CHAPTER SIX

PROPERTY AND LIABILITY INSURANCE

6.1. PROPERTY INSRUANCE

Property may be exposed to a wide range of perils – fire, theft, perils of the sea and damage by
persons (whether accidental or carelessness).

6.1.1. FIRE INSURANCE

Fire insurance is designed to indemnify the insured for loss of, or damage to, buildings and
personal property by fire, lighting windstorm, hail, explosion and a vast array of other perils.
Coverage may be provide for both the direct loss (that is actual loss represented by the
destruction of the asset), and indirect loss (defined as the loss of income and or extra expenses
caused by the loss of use of the asset protected). Originally, only fire was an insured peril, but
the number of perils insured against has gradually been expended.

Business may therefore, purchase fire insurance contracts covering their building and its
contents, to both the peril of fire and lightning. The standard fire policy promises in its insuring
clause to indemnify the insured for “direct loss by fire, lightning and by removal from premises
endangered by the perils insured against.”

Insurers, however, may offer protection against a very great number of perils other than fire and
lightning by extending the contract in relation to the interest of the insured through additional
premium payment. For additional premium the standard fire policy may be extended to cover
any of the following perils: windstorm, explosion, damage by aircraft, damage by vehicle, flood,
earthquake, fire and shock, bursting of pipes and water damage etc.

Not all fires are covered under the fire insurance contract, but the exclusions are few:

 Fires caused by war

 Fires intentionally set by public authorities, and
 Fires set intentionally by the insured.

Policy Format: Most of the first page of the standard fire policy is a declarations section in which
is printed such information as the insured’s name and address, the policy inception and
expiration dates, the description and location of the property covered, the peril insured against,
the amount of insurance applicable to each peril, and the code numbers of the forms and
endorsements that are attached. The standard fire policy plus the descriptive form may be
modified by one of more that forms or endorsements. These other forms may add, for example,
business interruption insurance or extra expense insurance. Endorsements may increase or
decrease the coverage. For example, they may add additional peril or exclude some parts of a
covered building, such as the foundations.
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The first page also contains a brief insuring agreement that states the insurer’s basic promise.
The second page describes such matters, as perils not included, uninsurable and excepted,
property, cancellation, and requirements in case a loss occurs.

Types of Fire Policies

There are different types of fire policies; some of the important polices include the following:

1. Valued Policy: This is a policy where the value of the property to be insured against fire and
allied perils is determined at the time the policy is issued. Undervalued policy also referred to as
“ordinary fire insurance policy.” The insurer pays to total value of damaged property irrespective
of the market value of the property at the time of destruction or loss.

2. Valuable (Automatic Reporting) Policy: Under this policy the indemnity to be paid by the
insurer is to be determined at the time of loss or after the loss has taken place. This policy is
often used for properties whether their value cannot be accurately determined at the inception of
the contract, example a building in process.

3. Floating Policy: Under this policy the insurer covers the interest of the insured on assets in
different locations.

4. Comprehensive Policy: This form of fire insurance policy give full protection, not only against
the risk of fire but all related perils such as riot; theft; damage by vehicles, animals or articles
from the air, including aircraft and the like.

5. Specific Policies: Under these policies the insured would get protection to a given type of
property in a given location for a specified value of property.

6.1.2. MARINE INSURANCE

Marine insurance is designed to protect against financial loss resulting from damage to, or
destruction of owned property, due to the peril primarily connected with transportation. It is a
contract of transport insurance whereby the insurer undertakes to indemnify the insured in the
manner and to the extent thereby agreed, against losses and damages involved in being
transported. In consideration of the payment of a certain sum called the “premium” the insurer
(underwriter), agrees to indemnify the insured (the client) against loss or damage cause by
certain specified peril termed “maritime perils”.

The marine cargo policies of Ethiopian Insurance Corporation are internationally accepted,
worded and standardized insurance policies. Accordingly the coverage it affords is to indemnify
the insuring public as per the terms, conditions, warranties, and exceptions of the policy in
respect of loss of or damage to the cargo insured mainly resulting from maritime perils: (heavy

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weather, stranding, collision, etc.,) or inland-transit accident (such as collision, overturning of the
carrying conveyance, explosions, fire, theft, non-delivery of the goods etc.,)

Marine insurance is divided in to two classes:

 Ocean Marine and

 Inland Marine.

6.1.2.1. OCEAN MARINE INSURANCE

Contracts concerned primarily with water transportation are considered to be ocean marine
insurance. For a considerable time ocean marine insurance was the only kind of modern
insurance.

Insurance has been developed and has attained a high degree of refinement in modern-day
commerce. As world trade grew and values at risk became larger, the needs for coverage become
more apparent. Larger ships and more refined instruments of navigation made long voyages
possible, and with this development insurance protection was looked upon almost a necessity.

Types of Coverage

The four chief interests to be insured in an ocean voyage are:

 The vessel, or the hull

 The cargo
 The shipping revenue or freight received by the ship owners.
 Legal liability for proved negligence.

If a peril of the sea causes the sinking of a ship in deep water, one or more of these losses can
result. However, each of these potential losses can be covered under various insurance policies.

Hull Policies: Policies covering the vessel itself or hull insurance are written in several different
ways. The policy may cover the ship only during a given period of time, usually not to exceed
one year. The insurance is commonly subject to geographical limits. If the ship is laid up on port
for an extended period of time, the contract may be written at a reduced premium under the
condition that the ships remain in port. The contract may cover a builder’s risk while the vessel
is constructed.

Cargo Policies: Contract insuring cargo against various types of loss may be written to cover
only during a specified voyage, as in the case of hull contract, or on an open basis. Under the
open contact, there is no termination date, but either party may cancel upon giving 30 days
written notice to the other, otherwise the insurance is continuous. All shipments, both incoming

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and outgoing, are automatically covered. The shipper reports to the insurer at regular intervals as
to the values shipped or received during the previous period.

Cargo policies written on a voyage basis cover that single voyage, but open policies usually
cover all shipments made on and after a certain date. If an open policy is cancelled, the coverage
continues on shipments made prior to the cancellation date.

Freight Coverage: The money paid for the transportation of the goods, known as freight, is an
insurable interest because in the event that freight charges are not paid, someone has lost income
with which to reimburse expenses incurred in preparation for a voyage. The earning of freight
by the hull owner is dependent on the delivery of cargo unless this is altered by contractual
agreements between the parties. If a ship sinks, the freight is lost and the vessel owner loses the
expenses incurred plus the expected profit on the venture. The carrier’s right to earn freight may
be defeated by the occurrence of losses due to perils ordinarily insured against in an ocean
marine insurance policy. The hull may be damaged so that is uneconomical to complete the
voyage, or the cargo may be destroyed, in which case, of course, it cannot be delivered. Also the
owner of cargo has an interest in freight arising from the obligation to pay transportation charges.
Freight insurance is normally made a part of the regular hull or cargo coverage instead of being
written as a separate contract.

Legal Liability for Proved Negligence: in ocean marine insurance policies the hull owner is
protected against third party liability claims that arise from collisions. Collisions loss to the hull
itself is included in the peril clause as one of the perils of the sea. The liability insurance is
intended to give protection in case the ship owner is held liable for negligent operation of the
vessel which is the proximate cause of damage to certain property of others. The vessel owner or
agent of that owner who fails to exercise the proper degree of care in the operation of the ship
may be legally liable for damage to the other ship and for loss of freight revenues.

Loss Settlement: If the cargo is totally destroyed, the insurer must pay the face value of the
policy. If the cargo is only partially damaged the insured and the insurer must agree on the
percentage of damage. If they cannot agree, the damaged cargo is to be sold for the account of
the owner and the amount received compared, with what would have been received had the cargo
been in sound condition. In either case, the liability of the insurer is determined by applying the
percentage of damage to the amount of insurance.

Illustration;

Assume that a cargo insured for birr 4000 could have been sold for birr 6000 in sound condition
but it worth only birr 4500 in damaged condition. Since the damage is 25 %, the insurer must pay
25% of birr 4000 or birr 1000 computed as follows;

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6.1.2.2. INLAND MARINE INSURANCE

Inland marine cargo insurance covers shipments primarily be land or by air. Although the
trucker, railroad, or airline maybe common carrier with the extension liability (called liability
exposures), the shipper may still be interested in cargo insurance because:

 It is usually more convenient to collect from an insurer than a carrier.

 A common carrier is not responsible for perils such as an act of war, exercise of public
authority, or inherent defects in the cargo.

No one cargo insurance contract exists. Instead, different insurers may issue different contracts,
and a given insurer will tailor the contract to the insured’s needs. A convenient way to classify
the contracts is according to the type of transportation covered. One or more of the following
modes of transportation maybe covered – railroad, motor truck, or air. Shipments by mail are
covered under separate first – class mail, parcel port, or registered mail insurance.

6.1.3. FIDELITY GUARANTEE INSURANCE

Fidelity guarantee insurance indemnifies an employer for any loss suffered at the hands of
dishonest employees. It provides guarantee against loss through the dishonesty or incapacity of
individuals who are trusted with money or other property and who violate this trust.

Cashiers and other who handle money, and other persons employed in positions of trust, are
frequently required by the employers to provide security as protection against their personal
dishonest usually in the form of fidelity guarantee policy. The policy indemnifies the employer
against losses from the dishonesty of his employees. The employer himself often takes out the
policy. He may insure a number of employees either individually or in a group basis under a
variety of policies.

Unlike other policies, fidelity guarantee policies specify a time limit to discover the loss and
report it to the insurer after the resignation, dismissal retirement, or death of the employee in
question. Hence, while the insurer undertakes to make the insured’s financial losses lighter, it is
also a requirement that the insured should

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  Inform the insurer of such fraudulent act immediately upon discovery.
 Either obtain admission of fraud or take appropriate legal action to establish fraud, and
 Cooperate with the insurer to bring the defaulter before the court of law.

In addition, before accepting the risk the insurer considers employers type of establishment,
methods of selecting employees, working conditions, emoluments and benefits in relation to the
responsibility assigned, supervision and control measures effectiveness.

6.1.4. THEFT INSURANCE

Although theft is generally one of the perils covered under an all risks policy, the contract
usually excludes or limits the amount of protection on certain types of property, such as money,
that is highly susceptible to theft losses.

Theft insurance protects a business against losses by burglary, robbery, or some other form of
theft by persons other than employees. Fidelity guarantee insurance or dishonesty insurance
covers losses caused by dishonest acts of employees.

Burglary is the act of unauthorized entry, with criminal intentions into any building or residence.
It is the unlawful taking of property from within premises closed for business, entry to which has
been obtained by force. There must be visible marks of the forcible entry. Thus, if a customer
hides in a store until after closing hours, or enters by an unlocked door, steals some goods, and
leaves without having to force a door or a window, the definition of burglary is not met under a
burglary policy.

Robbery, on the other hand, is defined to mean the unlawful taking of property from another
person by force, by threat of force, or by violence. Personal contract is the key to understanding
the basic characteristic of the robbery peril. However, if a burglar enters a premise and steals
what wallet of sleeping night guard, this crime is not one of robbery because there was no
violence or threat thereof. The person robbed must be cognizant of this fact. On the other hand
if thief knocks out or kills the guard and then robs the guard or the owner, the crime would be
classed as robbery. Robbery thus means the forcible taking of property from a messenger or a
custodian.

According to EIC, burglary policy does not cover losses or theft committed by:

 Members of the insured’s household,

 The insured himself or his assignee.
 Theft connected with war or any kind of population uprising, or
 Theft of valuables including documents and works of art unless agreed pre-hand. In
addition, failure to disclose materials facts at the time of writing the policy will also make
any theft claims null and void.

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6.2. LIABILITY INSURANCE

Liability insurance is contract that protects the insured against legal responsibility of losses to the
person or property of others.

6.2.1. AUTOMOBILE INSURANCE

Most automobile insurance contracts are scheduled contracts that permit the insured to purchase
both property and liability insurance under one policy. The contract can be divided, however,
into two separate contracts; one providing insurance against physical damage to automobiles and
the other protecting against potential liability arising out of the ownership or use of an
automobile.

The objective of automobile insurance is to indemnify the insured against accident loss or
damage to high auto and / or his liability at law for bodily injury or material damage cause by the
use of motor vehicle, subject to the terms and conditions and to the cover granted.

There are two main types of insurance covers in motor commercial and motor private insurance,
viz. Comprehensive cover and Third party cover.

Comprehensive Cover: A comprehensive cover provides protection against a wide range of

contingencies. It includes indemnity in respect of the insured’s legal liability for death or bodily
injury or damage cause to the property of third parties arising out of the insured’s vehicle. The
policy also indemnifies the insured in respect of all damages to the vehicle caused by an
accidental, external physical means as a result of collision, overturning, fire self-ignition,
lightning, explosion, and burglary.

The policy excludes, among other things, the following:

 Consequential loss sustained by the insured.

 Wear and tear depreciation of motor vehicle,
 Mechanical or electrical breakdown of failure of any part of a motor vehicle,
 Death of or injury to members of insured family or his employees,
 Damage to property of the insured or held by him in trust or in custody.

Third Party Cover: There are two parties involved in an insurance contract, the insurer and the
insured. Accordingly, any other person who may become linked in some way with the insurance
is regarded as third party. A third party only policy covers the insured’s legal liability (i.e.
property damage, death, and injury) towards other people in the event of an accident arising out
of the use of a motor vehicle.

A third party policy may be extended to include at an additional premium the policy holder’s
vehicle against the risks of fire and theft as follows:

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  Third party, fire and theft.
 Third party and fire.
 Third party and theft.

The basic cover guaranteed by the Ethiopian Insurance Corporation’s policies can be extended to
cover additional risks at an additional premium.

Classification of Risks:

There are various categories of automobile risks and a distinction is made in accordance with the
type of the vehicles. The main classifications are as follows:

 Private Vehicles: A motor vehicle used solely for private (social, domestic, pleasure,
professional purpose or business calls of the insured) purposes are classified as “private
vehicles” and are insured under the “private motor vehicles policy”. The term “private
purposes” does not include use for hiring, racing, and carriage of goods in connection
with any trade or business.
 Commercial Vehicles: A wide range of vehicles which carry goods and passengers are
classified under this heading and different rates of premium are supplied depending on
their use and type.

6.2.2 AVIATION INSURANCE

Aviation insurance is a comparatively recent phenomenon that has been developing with the
development of passenger plans, particularly “Jumbo Jets”. The overall increase in the number
of different passenger planes and the increase in their value called for aviation insurance.
Aviation insurance is an insurance that provides protection against losses or damages to the
different types of passengers, cargo planes, and associated losses.

Like automobile insurance, aviation insurance includes both property insurance, on the planes
and liability insurance.

Types of Policies

The most common types of policies under aviation insurance are:

 Aircraft Comprehensive Policy.

 Freight Liability Policy which includes airmail liability policy.

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Aircraft Comprehensive Policy: This policy covers against three types of potential losses:

A. Accidental damage to the aircraft, where protection is provided for damage to the aircraft by
accidents except those that are specifically excluded on the policy.

B. Third party legal liability, where the insurer assumes the responsibility to indemnify the
insured for death of or bodily injuries to third parties (excluding passengers) and ground damage.

C. Legal liabilities of the insured in respect of death of, or bodily injuries to passengers,
passenger’s baggage and personal effects, which are registered, are also covered by the
insurance.

Freight Liability: In addition to passengers and crew an aircraft carries cargo and mail. The
airline operating the aircraft is liable if the cargo or mail is lost or damage. The freight liability
policy provision requires the insurers to indemnify the insured against all sums which the insured
may become legally liable to pay to owner of cargo as a result of loss or damage or mishandling
of the cargo. The limit to the amount of indemnity is generally stated in the freight liability
policy.

6.2.3. WORKER’S COMPENSATION/EMPLOYERS’ LIABILITY INSURANCE

Worker’s compensation insurance covers loss of income, medical, and rehabilitation expenses
that result from work related-accidents and occupations disease. Insured workmen always retain
the right to claim damages. Employers’ liability claims become much more common aided by
Trade Unions.

If an employee is killed or injured at work as a result of an accident arising from defective

premises or equipment that a court may award damages against the employer. Any employer is
liable for an employee who suffers accidental bodily injury or disease while working for him.
The employee is thus entitling to compensation for injuries that may be temporary or permanent.
This compensation being unforeseen expenditure, the employer finds it difficult to compensate
such losses especially when it involves a high amount. An employer may therefore, take out an
insurance policy insuring himself against such claims by his employees.

The insurance which provide protection for injury to employees while at work, and as a result
make the employer liable for the loss, is called worker’s compensation insurance.

In addition to buying insurance, the insured (employer) can lower the loss claims by:

1. Providing a safe place of work to his employees

2. Proper plant tolls, machinery and working implements, and

3. Hiring competent and sober fellow employees

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6.2.4. PUBLIC LIABILITY INSURANCE

Public liability insurance was developed with employee’s liability insurance. Once, public
opinion had accepted the morality of being able to insure one’s liability, and the availability of
such insurance became known, the business grew rapidly.

The policy provides compensation for legal liability for death, injury, or disease to people other
than employees (which should be covered by employer’s liability policy). Public liability
insurance provides what is popularly termed “third party cover”. It indemnifies the insured in
respect of his legal liability for accidents to members of the public, or for damage to their
property, occurring in circumstances set out in the policy.

Under public liability insurance, policies are available to cover liabilities attaching to:

A. Pedal Cyclists.

B. Private individuals. The so called “personal liability” policy is available to protect private
persons from claims arising due to injury caused by such things as polished floor, a loose roof
tile or by pet animal. A pedestrian, for example, can incur heavy liabilities by causing a serious
road accident.

C. Product Liability: Liability arising out of defects of goods produced or sold.

D. Professional men such as doctors, dentists, solicitors, and bankers may take out policies to
protect themselves from claims arising out of negligence or mistake committed in the exercise of
their professional duties.

It should be noted that this form of cover might include or be included with other risks. For
example, a householder’s policy covering loss or damage to the building and/or contents can be
extended to cover the personal liability of the owner and his family towards the public. Whereas
liability arising from the use of motor vehicles is always exclude, and must be covered by a
separate motor policy.

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