The Hindu Business Line : Business houses run the risk of inadequate cover

Coimbatore, July 2 While everyone talks of double digit inflation and soaring prices, there is another problem that has come up for business houses — the value of goods in inventory has shot up because of price rise.

And if you had bought insurance by declaring the value of goods as it was about six months or a year ago, then you had better re-examine your insurance cover. It might turn out to be grossly inadequate.

This is the problem that was faced by a company that bought its insurance cover a while ago for its cotton purchases.

The company had given a declaration that the average cotton stock in its godown at any point would not exceed Rs 1 crore. The price of cotton shot up, but the company failed to enhance the cover.

When a fire occurred at the godown, the surveyor, who assessed the damage, seems to have stated that the goods were grossly under-insured and settled the claim by paying only a proportionate sum. The unit is said to have incurred a loss of over Rs 1.5 crore.

Given the steep hike in cotton prices, the market value of goods rapidly exceeded the insured value of goods stocked in godown.

Revisionary measures

Perhaps it is time for everyone to look at their cover now. In fact, the Managing Director of Link-K Insurance Company Pvt Ltd, Mr P. Mohankumar, is busy sending out mailers to his clients advising them to “verify the adequacy of the sum insured while declaring the quantity and market price ratio”.

Emphasising the need for enhancing cover on fire and engineering insurance policies, Mr Mohankumar told Business Line that in the present inflationary scenario, both new values and market values keep rising.

The price of raw materials such as cotton, wheat, and molasses; fuel such as diesel, gas, coal; and material such as cement and steel have soared in recent months.

Most business houses declare the value of goods based on the average inventory that would be stocked in the warehouse/godown at the time of taking the cover.

“The sums insured in respect of items such as buildings, machineries and stocks/raw material need to be reviewed and revised upwards sufficiently to ensure adequate protection. This will naturally involve payment of necessary pro-rata premium for increasing the sum insured under the existing policies. At the time of renewal too, this aspect needs close scrutiny. Else, the insured will be compelled to face an unenviable situation in the event of occurrence of loss as claims will not be paid in full on the ground that the sums insured were not adequate,” he explained.

De-tariffing

While stressing on the need for an enhanced cover, he said “insurers are now offering the premiums at a discounted rate. The discount rate war that is happening in the industry in the de-tariffed scenario would also help the insured get the best possible rate.”

When asked to comment on this development, Mr R. Chandrasekaran, General Manager and Regional Head (West), India Insure Risk Management & Insurance Broking Services Pvt Ltd, said “Companies have responded to the recent drop in premium rates for fire and engineering policies (due to de-tariffication) by enhancing the insured sums, wherever they felt that the earlier limits were on the lower sideWe have not however come across cases, where companies seek value enhancement due to inflationary trends.”

Mr Mohankumar said a good number of his clients had started to respond positively to his alert.

Industry associations maintained that they proposed to convene a meeting of their members to discuss this issue.

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