
more than one section of the policy in respect of the same happening and same liability, loss or damage.
The condition does not create a right of contribution. This already exists at common law. However, if
the condition were not inserted and provided that sum insured was sufficient, the insured could claim
the full amount from any one insurer, leaving that insurer to obtain contribution from the others after
payment of the loss.
The object is to prevent this discrimination (selection) against anyone insurers and so ensure that each
pays only a ratable proportion.
The condition does not require the insured to claim under the other policies, although in practice he
would normally do so.
Remember that policies have a condition requiring the insured to give notice of any circumstance which
may give rise to a claim.
Rules for Apportion to Apply
The policies must cover the same;
• Interest;
• Subject matter;
• Peril;
• Period of time.
The same interest
If one policy insured the owner and the other the mortgagee only, there would be no contribution. If
the first policy covered both the owner and the mortgagee there would be a common interest-the
mortgagee’s. Insurances might be taken out to cover the same interest but by interest people. Suppose
that a husband and a wife, living together, each takes out a policy on household goods. The policies are
for the same interest although in different names. Similarly, an agent might insure property on behalf
of his principal, and effect insurance himself.
The Same Subject Matter
The subject matter must be common to all the policies. This does not mean that the whole of the subject
matter must be exactly the same. Both policies must cover the item in respect of which the claim is
made. The same property might be covered under a travel policy and personal all risks insurance.
The Same Peril
One insurance might cover more perils than the other. Contribution arises if both policies include the
peril which caused the loss.
A theft policy would not contribute to a fire loss, but an all risks policy might since it includes fire risks.
The Same Period
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Both policies must be operative and liable at the time of loss.
It will be seen that two settlements can be made for the same material property, simply because the
interests insured are different and the contribution clause cannot be applied. Sometimes this can be
resolved by agreement between the insurers.
Non-Contribution Clauses
Sometimes the right to contribute is removed or modified by clause or exception in one or both of the
policies.
Fire
Unless specifically included, this insurance does not cover damage to property which at the time thereof
is insured by or would but for the existence of this insurance be insured by any marine policies except
in respect of any excess beyond the amount which has been payable under the marine policies had this
insurance not been effected.
This clause is intended to exempt the fire policy from contributing to a loss until the liability of the
marine policy has been exhausted. However, there may be a similar clause in the marine policy. The
insured has a double cover but is unable to recover his loss.
Such a situation is unacceptable and would be dealt with by a compromise between the two insurers.
Theft
The company shall not be liable for;
1. Loss or damage which can be insured under a fire policy, except in the case of the explosion caused
in an attempt to effect entry;
2. Loss or damage insurable under a glass insurance policy.
Glass
Loss or damage which is insured by or would but for the existence of this section be insured by any fire
insurance except in respect of any excess beyond the amount which would have been payable under
such fire insurance had the insurance under this section not been effected.
Business all risks
1. Loss or damage to cash, bank or currency notes, coins etc.
2. Loss or damage to goods consigned under the bill of lading.
Householders Policies
Property more specifically insured. If the insured has his jewellery covered in terms by a household
policy, but specific items covered by an All Risks policy, there is no contribution in respect of the
specified items.
AVERAGE CONDITION
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For the average to apply, this must be stated in the policy. In the standard policy document, this takes
various forms in different sections.
 Fire- every time is separately subject to average. There are special provisions in the
Reinstatement value and Stock Declaration Conditions.
 All risks-only which items which are not separately and individually specified are subject to
Average.
 Business Interruption-average is built-in to various sections of the cover.
Remember, however, that not all types of insurance are subjected to average.
The standard formula is;
Illustration
Activity
Importation of average
The second part of the other insurance or condition and average condition reads;
If any such other insurance is subject to any condition of average this policy, if not already subject to
any condition of average, shall be subject to average in like manner.
The condition gives the insurer an absolute right to import average from another policy, where
contribution is involved. The intention is not to penalize the insured, but to protect the non-average
policy from being at a disadvantage when in contribution with an average policy.
Salvage
Non-average Policies
If the net loss has been paid, the salvage belongs entirely to the insured
If the full value has been paid, the salvage becomes the property of the insurers. The proceeds are
divided among them in proportion to the losses paid.
With average policies
The same rule applies, but in the event of under insurance the insured is considered to be his own
insurer for the shortfall and is entitled to a proportionate share of the salvage recovery.
APPORTIONMENT OF LOSSES
The term rateable proportion used in the contribution has no exact interpretation. Rateable implies a
sharing of the losses between the insurances, but the exact workings are left to market practice. Most
local insurers subscribe to a Loss Contribution Agreement. This relates only to fire and fire perils in
terms of the so-called Trust and Extension Insurances, explained below.
Trust Insurance
A Fire, Special Perils or Householders Comprehensive insurance expressed to cover property other than
the property of the insured, which shall be deemed to include the property to visitors covered by the
insured’s policy as a separate item.
117
Extension Insurance
A fire, Special Perils or Householders Comprehensive insurance covering property at a specific situation
which extends to apply whilst such property is temporarily removed from such premises but remains
within the geographical limits.
Property is deemed not to include;
a) Stock-in-trade or merchandise;
b) Motor vehicles and motor chassis.
The contribution is determined on the basis of independent liability claims under Extension Insurance
being settled in the first insurance before apportionment with the Trust Insurers.
Policies Subject to Average
In the case of policies which are subject to average, or where an individual loss limit applies within a
sum insured, one must use the independent liability method to go calculate the payments. The
independent liability method to calculate the payments. The independent liability is the amount which
an insurer would be obliged to pay if it were only or independent insurer.
As more policies become subject to average, and terms limiting liability below the indemnity figure
grow more common, this method will be generally adopted. Even at the present, where contribution
does arise, it is the most frequently used method. As more policies become subject to average, this
method will be generally adopted. Even at present, where contribution does arise, it is the most
frequently used method.
The formula is;
Illustrations and examples
RENT APPORTIONMENTS
Cover in respect of rent varies, since it may be offered in several different forms.
• Under a Business Interruption policy.
• As an item in a Fire insurance schedule.
• As an extension, limited to a proportion of the main sum insured-Office Contents, Buildings

Combined, and Domestic Insurances.
It is necessary to know the wording of the Rent Clause incorporated in the policy.
Rent Insured under Fire Policies
In fire insurance, one would state the term of the rent insured-3months, 6months or 12months as the
case may be- and the nature of the interest. A landlord might consider rent receivable, a tenant rent
payable, or an owner/occupier rental value. The insurer’s liability is limited to a proportion of the sum
insured, or the actual rent if this is less, based on the period necessary to reinstate the damage and
render the premises tenantable.
118
When dealing with rent losses it is necessary to establish;
a) The period of time necessary for reinstating the damage
b) The actual rent of the premises or of that part destroyed and compares it with the sum insured.
Rent insurance is one capable of being interpreted as being based in equal proportion on x months of
rent, as rent is a constant factor throughout the year. The value of rent for one month is one-twelfth of
the annual rent.
Check for Examples
Rent Insured under Domestic Policies
The buildings section commonly covers loss of rent should the residence be so damaged by an insured
peril as to be uninhabitable. Mere inconveniences, such as having workmen on the premises and /or
having to close off certain rooms, do not constitute a claim. The basis of calculation is the annual rent,
unfurnished, or the equivalent rental value, and the amount payable may not exceed 20% of the
building sum insured. Similarly, the contents section will usually insure the cost of equivalent
accommodation, again limited to 20% of the sum insured and taking into consideration any saving in
rent payable.
It might appear that an owner-occupier does not pay or receive rent. However, he may be entitled to
claim the equivalent rental value of the premises, in terms of the building insurance. Under his
household contents policy, he may claim the cost of the alternative accommodation. Apportionment
should be on the basis of independent liabilities.
Another suggests is that the building insurers pay the whole liability for rent, and the contents insurers
the additional expenses. This becomes more difficult since where furnished accommodation is involved;
the contents insurers should pay also that proportion of the rent relating to the furniture.
An owner-landlord might continue to receive rent in terms of the lease agreement. The tenant would
then claim the full cost of alternative accommodation under his household contents policy if any.
Where the lease relieves the tenant from payment, the claim for loss of rent for the building
(unfurnished) falls under the building policy. The tenant would then claim the full cost of the alternative
accommodation under his household contents policy if any.
Any method of bringing the contents policy into a contribution to rent loss introduces the possibility
that the sum available for additional expenses may be inadequate. If the contents policy is brought into
sharing the rent loss, only the balance remaining after payment of additional expenses should be
brought into contribution, on the basis of independent liability.
Rent Insured under Other Policies
Where the risk is insured under the various sections of the standard commercial policy, General proviso
E makes it clear that the insurer will not be liable under more than one section in respect of the same
happening. It is not the intention to penalize the insured in the event of dual insurance, for example,
where rent has been insured in terms of both Fire and Business Interruption. Should the risk be spread
over separate policies, the normal rules of apportionment must apply.
Rent Insured under a Consequential Loss Policy
119
As previously explained, there is a difference between the scope of under a material damage policy
with a rent clause, and that under a business interruption policy. Subject to the indemnity period, the
business interruption insurance will continue to meet the shortfall until such time as the rentals reach
their previous level. Payment under the material damage cover ends when the premises become
tenantable.
Under business interruption, rent might be included in the Gross Profit item as part of the Turnover or
the Standing Charges or be separately insured as a Gross Rentals item-the money paid or payable to
the insured by tenants in respect of rental of the premises and for services rendered.
 Under the rent clause in a fire policy, recovery is proportionate to the period of un-tenant
ability.
 The claim under a business interruption policy is ascertained by applying the rate of gross profit
or rate of gross rentals to the reduction caused by the damage.
It must be expected that the fire policy will one figure as the rent loss, and the business interruption
policy a different one. Consequently, two assessments arise, and since, both policies are subject to
average, the apportionment should be on the basis of independent liability.
If both policies are full insurances, both attempt to offer the insured a full indemnity. Suppose the loss
under the fire policy is R20000 and under the business interruption policy R15000. Either sum
represents as indemnity in terms of the particular contract, but the insured is surely entitled to the
settlement which benefits him more. He cannot recover both amounts, and there is no comparison
between the sums insured.
The problem is how the loss can be apportioned. There is no real precedent or authority, and each case
must be dealt with on its merits.
Examples- check them out-Discuss with claims departments in select companies

Possible Answers to End of Chapter Questions
Work through these mental revision questions as a test of your understanding of this chapter. We
suggest that you attempt these before tackling the written questions. Please note that suggested
answers are not provided as chapter’s text contains the answers.
1. Give another name for the other insurance clause in a standard policy wording.
2. Briefly state the four rules which must be satisfied before apportionment can apply.
3. State the formula for independent liability method of apportionment.
4. Quote the basis of rent cover under the Buildings section of a domestic policy.
5. What is the basic difference in the scope of rent cover under a business interruption policy as
compared with a material damage policy with rent clause?
6. in each of the above policies in Question 5 how is the loss of rent determined?
120
References
Anon., 2009. In: Business Knowledge for it In Insurance. s.l.:Essvale Corporation Limited, p. 32.
Anon., 2016. www.cila.co.uk. [Online]

Available at: http://www.cila.co.uk/images/pdfs/Handout---CILA-Claimant-SIG-Seminar---Reinstatement---A-
Claimant-SIG-Perspective-London---22NOV16.pdf
[Accessed 1 May 2018].
Anon., 2017. [Online]

Available at: www.nios.ac.in
Boggs, C., 2011. Insurance and Risk Managment. s.l.: Wells Media Group.
David, J. S. & Mark, D. S., n.d. The Managers Guide to Terrorism, Risk, and Insurance: Essentials for Today's
Business. s.l. Rothstein Publishing.
Evans, R., 1987. The Early History of Fire Insurance. The Journal of Legal History, VIII(11), pp. 88-91.
Gillot, N. et al., 1988. Institute and Faculty of Actuaries. [Online]

Available at: https://www.actuaries.org.uk/documents/commercial-fire-insurance
[Accessed 24 December 2017].
Hexamer, C. A., 1905. Fire Insurance- Rates and Schedule Rating. The Annals of the American Academy of Political
and Social Science, Volume 26, pp. 211-223.
Insurance Institute of India, 2011. General Principles of Insurance. In: s.l.:s.n., pp. 1-46.
Insurance Regulatory Authority of Uganda, n.d. Insurance Regulatory Authority. [Online]

Available at: https:/ira.go.ug/minimum-premium-rates.pdf
Kyriaki, N., 2007. Principles of Indemnity in Marine Insurance Contracts- A Comparative Approach. s.l.: Springer.
Manning, A., 2008. Business Interruption Insurance & Claims: A Practical Guide to Business Interruption Insurance
for Business Managers, Insurance Brokers and Advisers, Underwriters, Claims Officers, Loss Adjusters and Risk
Managers. 5th ed. Victoria, Australia: Mannings of Melbourne Pty Ltd.
Outreville, F. J., 1998. Theory and Practice of Insurance. New York: Springer Science +Business Media.
Pearson, R., 1992. Fire Insurance and the British Textile Industries during the Industrial Revolution. Business
History, XXXIV(4), pp. 1-19.
Raul, C. & Andrea, L., 2014. What is Terrorism? Concepts, Definitions and Classifications. Contributions to Conflict
Managment, Peace Economics and Development, Volume 22, pp. 1-23.
Roberts, H., 2011. Riley on Business Interruption. 9th ed. s.l. Sweet & Maxwell.
Roberts, H., n.d. Riley on Business Interruption. In: s.l.:Sweet & Maxwell.
Spruce, H., 2016. Information about the Fire Triangle & Tetrahedron. [Online]
Available at: www.highspeedtraining.co.uk
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wikipedia, n.d. Fire. [Online]
Available at: http://en.wikipedia.org/wiki/Fire
IMS Proschool: Risk Management and Insurance Planning, pp 110-114

Rush, J & Ottley, M (2006); Business Law, PP – 164, Cengage Learning.
Saunders, D ()California Liability Insurance Practice; Claims and Litigation; 2016 Update, CEB
https://en.wikipedia.org/wiki/Home_Insurance (Last Accessed 26th November 2017)
https://en.m.wikipedia.org/wiki/Home (Last Accessed 8th December 2017)
https;//www.willis.com/Documents/Publications/General_Publications/Lloyds_household_Policy.pdf
http://ahliasuransi.com/automatic-reinstatement-clause-sum-insured/ (Last accessed 02 December 2017)
https://www.theinstitutes.org/doc/resources/AIC_2e.pdf (Last accessed 08 December 2017)
https://googleweblight.com/i?u=http://www.bankexamstoday.com/2015/02
122
APPENDIX I
FIRE RATING GUIDE

I. FIRE AND ALLIED PERILS (MATERIAL DAMAGE)
1) Aerated Water Factories & Mineral Water 0.2%
2) Agricultural Show Grounds 0.3%

3) Airports, Airfields & Hangers 0.25%
4) Aluminium Pressing Works 0.225%
5) Auction Sale Rooms 0.2%

6) Automobile Show Rooms 0.2%
7) Bacon Factories 0.3%
8) Bakeries & Biscuits Manufacture 0.3%
9) Banks 0.125%
10) Bars and Gaming Rooms 0.3%
11) Blacksmiths 0.4%
12) Boarding Houses 0.25%
13) Boat Houses 0.175%
14) Boot & Shoe Factories 0.3%
15) Brick & Tile Works 0.2%
0.15%
16) Broadcasting Stations & Telecommunication Houses
17) Buildings in course of construction 0.25%
0.2%
18) Butter and Cheese factories, Creameries and Diaries
19) Cafes & Restaurants 0.2%

20) Candle Manufacturing 0.4%
21) Car bonds/ Warehouses 0.25%
22) Ceramic & Pottery Works 0.3%

23) Chemical Insecticides and Sprays 0.3%
24) Chemical manufacturing & Storage 0.3%
25) Churches, Chapels, Mosques & Temples 0.1%
26) Cigarette Factories 0.4%

27) Cinemas and Theatres 0.25%
28) Clothing Factories 0.3%
29) Clubs (Discotheques) 0.3%
123
30) Coal and/ or Compost and Manure in the Open 0.5%
31) Coffee Mills or Factories 0.225%

32) Cold Storage & Ice Factories 0.15%
33) Collieries 0.4%
34) Concrete Block Works (Wet Process) 0.15%
35) Confectioneries (Manufacturing) 0.225%
36) Cosmetic Factories 0.3%

37) Cotton Factories 0.3%
38) Distilleries (Chemical) 0.2%
39) Dry Cleaners 0.2%
40) Dwellings & Domestic Outbuildings 0.125%
41) Electric Light & Power Stations 0.2%
42) Engineering Workshops 0.25%
43) Fish & Meat Processing 0.25%
44) Flax Factories 0.5%
45) Flour &Mealie Mills 0.225%
46) Fruit Juice Factories 0.225%
47) Garages 0.25%
48) Ghee Refineries 0.3%
49) Glass Factories 0.3%
50) Gold Smiths 0.3%
51) Goods in Government Bonded Warehouses & Other Warehouses

0.3%
52) Goods in the Open, Not Otherwise Provided For 0.3%
53) Grass/ papyrus/ makuti/ banana fibre thatched buildings 0.6%
54) Greenhouses Refer to Reinsurers
55) Hospitals 0.125%
56) Hotels 0.125%
57) Jaggery Industries 0.3%
58) Jam & Canning Factories 0.225%
59) Knitting Works 0.3%
60) Joinery 0.3%
61) Laundries 0.2%
124
62) Masonic and/ or Other Fraternal Meeting Halls 0.1%
63) Match Manufacturing 0.4%
64) Mining Risks 0.225%

65) Multi Occupancy Buildings Rate each risk separately.
Where it is not possible, use
the rate of the dominant risk.
66) Nail, Screw, Needle, Pin, Barbed Wire & Wire Mesh Makers 0.2%
67) Offices 0.125%
68) Oil Storage (Depots) 0.4%
69) Oil & Fat Factories 0.25%
70) Power Houses 0.225%
71) Paint & Vanish Factories 0.4%
72) Paper Industries 0.3%
73) Petrol Filling Stations 0.225%
74) Pharmaceutical: Tablet, Pill, Capsule Making and Bottle Filling 0.225%
75) Plastic Industries 0.4%
76) Poultry Houses 0.2%
77) Printing Works/ Carton Factories 0.225%
78) Pyrethrum Drying Sheds 0.5%
79) Quarries 0.2%
80) Razor Blade Makers 0.225%
81) Rice Mills 0.225%
82) Rubber Goods Factories, Tyre Factories & Tyre Re-treading Works 0.3%
83) Schools (Day) 0.15%

0.25%
84) Schools & Colleges (Boarding) & Hostels
85) Shops & Super Markets 0.225%
86) Silent/ Dormant Risks 0.15%
87) Sisal Factories 0.4%
88) Soap Factories 0.25%
89) Spray Painting 0.3%
90) Stables 0.25%
91) Steel Tubes, Steel Bed & Steel Furniture Makers 0.2%
92) Steel Rolling Mills, Steel Bar, Strip & Girder Makers 0.2%
93) Sugar Mills & Refinery 0.25%
125
94) Tanneries 0.25%
95) Tea Factories & Withering Houses 0.25%
96) Timber Stores & Sheds Strong 0.3%
97) Tobacco Factories 0.4%
98) Unoccupied Buildings 0.15%
99) Vinegar Factories 0.225%
100) Wattle Extract Factories 0.4%
101) Wattle (Dry) Back Factories 0.4%
102) Wine Bottling Premises 0.225%
103) Woodworkers, Carpenters, Saw Mills, Joiners, Cabinet Makers & 0.3%
Upholsterers
25M: 10% Discount
50M: 15% Discount
75M: 17.5% Discount
100M: 20% Discount iv) Industrial All Risks: IAR policies can be issued for large risks on the
condition of the following
Premium to be loaded by at least 20% of the applicable fire rate.
For Burglary Extension, the minimum rate of 1% on First Loss Sum Insured. Deductible:
5% of the claim, minimum Shs.10,000,000/=
v) Long-Term Agreements:
Special Discounts to be allowed in respect of LTAs
3 Years: 7.5% Discount
5 Years: 10% Discount
The discounts are applicable for risks above Shs.10B vi) Risk surveys: All risks
above Shs.2.5B must be surveyed at least once in 3 years.
vii) Risks above Shs.20B should be referred to the Reinsurers for confirmation of rates. The rates should then be
forwarded to the Insurance Regulatory Authority for approval.
Table 6: Fire Minimum Rating Guide
(Source: Insurance Regulatory Authority of Uganda)
126

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PROPERTY INSURANCE

Diploma in insurance study text

1.2 LEARNING OBJECTIVES

1.3 DEFINITION OF RISK

(Boggs, 2011) defines risk as;

a. Financial and Non- Financial Risks

Financial Risk Vs Non-Financial Risks

Pure Risk Vs Speculative Risk

Dynamic Vs Static Risk

Particular Vs Fundamental Risks

For a risk to be insurable, it should possess the following characteristics;

PERILS AND HAZARDS

What are Perils and Hazards?

1.4 RISK MANAGEMENT

• Analysis and Evaluation of Risk

• Treatment of Risk and Reaction Planning

• Reporting and Monitoring Risk Perfomance

• Revewing the Risk Management Framework

Risk Analysis and Evaluation

Risk Monitoring and Review

1.5 INSURANCE CONTRACT

CHARACTERISTICS OF AN INSURANCE CONTRACT

Offer and Acceptance

Legal Capacity to Contract

1.6 PRINCIPLES OF INSURANCE

b. Utmost good faith

INSURANCE AS A RISK MANAGEMENT TOOL

1.7 CHAPTER SUMMARY

The Risk management process involved 5 stages. These are;

The four important characteristics of an insurance contract include;

a. Offer and acceptance

1.8 REVISION QUESTIONS

1.9 CASE STUDY QUESTION

2.2 LEARNING OBJECTIVES

 Differentiate between commercial and non-commercial property insurance

2.3 NON-COMMERCIAL PROPERTY INSURANCE

The types of non-commercial property insurance include;

a. Home/House owners Insurance

HOME/HOUSE OWNERS INSURANCE

PRIVATE MOTOR VEHICLE INSURANCE

Non-Commercial Property Insurance is discussed in further detail in subsequent chapters.

2.4 COMMERCIAL PROPERTY INSURANCE

a. Fire and allied perils Insurance.

2.5 MAJOR HAZARDS AND PERILS

The size of an earthquake is measured using a Richter magnitude scale.

What do you think are some of the causes of floods?

Some of the moral hazards include the following.

 The attitude of the insured toward his/her peers

2.6 RISK SURVEYS

Benefits of a survey to the Insurer

Benefits of a survey to the Policyholder

a. Identifying hazards that could affect the business

CONDUCTING A RISK SURVEY EXERCISE

Stage 2: Compiling the risk Survey Report

Stage 3: Communicating the findings to the principle

Stage 3: Follow up on the recomendations made

1. Stage 1:- Onsite Assessment

Risk Survey Checklist

 Location of the risk

2. Stage 2:- Compiling the risk survey report

Qualities of a good risk Survey Report

Components of a Risk Survey Report

 Details of the Insured