Page 187 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes 2. Unvalued policy: An unvalued policy in one in which the value of the subject matter is not
declared at the time of policy taken. But in case of loss the value is computed by assessment.
This is also called an open policy.
3. Specific policy: Under this policy a definite amount is insured on a specified property and
in the event of loss, it will be paid if the loss falls within the specified amount. But the
actual value of the subject matter is not considered in this respect.

Example:
If a person has taken a policy of ` 10,000 against a property worth ` 15,000 and he
suffers a loss of ` 9,000, he can realize the whole loss from the insurer. But if the loss
amounts to ` 13,000, only ` 10,000 can be recovered.
If a policy is taken for ` 20,000 upon a building whose actual value is ` 1,00,000 and
the fire occurs causing the amount of loss ` 20,000. The insurance company will pay
the whole amount of loss of ` 20,000 irrespective of the fact that the building was
insured for one-fifth of its value.
4. Average policy: A fire policy containing ‘Average clause’ is called an average policy.
Under this policy, if the actual value is greater than the insured amount, the insurance
company will pay proportionately and the insured is deemed to be his own insurer, for
the balance. The claim is arrived at by dividing the amount of insurance by the actual
value of the subject-matter and multiplying it by the amount of loss.

Example: If a person insures his goods worth ` 40,000 for ` 30,000 only, and the loss
caused by fire is ` 20,000, then the amount of claim to be paid by the insurer will be 30,000/
40,000*20,000 = ` 15,000. The insured will have to bear his own loss for ` 5,000. Thus, under an
average policy, the insured is penalized for under-insurance of the property.
The object of this policy is to prevent under-insurance and to induce the insured to take out
a fire policy for the correct value.
5. Floating policy: This policy is taken out to over goods belonging to the same person but
lying in different lots at different places under one sum for one premium. For example, a
manufacturer or a trader may take one floating policy for all his goods lying in part in
warehouses, railway stations, port etc. The premium charged under such a policy is
generally the average of the premia that would have been paid if each lot of the goods had
been insured under specific policies for specific amount.
This policy is useful when the insured is in a position to declare only the total value at risk
and not separate values in separate risks.

Did u know? Floating policies cannot be issued to cover goods in unspecified buildings or
places, nor can they be extended to more than one town or village. Floating polices are
always subject to an average clause.

6. Stock declaration policy: Goods which are subject to frequent fluctuations in value or in
volume, present a special problem for insurance. In such a case if a businessman takes out
a policy for the maximum amount, he has unnecessarily to pay a high premium and if he
takes out a policy for a lower amount the large part of his stock may remain uncovered.
So, to remove this difficulty, the ‘declaration policy’ is introduced, which intends to provide
maximum cover and at the same time to avoid over-insurance with consequent over-
payment of premium.

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