Alternative Basis of Valuation Clause

Alternative BOV clause — What is this?

As this relates to ‘Basis of valuation’, I will start off with what the initial paragraph in my post The ‘Agreed value’ mystery was:

Any insurance beginner who has learnt it in theory or a seasoned marine insurance practitioner will tell you, or rather it will roll off the lips nonchalantly that Marine cargo insurance is an ‘Agreed Value’ policy. What exactly does this mean, you query and the answer is ‘ Marine cargo policy can include profit as well’. Does this not go against the fundamental principle of Indemnity in insurance? Now the nonchalance slips away as  they tread shaky ground.

Again in my post Basis of valuation in cargo policies, I had commented thus ‘ The invoice value forms the basis of claim settlements under marine cargo policies, so why the fuss about Basis of valuation, one may feel.’

So am I changing tracks and trying to convey something to the contrary? No. In fact, I am only trying to prove the golden adage — Exception proves the rule.

Let us look at what the exceptions could be and where the principle of Agreed value/ settlement based on invoice value (which includes profit) can be given the go-by and which is accepted as sound practice by the assured as well. There could be sale transactions where the goods are lost/damaged in transit, but the sale itself is not lost as the seller is able to send replacement goods to the buyer in lieu of goods lost/damaged in transit. This happens in a big way in case of critical pharmaceutical products, customized machinery, critical spares or components, raw materials of very precise specifications, goods with seasonal demand in the specific geography of the buyer, etc. The buyer has a very urgent requirement of the goods lost/damaged or he is solely or largely dependent on the same for continuation of his business, retention of customers or meeting market demands in a timely manner. In such cases, even if the cargo insurance policy is assigned to him and he gets the claim settled in his favour at the invoice value or any other basis of valuation, as agreed in the policy, it does not suit his need as much as a replacement consignment from the seller would.

However, when it is looked at from the seller’s (assured)

‘Basis of Valuation: Insured’s Sales Price or where the Insured is able to replace the Subject-Matter Insured and maintain the original sale, as below.

In circumstances where there is no loss of sale to a third party purchaser, or of any inter-company sale, then this insurance will indemnify the Insured on the basis of the cost of replacement or the cost of re-manufacturing and all reasonable incidental charges related thereto, where less than the Insured’s original Sales Price.

In circumstances where a certificate of insurance has been issued, the value indicated in the certificate will be paid to the certificate holder Insured/Assignee, limited to CIF plus 10% or as otherwise agreed, and the Insured undertakes to reimburse the Insurer the difference between the insured value stated in the certificate and either the cost of replacement or the cost of re-manufacturing and all incidental charges related thereto incurred in the replacement of the Subject-Matter Insured.

In fact, this clause even goes to the extent of stating that where claim has been settled with the assignee on the basis of the value stated in the certificate of insurance but still there is a replacement to be sent, assured has to pay back to the insurer the difference between the value stated in the certificate ( Invoice value or Invoice value plus) and the cot of replacement/re-manufacture and other incidental charges incurred i.e. excluding the mark-up. The second portion of this clause may be difficult to enforce but suffice to say the addition of this clause under the policy after due discussions with the assured goes a long way in reducing the liability of the insurer as also the policy performance of the assured. Some readers may feel that this will not work in India. Let me assure you, instead of this clause, a similar manuscript wording is very much in vogue in India in some of the policies of large pharmaceutical companies for years. In this connection you may also refer to my post Pharmaceuticals as cargo, where I had explained this concept.