In 2012, when we had just about set-up our insurance broking business, I received an email from a Chandigarh-based exporter. "Do you know what comprehensive general liability insurance is?" he asked. His American client was insisting on this as a precondition to doing business. The local branches of insurers, banks and sales persons had told him that this was a western concept not available in India. Last week, 5 years later, I had a feeling of déjà vu when another, larger Delhi-based exporter, called with exactly the same question.
Liability remains a hazy concept not understood by the very people most exposed to these risks. Unless the risks are better understood, insuring them remains a distant objective. Swiss Re, in its Sigma report on Liability in Asia, estimates the Indian liability insurance market to be under Rs2,000 crore and just about 2.2% of the general insurance market. This puts India in the 9th position in Asia in terms of proportion and 5th in terms of absolute size. The annual growth of this product, over the past several years, has been slower than the industry. One reason for poor awareness and take-up rates is that claims paid have been few, despite litigation increasing rapidly. Claims as a proportion of premium have been about 40%, which is far lower than in other lines of business such as health and motor insurance. However, this will change rapidly as litigation continues to rise, more people buy this insurance and buyers understand how to claim.
Liability risk refers to actions for which you can be held accountable, should something go wrong. The insurance does not remove the risk of litigation but pays for your defence and penalties. There are many liabilities you face but four, in particular, are important to know. These are: risks arising because of disgruntled customers; accountability for issues in the companies you work in or are on the Board of; injuries to people on your premises or using your products; and accidents involving your workers. These risks are real and ever increasing.
Some professions are more vulnerable to irate customers. These include doctors, chartered accountants, advisers, architects and builders. Clients file cases if a medical treatment does not work out, tax advice turns out poor, constructed buildings have flaws, or delivery is delayed. A professional indemnity insurance covers such risks that come out of a perceived deficiency or negligence.
Many of us work in companies or are directors. The more senior you are, the more accountable you will be held for the mistakes. The Companies Act, 2013, and the Insolvency and Bankruptcy Code, 2016, broaden the statutory responsibilities of directors and senior executives and also create provisions for penalties. These penalties can cross over company boundaries and encroach on your personal assets, particularly for directors. A case that I am familiar with involves a bank that sued a director for a loan default related to his company. When the director died, the liability was transferred to the heirs who had nothing to do with the loan or the company. Another case, described publicly, involved a start-up entrepreneur jailed because his company had allegedly not paid some vendor dues. A 'directors and officer's liability' insurance protects you in such situations.
You are exposed to third-party litigation if you run a business that has outsiders visit your premises or manufacture items that could hurt someone, even inadvertently. Restaurants, factories, exporters, makers of consumer goods, auto-component manufacturers and many others face this threat. This can be insured by a 'comprehensive general liability' cover, the insurance that I referred to at the beginning of this column.
Finally, if you are constructing a home or have a business that employs workers, then you are accountable for accidents they have at work. In cases of a death or disability, the courts decide the compensation under the Workmen's Compensation Act, 1923. This is an unlimited liability, which means there is no maximum level set for compensation. Such risks are insured by the "workers' compensation" insurance.
Ask the following basic questions when you buy liability insurance. How much sum assured is needed? Will the insurer pay even if you lose the legal case? Will the insurer provide you advice on fighting your case? Will claims that may come up years after your action be insured?
These questions are difficult to answer. Take the first one on the right level of sum assured. I asked this of a senior liability insurer who told me that you know you should have bought more if your insurance runs out. He was being facetious, of course, but the question remained unanswered. For professionals working on their own, a sum assured of Rs1 crore is a good place to start. As your business grows, this can be increased. For most liability insurances, this will cost under Rs20,000. If you lose the case, unless the damage is deliberate, the insurer will pay the claim. Practically, cases take a long time to settle so insurers may even press for early settlement. In liability claims, insurers are closely involved in your case. Sometimes they may suggest lawyers or even a line of defence. Finally, do remember these claims can come in years after an incident. Insurers will pay these claims provided you have renewed your insurance every year. As in your personal health and term insurance, timely renewals are key.
A few months ago I was at the family vet, when a young girl asked if our dog bites. "Not at all," said the vet, over-confidently I thought. But then I recalled that the first liability insurance we sold was to the vet—to insure him for situations where someone got bitten in his clinic.
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