Making Risk Surveys Lifeblood of Insurance & Protection

Swiss Re publication ‘Sigma’ in its 2/2018 issue stated: “In a digitally-connected world, insurance may come to play more of a risk avoidance/mitigation role, rather than solely indemnifying losses.” This is because there is an evolving risk landscape challenging insureds and insurers all the time, and everyone needs new and/or improved versions of protection, both preventive and curative. This is very much in order provided that no one breaches the “boundaries of insurability”.

Insurance is about protection against risks. Thus insurance is not only about losses and indemnification but active protection creating upsides for the insured. Insurers thus need to refocus on risk inspections and value addition in their protection paradigms. Insureds in turn must actively seek risk inspections and ask for regular risk inspections, and seek the best ways to tighten their risk focus to get protection against losses. Such an effort seeks to discover the changes, if any, in their risk profile, understand the risk insured better and fill all the dots and dashes in reducing/avoiding risks and losses.

Thus, good insurance requires risk surveys for the various type of risks. In its basic form this is intended to understand how:

How various risks behave.

Evaluate whether relevant specifications have been complied with

Seek avenues of risk betterment

Identify any unusual features which might influence an underwriter

Provide more details than the standard underwriting submissions

Make actionable points for risk improvements    

A report which makes clear that a risk is of poor quality can cause an underwriter to:

·       refuse to offer any coverage at all, or

·       charge a higher premium or

·       restrict the cover

·       Ask for risk betterment and consequent reduction of premium

Risk surveys can:

1. Alert managements to major potential hazards.
2. Suggest practical (tailormade) loss prevention measures.
3. Alert the insureds about possible losses and risks based on the insurer’s and the insurance industry’s loss experience.

Risk Survey Clause

The risk survey recommendations need to be discussed, mutually agreed, after which the insured must implement them. If they are not and that involves heightened risk, it can be deemed that the material changes required for risk betterment has not occurred. In rare and high risk cases, insurer could even insert a clause in the policy that the risk surveyor appointed by the insurer and/or the reinsurer shall have the right at all reasonable times to conduct risk surveys and this right includes the inspection of any documents as may be required. Further, the clause may state that in the event surveyor recommendations are not carried out and a loss occurs due to a hazard or peril which had been identified for improvement or mitigation and a loss took place owing to not implementing the risk advice, such a loss will be deemed to be foreseeable and not accidental.

Insureds need to capitalise on the risk surveys held

Risk survey is a great value addition, even when informally done by an insurer or their duly appointed risk surveyor or any officer. Such risk inspections or even informal visits need to be captured by the insured through photos/videos and by confirmation by the insured of the fact, to put on record that the same has been done. This is because in the eventuality of a claim, often the insurers or surveyors nit-pick and repudiate claims on imaginary breaches. Even assuming that there was a technical non-disclosure, the fact that the insurer visited gives the insured the required waiver.

There was the instance of a claim in a textile factory which had their factory buildings and godown at one location, and the godown got burned down by an accidental fire, but the claim was repudiated as the plot of land on which the godown stood, though in the same compound, was registered in the name of one of the Directors. Similarly there were other plots for the factory in the same location that had buildings where the land was in the name of some of the other Directors. Despite the factory having been visited serval times by the local officers including one who was a trained RO Risk Inspector earlier, the insured could not provide evidence of the same. The claim was repudiated as the "location of the godown was not duly declared".

The Supreme Court in the case Canara Bank vs M/S United India Insurance Co. Ltd (2020) stated: “35. The contention of Shri Malhotra is that the insurance company was not informed by the Bank, the cold store or the farmers that the farm produce or the insured goods belong to the farmers and therefore the policy is voidable. At the outset, we may note that misrepresentation or misdescription only makes the policy voidable. The insurance company never chose to declare the policy void for 3 long years when it was in existence and, at this stage, cannot be permitted to wriggle out of its liability by taking this objection. Even otherwise, we are of the view that the submission made on behalf of the insurance company is without any substance. The policies of insurance clearly show that the premises was separately insured for Rs.5 crores and the stock in trade were insured for Rs.30 crores. This insurance was taken not only for the year when the fire took place but was renewed for 3 long years.” Further in para 37, the SC stated: “This stock in trade was covered for a sum of Rs.30 crores and premium was charged accordingly. A prudent insurance company before issuing a policy of such a heavy amount, must or at least should have ascertained the value and the nature of the goods. The insurance company before us is one of the largest nationalised insurance companies and a presumption has to be drawn that it must have verified the details before insurance policy was issued. If verification had been done by a visit to the cold store, it could have been easily found out who are the owners of the stock.”

Hence, it is clear that a risk inspection, even of an informal kind, can have the benefit to offer a smooth claim settlement outcome, which all parties in insurance should work for.