Insurance policy scope of cover

One of the sections of an insurance policy that the recent burnings and lootings threw up is the scope of cover of an insurance policy. Except for all-risk policies, where there is no scope of cover (the exclusions determine the extent of cover), most of other insurance policy documents have scope of cover. It details the perils and risks the policyholder is protected against. Unless otherwise stated, nothing outside the scope of cover is covered under the policy.

One of the policies that came up in discussions in the aftermath of the large scale arson is the fire insurance policy (a fire insurance policy is scarcely issued alone these days. It usually comes with special perils). The standard fire policy covers three perils: fire (limited), lightening (unlimited) and explosion (limited). We shall concentrate on fire in relation to the post EndSars protest. The standard fire policy covers “Fire (whether resulting from explosion or otherwise) not occasioned by or happening through: “… riot, civil commotion, war invasion, act of foreign enemy, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, military or usurped power.” In strict sense, those fire and special perils policyholders, whose buildings and other properties were destroyed during the riots are not entitled to any relief by their insurance companies, unless their policies were extended to cover strike, riots and civil commotion (SRCC).

As a result of the increased risk of SRCC some insurance companies now grant this extension in their fire and special perils policies and motor insurance policies. But some companies still require a policyholder or his insurance broker to ask for this extension. I feel that the time has come for all insurance companies to add the SRCC extension automatically to the fire and special perils policy and not treat it as an extension. They can charge additional premium to cover the extra risk ab initio. This is the practice in India. This will save all parties the controversy that could be generated if those policyholders whose properties are damaged by fire during riots and civil commotion find out they cannot get insurance compensation because of the absence of SRCC extension in their fire policy. SRCC should also form part of motor insurance policies and goods-in-transit policies.

But only the scope of cover will not tell a policyholder the extent of his insurance cover. He also needs to go the section on exclusions or exceptions.  There, the policyholder gets to see what is excluded. For instance, a comprehensive motor policy will tell you that the policy covers theft, which is true. But under exclusion, you will see fidelity guarantee exclusion. What it simply means is that the theft the policy covers does not include theft by your driver and other domestic staff. So, if your driver disappears with your vehicle, you are not entitled to claim under your motor insurance policy. There are many reasons for having exclusions in insurance policies, but in this particular case, there is a more appropriate policy for covering dishonesty of employees. It is called fidelity guarantee insurance.

All insurance policies have exclusions. Even the so-called “all risk” insurances have exclusions. “All risks” only means that the cover is wider and any risk, not specifically excluded is covered. These exclusions include risks that are better covered by a more appropriate policy. A good example is the fidelity guarantee exclusion in motor insurance above. Another good example is the exclusion of motor liability under public liability policies.

In all standard insurance policies, catastrophic risks are paramount exclusions. This is because they are supposedly uninsurable. Examples are war risks and nuclear risks. In those days, you could never get a cover for these risks, but now cover is available for war and nuclear risks. Risks that are easy to control are also not covered. For example, when a shop owner closes at the end of the day, he is expected to lock his shop. But if he leaves it open and thieves steal his wares, he is not covered by his burglary policy because there was no forcible entry or exit. Insurance policy endorsements are also used to extend or reduce scope of cover. In addition, limitations are used to reduce scope of cover. For example, in a motor policy, you have limitations as to use. That is why vehicles insured for private use only will not get any remedy if the insurance company finds out that the loss or damage occurred while the vehicle was being used for commercial purposes.

The bottom line is that policyholders and their insurance brokers should take time to study the policy documents and ensure it captures the reason for which the policyholder took the policy. But majority of policyholders scarcely read their policies. The solution is to engage the services of a Registered Insurance Broker (RIB), who will arrange your policy to ensure you get adequate coverage, among other services at no extra cost to the policyholder.