Module 2: Classes of Business

Question 1

In the UK, what does the Road Traffic acts 1988 and 1991 require?

Answer 1

A motorist to have insurance covering his or her legal liability to pay damages arising out of injury causes to any person and damage to third party property.

Question 2

What are the four classes of motor insurance risk?

Answer 2

1. Private cars.
2. Motor cycles .
3. Commercial vehicles - include goods carrying vehicles, hire cars, taxis, coaches, buses, agricultural and forestry vehicles and special vehicles, such as fork life trucks and mobile plant excavators.
4. Motor trade risks.

Question 3

What does jewellers’ block insurance protect against?

Answer 3

It protects jewellers in the event of physical loss of or damage to their stock on their own premises, in vaults or in transit.

Question 4

What does jewellers’ block insurance policy cover?

Answer 4

1. Stock and merchandise used in the conduct of the insureds business and bank notes against any loss or damage from any cause whatsoever whilst in territorial limits.
2. Premises, trade and office fixtures, fittings etc. against a wide range of perils.

Question 5

What does a fine art insurance policy protect against?

Answer 5

The principal exposures for private collections are fire, theft or water damage, caused, for example by burst pipes.

Commercial risks also have theft exposure, and works of art may be damaged in transit between a buyer or seller, or when loaned to an exhibition.

Question 6

What are the pre-conditions of fine art insurance coverage?

Answer 6

That a full inventory of insured items and values is maintained.

Cover is often provided on an “agreed value” basis to guard against disputes arising as to an items value once a loss has taken place.

Agreed values are normally based on valuations provided by professional experts such as the international auction houses.

Question 7

Which area of insurance (other than life) has a specific Act of Parliament devoted to it?

Answer 7

Marine.

The Act is called the “Marine Insurance Act 1906 (MIA)”.

Question 8

What are the key points of the Marine Insurance Act?

Answer 8

1. The act brought together all the pre-existing laws about marine insurance and presented it in one “codifying” law, also providing definitions for some key terms.
2. It refers to “marine adventures” which means that marine insurance can be obtained for most things that go wrong whilst a vessel is at sea, or whilst cargo is being moved around.
3. The insurance can extend to some land risks and also inland waters such as rivers or lakes.

Question 9

What are the two meanings of “average” in insurance?

Answer 9

1. Average in marine insurance means LOSS.

2. Average in non-marine insurance means UNDERINSURANCE.

Question 10

Name examples of types of people who could have Insurable interest in marine adventure.

Answer 10

1. Shipowners.
2. Charterers.
3. Cargo owners.
4. Master and crew.

Question 11

What Insurable interest will a shipowner have when involved in a marine adventure?

Answer 11

1. Their interest in the ship.
2. Their ability to earn money from using the ship (called freight if they carry cargo or passage money if they carry passengers).
3. Their liability if the ship hurts someone or damages someone else’s property.

Question 12

What Insurable interest will charterers have when involved in a marine adventure?

Answer 12

1. Their liability to the shipowner if they cause damage to the ship.
2. Their liability if the ship damages someone or someone else’s property.
3. Their ability to earn money from using the ship (called freight if they carry cargo or passage money if they carry passengers).

Question 13

What Insurable interest will cargo owners have when involved in a marine adventure?

Answer 13

1. Their interest in the cargo.

2. Their liability in case the cargo hurts anyone, damages the ship or anything else.

Question 14

What Insurable interest will the master and crew have when involved in a marine adventure?

Answer 14

1. They have an Insurable interest in their wages.

Question 15

What are honour policies?

Answer 15

“Honour policies” are insurance policies issued in the marine market which do not require Insurable interest.

(For example the shipowners interest in equipment on board the vessel which is not strictly part of the normal ships equipment.)

These policies are not enforceable at law.

Question 16

What are the three main classes of marine insurance?

Answer 16

1. Cargo insurance.
2. Hull insurance.
3. Marine liability.

Question 17

Names five examples of marine liability insurance.

Answer 17

1. Shipowners liability.
2. Charterers liability.
3. Cargo owner liability.
4. Ship builders and ship repairers liability.
5. Port and terminal operators liability.

Question 18

What does Energy Insurance involve?

Answer 18

Energy insurance refers to offshore energy, covering risks not on land.

Energy insurance is usually used to mean oil and gas industry where the exploration and production of these resources mainly takes place out at sea.

Question 19

In marine insurance, what does Hull refer to?

Answer 19

The ship itself together with its machinery and normal equipment.

Question 20

What are the standard clauses commonly used in the London Market?

Answer 20

The institute time clauses 1/10/83.

More modern clauses exist (e.g. The international hull clauses 01/11/03), however the older clauses are still preferred by brokers and insureds.

Question 21

What do the institute time clauses (ITC) 1/10/83 cover?

Answer 21

The ITC 1/10/83 provides cover against damage to your own vessel caused by the following elements:

• perils of the sea
• fire, explosion
• violent theft by persons from outside the vessel
• jettison (i.e. deliberately throwing cargo overboard normally)
• piracy
• breakdown of or accident to nuclear installations or reactors
• contact with aircraft, docks and similar
• earthquake, volcanic eruption or lightning
• accidents in loading, discharging or shifting cargo or fuel
• bursting of boilers, breakage of shafts or any latent defect in the machinery or hull
• negligence of master, officers, crew, pilots, repairers or charterers
• barratry of master, officers or crew (i.e. a wrongful act causing damage to the ship or cargo).

The clauses also cover a proportion (in this case 75%) of any sum paid out by the insured as a result of its legal liability to another vessel following a collision.

Question 22

What does Cargo insurance cover?

Answer 22

Cargo insurance covers physical damage to, or loss of, goods whilst in transit.

Question 23

Cargo insurance is often provided by means of one of three institute cargo clauses, A, B, or C, plus war clauses and strike clauses. Outline the coverage provided by cargo clauses A, B and C.

Answer 23

Institute Cargo Clauses (A): cover “all risks” of loss or damage, subject to certain stated exclusions.

Institute Cargo Clauses (B): offer cover against major perils, such as fire, explosions, sinking, stranding and capsizing
They also provide wider coverage by insuring against earthquake, volcanic eruption and lightning, as well as water damage.

Institute Cargo Clauses (C): provide basic standard cover against major perils such as fire, explosion, sinking, stranding and capsizing.

Question 24

There are other more specific cargo clauses in uses for insuring shipments of various cargoes. What types of shipment could they cover?

Answer 24

1. Frozen food
2. Meat
3. Bulk oil
4. Commodities
5. Oils
6. Seeds
7. Fats
8. Rubber

Question 25

When were the original A, B and C cargo clauses issued?

Answer 25

However, they have just been updated and reissued with effect from 1 January 2009.

Question 26

How do “Free On Board” (FOB) contracts work?

Answer 26

In FOB contracts, the seller is responsible for arranging for the goods to be delivered “free on board” to the ocean vessel at the load port, where the sellers responsibility ceases.

The buyer arranges to pay the freight and the insurance for the shipment.

Question 27

How do “Cost Insurance Freight” (CIF) contracts work?

Answer 27

In CIF contracts, the seller of the goods is responsible for arranging delivery of the goods to the buyer by booking all the transport (e.g. Road hauliers and vessels), paying the charges (the freight) and arranging the insurance.

The buyer is charged an inclusive price: the cost of the goods, the freight and the insurance (CIF).

Question 28

How are cargo policies unusual?

Answer 28

1. Cargo policies are unusual in that they are freely assignable because often goods are bought and sold whilst in transit.
2. Cargo policies do not require the person making the claim to be the person who bought the policy in the first place as long as the assignments or transfers are clear to the insurer and the person making the claim has an Insurable interest at the time the loss occurred.

Question 29

What is an Open Cover?

Answer 29

An agreement between a merchant or shipper and insurer under which all the movements that it covers are automatically insured.

Question 30

How do open covers work?

Answer 30

1. An open cover is for an agreed period of time, usually 12 months.
2. It will state the conditions under which future policies for specified goods will be issued.
3. An open cover has a schedule of rates for various voyages, against which the assured declares individual shipments as and when they occur.
4. The broker raises a premium debit, based on the rating schedule and valued declared for insurance.

Question 31

How does the period of cover work for ships and cargo?

Answer 31

They’re insured for a period of time, for a voyage,

OR

for a “mixed time” (i.e. time and voyage).

Question 32

How does the period of cover work for cargo?

Answer 32

Cargo is insured for the voyage and usually on a warehouse to warehouse basis

(it also covers land based transit of the goods).

Question 33

How does the period of cover work for shipbuilders risks?

Answer 33

Shipbuilders risks are insured during construction ashore

(from the time the keel is laid to launch),

sea trials and until the vessel is delivered by the shipbuilder to the shipowner.

Question 34

How does the period of cover work for drilling rigs and platforms?

Answer 34

Drilling rigs and platforms are insured for construction, the voyage to the site, placing on the site, further construction until the complex is completed and thereafter whilst operating.

Question 35

What is an Actual Total Loss in marine insurance?

Answer 35

A loss which occurs when the subject matter insured is destroyed or so damaged as to cease to be a thing of the kind insured, or that the insured is irretrievably deprived of it.

Question 36

What is a Constructive Total Loss in marine insurance?

Answer 36

A loss which occurs when the subject matter insured is abandoned because:

an actual total loss appeared to be unavoidable,
OR
because it could not be saved without expenditure that would exceed its value.

Question 37

What is a Partial Loss in marine insurance?

Answer 37

A loss where the loss is a partial loss and not a total loss.

Total loss of part of the subject matter insured is a partial loss.

Question 38

What does Average mean in marine instances?

Answer 38

In marine insurance it means partial loss.

Question 39

What does General Average Loss mean in marine insurance?

Answer 39

A loss arising from a general average act,
which is defined in the MIA 1906 as

“where any extraordinary sacrifice or expenditure is voluntarily and reasonably made or incurred in time of peril for the purpose of preserving the property imperilled in the common adventure.”

Question 40

What does General Average Contribution in marine insurance mean?

Answer 40

A contribution to which the person on whom the costs of a general average act falls is entitled from the other interested parties, to help cover the loss he has sustained.

Question 41

What does Particular Average Loss mean in marine insurance?

Answer 41

A partial loss of, or damage to, the subject matter insured, caused by a peril insured against, which is not a general average loss.

Question 42

What does “sue and labour” mean?

Answer 42

“Sue and labour” is a principle whereby the insured is expected to act prudently and to take reasonable steps to prevent or reduce loss.

Question 43

If a ship was damaged and was taking water, what action could the shipowner take to the ship from sinking and which might be classed as “sue and labour”

Answer 43

1. Get some pumps to try and reduce the water level.

2. Call tugs to try and tow the vessel to safety.

Question 44

Name three types of standard aircraft policy cover.

Answer 44

Section 1: Loss or damage to the aircraft.
Section 2: Legal liability to third parties other than passengers.
Section 3: Legal liability to passengers.

Question 45

What would a section 1 - loss or damage to the aircraft policy pay for?

Answer 45

1. Replacing or repairing accidental loss or damage to the aircraft arising from risks covered, including disappearance if unreported 60 days after commencement of flight.
2. Reasonable emergency expenses up to 10% of the sum insured.

The policy excludes wear and tear, breakdown and damage which has a progressive or cumulative effect.

Question 46

What would a section 2 - legal liability to third parties other than passengers policy cover?

Answer 46

Legal liability and agreed legal costs for bodily injury or damage to property, subject to limits for each person and each accident

Question 47

What would a section 3 - legal liability to passengers policy cover?

Answer 47

Legal liability and agreed costs in respect of claims from passengers for injury or damage to, or loss of:

• personal effects and baggage, subject to limits for each passenger and each aircraft.

Question 48

What six other forms of aviation cover are there?

Answer 48

1. Products legal liability.
2. Airport liability.
3. Cargo.
4. Loss of licence.
5. Loss of use.
6. Personal accident

Question 49

What are the ten typical types of property insurance coverage?

Answer 49

1. Fire (which may include other perils).
2. Business interruption.
3. Theft (which may include other perils).
4. Money.
5. Jewellers’ block.
6. Fine art.
7. Private homes.
8. Goods in transit.
9. Bankers’ blanket bond.
10. Builders and contractors.

Question 50

What four things does a typical fire insurance policy cover?

Answer 50

Loss or damage caused by:

1. Fire and/or lightning.
2. Fire consequent upon explosion wherever explosion occurs.
3. Explosion consequent upon fire on the premises insured.
4. Explosion of domestic boilers and/or as used for domestic purposes.

Question 51

What four additional risks can be included within a fire policy?

Answer 51

1. Chemical perils - for example, explosion (on its own, no fire needed).
2. Social perils - for example, riot, civil commotion and malicious damage.
3. Natural perils - for example, storm, tempest, flood, earthquake.
4. Miscellaneous - for example, burst pipes, water damage, aircraft or other aerial devices or articles dropped therefrom, impact by vehicles etc.

Question 52

What does money insurance cover?

Answer 52

A money insurance policy covers loss of money in transit, on specified premises and in a bank night safe.

(“money” includes a wide range of notes, cheques, bankers’ drafts, stamps tokens, vouchers etc.)

Question 53

What does the building section of a UK home policy typically cover?

Answer 53

1. Loss or damage to buildings from specified perils.
2. Accidental damage to glass, sanitary fittings and underground services.
3. Cost of alternative accommodation should the house be uninhabitable.
4. Property owners’ liability.

Question 54

What does Goods in transit policies provide?

Answer 54

“All risks” cover for property being loaded onto, carried on or unloaded from motor vehicles and trailers, including temporary garaging during transit in the UK.

They can also encompass liability insurance for the carriers themselves.

Question 55

What are the two fundamental differences between cargo insurance and goods in transit insurance?

Answer 55

1. Goods in transit insurance often covers the liability of the carrier, whereas cargo insurance is covering the physical damage to the goods themselves.
2. Goods in transit insurance also tends only to cover road and possibly rail haulage, whereas cargo insurance can cover all forms of transportation.

Question 56

What does bankers blanket bond insurance cover?

Answer 56

Cover is typically arranged to protect all branches of the bank in a single policy.

However, key vault exposures may be very significant and require additional specialist coverage up to high values.

1. Infidelity - employee dishonesty.
2. Valuable property on banks’ premises.
3. Valuable property in transit.
4. Forgery.
5. Forged/Counterfeit securities.
6. Counterfeit currency loss.
7. Damage to office and contents.

Question 57

What does a builders and contractors insurance policy cover?

Answer 57

Physical damage arising from a wide range of perils, and public liability risks for the construction and erection and the maintenance period.

Question 58

What can be done if a catastrophic property loss occurs?

Answer 58

1. Insurers can participate in a pool, whereby they all assume a part of the risk, thus spreading it widely around the market.
2. National governments may provide financial backing, effectively acting as the insurer “of last resort”.

Question 59

What does liability insurance protect?

Answer 59

It protects the insured in respect of their legal liability to others. Legal liabilities arise in a number of different ways.

For example: through negligence, breach of contract or breach of statutory duty.

Question 60

What is a long-tail risk?

Answer 60

A risk that may have claims notified or settled long after the policy has expired.

It is often necessary for an insurer to arrange reinsurance protection to cover claims which may arise after the account has been closed.

It is used to describe risk covered as those of liability rather than physical damage.

Question 61

What is a short-tail risk?

Answer 61

A risk in respect of which all claims are likely to be advised and settled within the period of cover or shortly after the cover has expired. Normally confined to physical damage risks.

Question 62

What does public liability insurance cover?

Answer 62

It provides an indemnity to the insured against legal liability for damages paid to claimants for bodily injury or disease (fatal or non-fatal) or damage to property.

The policy covers both the claimants and the insureds costs and expenses.

Question 63

What does employers liability insurance (EL insurance) cover?

Answer 63

It covers employers against the costs of compensation and legal fees for employees who are injured or made ill at work, when the employer is legally responsible.

Question 64

In the UK, how much EL insurance must employers legally take out?

Answer 64

£5,000,000 from an authorised insurer.

1. The insured must demonstrate that he is complying with the law:

Therefore the insurer provides the insured with a Certificate of Employers’ Liability Insurance, which the insured must display where employees can easily read.

2. An insurer cannot impose conditions making the employer or the employee responsible for paying any part of the claim:

What this means in practice is that insurers cannot refuse to pay out on a claim if there has been a breach of warranty by the insured but can claim back against the insured afterwards.

Question 65

What does workers’ compensation insurance cover?

Answer 65

It provides medical, rehabilitation and financial benefits for the death or disability to employees as a matter of right, without regard to fault.

WC insurance is compulsory in a number of countries with “no fault” systems of compensation. In the USA, for example, it is compulsory in all states, although the detailed requirements vary.

Benefits in the event of death or disability are payable in accordance with a pre-set scale.

Question 66

What does products liability cover?

Answer 66

Legal liability for bodily injury or property damage.

It arises out of goods or products (including food and drink) manufactured, constructed, altered, repaired, serviced, treated, sold, supplied or distributed by the insured.

Question 67

What does professional indemnity insurance (PL Insurance) cover?

Answer 67

Liability for professional negligence causing financial or personal injury to clients.

It is sometimes called “errors and omissions insurance”.

Particular policies are available for particular professions, including accountants, chemists, solicitors and stock brokers.

In many countries specified professions are legally obliged to have PL insurance. In the UK, for example, this applies to solicitors and FSA-regulated insurance intermediaries.

Question 68

What is directors and officers liability insurance (D&O insurance)?

Answer 68

A means by which a company can recover its costs, possibly the resulting damages, in the defence of actions brought against it and/or its past and present directors and officers (including individuals acting in that capacity) for the commitment of ‘wrongful’ acts (as opposed to ‘negligent’ or fraudulent’ acts).

Question 69

What are the three main types of insurances of the person?

Answer 69

1. Personal accident insurance.
2. Accident and illness insurance.
3. Life insurance.

Question 70

What is comprehensive motor cover?

Answer 70

Cover which comprises:

1. Third party liability
2. Loss of or damage to the vehicle due to specified perils (including accidental damage)
3. Loss of rugs, clothing and personal effects

Question 71

What two other motor cover options are there?

Answer 71

1. Third party only: covers liability for death or bodily injury to a third party and liability for damage to third party property.

This is the minimum required by law under the Road Traffic Acts.

2. Third party fire and theft: covers third party liability, plus the risks of loss of or damage to the vehicle due to fire or theft.

Question 72

What five other types of insurance does the London Market write?

Answer 72

1. Political risks insurance
2. Credit insurance (typically provides cover to a lender against the default or insolvency of the contracting counter party).
3. Intellectual property insurance (protects the patents, copyrights, trade and service marks of industry, businesses and creative artists).
4. Contingency insurance
5. Livestock insurance (covers the insured against death of animals as a result of accident illness or disease).

Question 73

What are the main types of political risks and insurances?

Answer 73

1. Contract frustration insurance
2. Confiscation, expropriation, nationalisation, deprivation (CEND) insurance
3. Political violence insurance
4. Political risks for lenders

Question 74

What does contract frustration insurance cover?

Answer 74

Costs suffered when a contract is unilaterally terminated by a foreign government

OR

frustrated due to political perils including war, embargo or licence cancellation.

Question 75

What does Confiscation, expropriation, nationalisation, deprivation (CEND) insurance cover?

Answer 75

Loss of assets or investments arising out of the actions of a foreign government.

Question 76

What does political violence insurance cover?

Answer 76

Physical damage to assets due to war, civil war, strikes, riots, civil commotion, sabotage, terrorism and malicious damage.

Question 77

What does political risks for lenders involve?

Answer 77

Financial institutions lend considerable amounts to parties in foreign countries.

They need protection against the possibility that the borrower defaults on its (re)payment obligations due to political risks, political violence risks and currency in-convertibility/non-transfer.

Question 78

What are the different types of contingency insurance?

Answer 78

1. Cancellation and abandonment insurance
2. Non-appearance insurance
3. Products recall insurance
4. Over-redemption insurance
5. Prize indemnity/promotional insurance