Intention, expression & claim-handling

In large insurance companies, the underwriting and claims are distinct & separated functions, unlike in the past where a common person had the responsibility for both underwriting and claims in that class of business. There are exceptions to this rule though, in some insurance companies.

What is it that this distinction or separation seek to achieve? It acts as a check & balance. An underwriter cannot cover up his lapse by going ahead and settling a claim not falling within the policy condition or declining a payable claim for extraneous reasons. Both these instances arise, cannot be denied where both underwriting and claims vests with one person. So, having agreed that underwriting and claims should be handled independently by different teams, question arises as to what additional responsibilities this imposes on the underwriters — this is what we seek to discuss here, with reference to Marine cargo insurance.

Why does an underwriter add/delete a condition/clause or add a warranty? What is the intent? The intent could either be to restrict/limit coverage or at the request of the insured provide for enhanced coverage then what the standard policy would offer or the warranty may be a direction to the assured to do or not to do something. The condition/warranty should clearly spell out the intent of the underwriter and should be understandable ( in the same sense) not only to the assured and intermediary but also to the claims handler. Hence the expression of the intent or in other words, the policy wordings become paramount.

A few examples would amplify this point. In case of  “Tail-end” transits, i.e. transits incepting from any Indian port/ airport, where the overseas voyage is insured by an overseas insurer, the Indian underwriter’s clear intent is not to pay for any losses/damages which could have occurred in the long overseas leg but discovered only at the end of the inland transit leg of the journey. Absolutely right as far as intent goes! Why should any underwriter pay for a pre-existing loss/damage ( though unknown) at the time of incepting coverage? So what does the underwriter add as a condition in his All-Risks policy?  Even though cover is on All-risks terms, cover for ‘Tail end’ transits will be limited to Inland Transit Clause-B or Road Risks only. Is this a faithful expression of the underwriter’s intent? Answer is NO. The intent of the underwriter was to exclude losses/damages which are pre-existing but pay for losses/damages during the inland transit by clearly identifiable incidents which disrupt the ordinary course of transit. If the truck carrying cargo under a tail-end transit is hijacked or washed away in flash floods, the claim-handler will not be paying the claim, given the limited coverage under the policy, even if the intent of the underwriter was different.

Another example would be that in almost every All-Risks policy be it for overseas voyages or inland transits, ROD, electrical & mechanical derangement and contamination are covered only if caused by an ICC-B/ITC-B peril. How apt would this wording be vis-a-vis underwriter’s intent and expression? Under ROD, what an underwriter should and rightly seeks to exclude is the gradually developing atmospheric rust or oxidation which can also be looked at as an inherent vice of the metals in question. What if during the voyage, an adjoining cargo of chemicals spills on the metals discoloring it? With this ICC-B/ITC-B wording in the policy, the claim will not be payable, as no ICC-B/ITC-B peril would have operated. Underwriter will agree that this claim is to be paid but he would have tied himself in knots with his wording.

Similarly, in case of derangement, the intent of any underwriter is not to pay for any manufacturing defect or derangement caused by normal jerks and jolts during transit ( This could, if established fall under the exclusion for Insufficiency of packing too). What happens if during unloading or handling, an identifiable incident of a box falling down occurs? Though no damages externally are noticed, on opening up derangement is a possibility. Again No ICC-B/ITC-B peril had operated and the claims handler will go strictly by the policy wording and decline the claim.

Contamination is widely presumed to happen when an external material(s) which is not supposed to mix with the insured cargo, does in fact mix either due to unclean tanks, pipelines, etc or due to water ingress in the vessel tanks ( covered under ICC-B). There could be manufacturing defects or instability of the chemical/compound which may manifest as contamination, which any which ways are not indemnifiable under a cargo policy. While one may feel that limiting contamination liability to losses caused by an ICC-B peril would serve the purpose, this is not fully correct. What if a different chemical from an adjoining tank leaks/oozes into the insured cargo while on on its voyage?The limited wording of contamination’ if caused by an ICC-B/ITC-B peril’ will not come to the rescue of the assured.

Sum and substance is that, the INTENT of the underwriter should find appropriate EXPRESSION in the policy so that any genuine claim of an innocent assured does not get declined and the claims handler finds the claim payable as per the POLICY WORDING. The first step in this direction would be for underwriters to stop using the ubiquitous “unless caused by ICC-B/ITC-perils” but apply their minds thoroughly to give clear expression to their intent, which in turn would clear the way for the claims-handler for quick decisions.