LIABILITY INSURANCE

LIABILITY INSURANCE

RAZIA MALINI MOHAMAD
NOR IZZATI HASAN

NORHIDAYAH MOHAMAD YUSOP

POLITEKNIK KOTA BHARU

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Published and printed by:
Department of Commerce
Politeknik Kota Bharu
KM. 24, Kok Lanas,
16450 Ketereh, Kelantan.
Liability Insurance First Edition 2022
© 2021 Razia Malini Mohamad, Nor Izzati Hasan and Norhidayah Mohamad Yusop

All rights reserved. No part of publication may be reproduced, stored in any form or by any
means, electronic, mechanical, photocopying, recording or otherwise without prior written
permission of the copyright holder.

Razia Malini, Nor Izzati & Norhidayah
Liability Insurance/ Razia Malini, Nor Izzati & Norhidayah

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SYNOPSIS
Liability Insurance book is primarily intended for insurance students enrolled in Polytechnic
Diploma Programme. Much of the content in this book will be useful and relevant to anyone
who works in liability insurance similar fields. Many different areas of liability insurance are
examined and presented, with supporting examples added in which they were believed to be
incredibly beneficial to students.

The goal is to enhance students knowledge on liability insurance that will help them to
prepare for professional practices once they graduated from polytechnic. Students will learn
about the nature of legal liability and the scope of coverage for liability insurance. They also
will learn about the risk assessment and underwriting for the liability, claim procesures and
policy documentation for liability insurance.

This book is mainly designed to give polytechnic students their first overview of liability
insurance. It is also our hope that the book will appeal to readers from institutions of higher
learning, besides matriculation and diploma.

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AUTHOR’S BIOGRAPHY

Razia Malini Mohamad is a Head of Diploma in Insurance
Programme at Commerce Department, Politeknik Kota Bharu. She
holds Bachelor in Risk Management and Insurance (hons.) from
Universiti Utara Malaysia. She has lectured in various subjects such
as microeconomics, principles and practices of insurance for 12
years and her specialization subjects are liability insurance and
economics. She has been actively involved in the academic
curriculum of the insurance programme, such as develop and
exercise the curriculum review. She can be contacted at
[email protected].

Nor Izzati binti Haji Hasan is a lecturer at Commerce Department,
Politeknik Kota Bharu. She holds Bachelor in Risk Management and
Insurance (hons.) from Universiti Utara Malaysia. She has lectured
in various subjects such as Principle and Practice of Takaful, Motor
Insurance, Marine Insurance and Digital Entrepreneurship. She has
been actively involved in the academic curriculum of the insurance
programme, such as develop the curriculum review. She also had
experience working in the policy servicing department. She can be
contacted at [email protected].

Norhidayah binti Mohamad Yusop is a lecturer at Commerce
Department, Politeknik Kota Bharu. She holds Bachelor in Risk
Management and Insurance (Hons.) from Universiti Utara Malaysia.
She has lectured in various subjects such as Medical and Health
Insurance, Marine and Aviation Insurance, Life Assurance,
Property and Percuniary Insurance and Statistics. She has been
actively involved in the academic curriculum of the insurance
programme, such as develop the curriculum review. She can be
contacted at [email protected]

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TABLE OF CONTENT

SYNOPSIS ...........................................................................................................................iv
AUTHOR’S BIOGRAPHY ..................................................................................................... v
TABLE OF CONTENT ..........................................................................................................vi
LIST OF FIGURE..................................................................................................................ix
1.0 OVERVIEW OF LIABILITY INSURANCE ................................................................... 1

1.1 DEFINITION ........................................................................................................... 1
1.2 FORMS OF ORDERS............................................................................................. 1
1.3 BASES OF LEGAL LIABILITY ................................................................................ 1
1.4 SOURCES OF TORT ............................................................................................. 2

1.4.1 Negligence....................................................................................................... 2
1.4.2 Nuisance.......................................................................................................... 3
1.4.3 Trespass.......................................................................................................... 4
1.4.4 Breach of Statutory Duty.................................................................................. 5
1.4.5 Defamation ...................................................................................................... 6
1.5 EXERCISE 1.1........................................................................................................ 8
2.0 SCOPE OF COVERAGE OF LIABILITY INSURANCE ............................................. 10
2.1 PUBLIC LIABILITY................................................................................................ 10
2.2 PRODUCT LIABILTY............................................................................................ 10
2.2.1 Product Guarantee ........................................................................................ 11
2.2.2 Product Recall ............................................................................................... 11
2.3 EMPLOYERS LIABILITY ...................................................................................... 12
2.3.1 Workmen’s Compensation ............................................................................. 13
2.3.2 Social Security Organisation (SOCSO) .......................................................... 13
2.3.3 Foreign Workers Compensation Scheme....................................................... 14
2.4 PROFESSIONAL INDEMNITY POLICY................................................................ 14
2.5 DIRECTOR AND OFFICER’S LIABILITY.............................................................. 14
2.6 ERROR AND OMISSION LIABILITY..................................................................... 15
2.7 MAID AND FOREIGN WORKERS LIABILITY....................................................... 16
2.8 PERSONAL LIABILITY ......................................................................................... 16
2.9 CONTIGENCY LIABILITY..................................................................................... 17
2.10 GOLFER INSURANCE ......................................................................................... 18
2.11 FIDELITY GUARANTEE INSURANCE ................................................................. 18
2.12 CREDIT INSURANCE .......................................................................................... 19

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2.13 EXERCISE 2.1...................................................................................................... 20
3.0 RISK ASSESSMENT AND UNDERWRITING OF LIABILITY INSURANCE.............. 22

3.1 UNDERWRITING.................................................................................................. 22
3.2 RATING FACTOR................................................................................................. 23
3.3 RISK ASSESSMENT ............................................................................................ 24
3.4 UNDERWRITER ................................................................................................... 24
3.5 UNDERWRITING CONSIDERATION ................................................................... 25

3.5.1 Public Liability ................................................................................................ 25
3.5.2 Product Liability ............................................................................................. 25
3.5.3 Employers Liability ......................................................................................... 25
3.5.4 Professional Liability ...................................................................................... 26
3.5.5 Director and Officers Liability ......................................................................... 26
3.5.6 Errors and Omission Liability ......................................................................... 26
3.5.7 Personal Liability............................................................................................ 26
3.5.8 Golfer Liability ................................................................................................ 27
3.6 OPERATION OF POLICY WORDINGS ................................................................ 27
3.6.1 Risk Occurrence Policy.................................................................................. 27
3.6.2 Claim Made Policy ......................................................................................... 27
3.7 EXERCISE 3.1...................................................................................................... 28
4.0 CLAIMS PROCEDURES AND DOCUMENTATIONS ............................................... 30
4.1 CLAIM PROCEDURE ........................................................................................... 30
4.2 DOCUMENTATION OF CLAIM............................................................................. 31
4.3 METHOD OF CLAIM SETTLEMENT .................................................................... 32
4.4 PRINCIPLE OF AVERAGE................................................................................... 33
4.5 DISPUTES OVER CLAIMS................................................................................... 33
4.5.1 Method Solving Disputes ............................................................................... 33
4.6 EXERCISE 4.1...................................................................................................... 35
5.0 POLICY ADMINISTRATION..................................................................................... 37
5.1 INSURANCE DOCUMENTATION ........................................................................ 37
5.2 POLICY WORDING .............................................................................................. 37
5.2.1 Heading ......................................................................................................... 37
5.2.2 Preamble ....................................................................................................... 37
5.2.3 Operative Clauses ......................................................................................... 37
5.2.4 Exclusions ..................................................................................................... 38
5.2.5 Conditions...................................................................................................... 38
5.2.6 Warranties ..................................................................................................... 39

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5.2.7 Definition........................................................................................................ 40
5.2.8 Information and Facilities ............................................................................... 40
5.3 EXERCISE 5.1...................................................................................................... 42
6.0 ANSWER KEY ......................................................................................................... 44
REFERENCES ................................................................................................................... 45

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LIST OF FIGURES
Figure 1.1: Sources of tort..................................................................................................... 2
Figure 1.2: Example of negligence ........................................................................................ 2
Figure 1.3: Elements of negligence ....................................................................................... 3
Figure 1.4: Example of nuisance ........................................................................................... 4
Figure 1.5: Classes of trespass............................................................................................. 5
Figure 1.6: Classes of defamation......................................................................................... 7
Figure 2.1: Types of defects................................................................................................ 11
Figure 2.2: SOCSO Website Interface ................................................................................ 13
Figure 3.1: Purposes of underwriting................................................................................... 22
Figure 3.2: Duties of underwriter ......................................................................................... 24
Figure 4.1: OFS website interface ....................................................................................... 34
Figure 5.1: General exclusions............................................................................................ 38

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1.0 OVERVIEW OF LIABILITY INSURANCE

1.1 DEFINITION
Liability insurance: A part of the general insurance that guards the insured against liabilities
brought on by lawsuits and other claims of a similar nature and protects if the insured is sued
for claims covered by the insurance policy.
Legal liability: Obligation which the law may impose on the person considered to be responsible
for the breach of any legal duty.

1.2 FORMS OF ORDERS
Awards of damages: Provide financial compensation to another for the harm or treat of harm
suffered by the other.
Grant of an injuction: A prohibitory injunction the person is required to stop from pursuing an
unlawfully activity that harms or threaten to harm another. A mandatory injunction demands
the person to take appropriate steps to correct an unlawful act which was the result of his
activity.
The order for specified performance: Regarding the breach of contract, the person against
whom the order applies to is required to carry out what he had originally promised to do under
the contract.

1.3 BASES OF LEGAL LIABILITY
Contract: When one of the parties fail to perform his obligation under the contract
Tort: As a member of society, everyone is expected to confirm to certain minimum standards
of conduct. When a person fails to observe the minimum standards imposed, he faces legal
liability. A tort may consist of either a wrongful act or omission which is not authorized by the
law.

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1.4 SOURCES OF TORT

Figure 1.1: Sources of tort

1.4.1 Negligence
It is a breach of the defendant's legal duty of care that results in unintended damage
to the plaintiff. Making a decision that a prudent and reasonable person would not
make.

Figure 1.2: Example of negligence

Elements of negligence
• The defendant owed the plaintiff a duty of reasonable care.
• There was a breach of that duty.
• The plaintiff sustain damage as a result.
• The damage was not too remote.

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Figure 1.3: Elements of negligence

Defences against negligence

Contributory negligence: When it is established that the claimant's own negligence led to its
loss or harm, a defence may be presented. If it is possible, the defence totally prevents plaintiffs
from receiving any compensation if they are negligently responsible for their own injuries.

Comparative negligence: Depending on how much blame each party bears, the recovery is
divided. Allows a plaintiff who has been injured due to negligence to receive some
compensation and prevents the defendant from being totally released from liability just
because the plaintiff neglected to employ reasonable caution as well.

Voluntary assumption of risk: If a plaintiff deliberately enters a hazardous position while fully
aware of the risk involved, he is said to have "assumed the risk" of injury. "Voluntary" suggests
the risk-taker had the option to forgo the risk. A person cannot be said to have assumed the
risk if he was forced to engage in the risky action.

1.4.2 Nuisance
Common law tort. It refers to something that offends, irritates, creates difficulties, or harms.
Acting in a way that a cautious and reasonable person would not.

Classes of nuisance
Private nuisance: A annoyance infringes on another person's or an organization's rights. Noise,
smoking, obnoxious odours, excessive light, vibration, and soil or stream contamination.

Public nuisance: Unreasonable interference with the right to property of the general public. It
includes behaviour that endangers public health, safety, peace, or convenience.

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Figure 1.4: Example of nuisance

Factors in case of reasonable
• The nature, timing, frequency and duration of the interference by the defendant.
• The appropriateness of the plaintiff’s and defendant’s location.
• Practicability of avoiding harm.
• The relative value the plaintiff’s right and the defendant’s activity.
• Is the plaintiff abnormally sensitive.
• Motive of the defendant.

Defences against nuisance
Consent: In a lawsuit against the party that caused the harm, the injured party's consent
(provided before or, in some circumstances, after the injury) is a defence that bars the wounded
party from receiving compensation.
Comparative negligence: Reduces (partially, or occasionally completely) the defendant's
responsibility when the plaintiff’s own negligence contributed to the harm they sustained.
Prescription: Use or enjoyment of the property, identity of the thing/property enjoyed and it
should be unfavourable to the rights of another individual.

1.4.3 Trespass
An intentional or negligent act which directly causes harm or injury to land, goods or person.
One of important feature of trespass is that it is “actionable per se” . Which means that the
plaintiff in trespass is not required to prove that he had suffered damage. Indeed, an action
can be successfully brought although no damage had been caused.

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Classes of trespass

Figure 1.5: Classes of trespass

Defenses on trespass
Consent: The trespass was lawful if the plaintiff had given the alleged intruder permission to
use or enter his property. When a reasonable person would have opposed to these behaviours,
he or she would have spoken up. However, consent can also be expressed by silence or
inaction.
Superior lawful authority: There are some people who are legally allowed to use force against
others or threaten to do it. Such power is typically conferred to maintain public peace and
order.
Inevitable accident: When an unavoidable mistake (accident) negates the required element of
intention, or, in other words, when the person did not intend the consequences of his or her
act, the mistake can amount to a defence.
Prescription: When a non-owner uses that land openly, peaceably, continuously, and under a
claim of right ad verse to the owner for a period set forth by a particular state, the owner loses
the absolute right to exclude all other persons from taking possession of his land.
1.4.4 Breach of Statutory Duty
This tort concerns cases where damage or injury had been caused to a person by another
when he failed to observe a duty imposed upon him by legislation. For example, The Factories
and machinery Act, Road Transport Act, Employees' Social Security Act Workmen’s
Compensation Act.

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Elements for statutory breach of duty
• That it is the intention of Parliament to allow the plaintiff the right to civil remedy as a result

of the defendant’s failure to comply with a statutory duty.
• That the plaintiff is a person who Parliament wishes to protect in making the legislative

provisions concerned.
• That the damage suffered by the plaintiff is of the type against which Parliament wishes

to provide protection.
• That the failure to comply with the duty is the cause of the damage suffered by the plaintiff.

Defences of breach of statutory duty
Consent: Consent is not a defence to an action brought by an employee against his employer
for breach of statutory duty. There is one small exception to this rule: if the claimant is an
employee and holds their employer vicariously liable for a colleague's breach of a statutory
duty, the defence can be advanced.
Contributory negligence: The plaintiff contributory negligence will serve to reduce the amount
of damages he may recover from the defendant.
Delegation: Delegation of duty to the plaintiff (The defendant may delegate his statutory duty
to the plaintiff who subsequently suffers injury through breach of the duty). Delegation of duty
to a third party (When a person or group of people is obligated by law or statute to perform a
duty, they do not release themselves from that obligation or release themselves from liability
by delegating or handing over that duty to another person to perform it).

1.4.5 Defamation
It is a publication of statement which reflects on a person’s reputation and tends to lower him
in the estimation of members of society or tends to make them to avoid him (Winfield). In
Malaysia, the law of defamation is governed by Defamation Act 1957.

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Classes of defamation

Figure 1.6: Classes of defamation

Elements for defamation
• That the defendant had made a defamation statement.
• That the statement made reference to the plaintiff.
• That there had been a publication of the statement by the defendant.
• In the case of slander not actionable “per se” , that the plaintiff has suffered pecuniary

damage
Defences of defamation
Justification: Means the truth. A defence to an action for defamation that the words are true in
substance and fact.
Fair comment: The comment must be fair and based on true facts at the time it was made, and
the topic must be of public interest. It must also be an expression of opinion rather than a
statement of fact. Fairness requires that the defendant was an honourable man who spoke his
views on a matter of public importance and not be malicious (evil motive).
Privilage: Freedom of communication without fear of an action of defamation which is granted
by law. Absolute and qualified privilage.
Apology: Not a defence in defamation. Section 10 of Defamation Act; the defendant may
mitigate the damages if he can show evidence that he had offered an apology to the plaintiff
before the commencement of such action.
Consent: The defendant cannot be held accountable if the plaintiff offers his approval for
publication to be made (explicit or implied), such as when the plaintiff agrees to be interviewed
knowing that the interview's substance would be published in magazines.

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1.5 EXERCISE 1.1

1. Failure to use the care required to protect others from an unreasonable risk of harm is
referred to as
A. breach of statutory duty .
B. negligence.
C. nuisance.
D. trespass.

2. All of the following must be present to establish negligence, EXCEPT
A. damages.
B. breach of a legal duty that was owed.
C. proximate cause.
D. willful behaviour.

3. Lim sues Phua for personal injuries sustained in a car accident. Lim's negligence was
determined to be a factor in the loss during the trial. What can Lim recover under
comparative negligence laws?
A. Phua is not liable to pay Lim any damages.
B. To the extent that Lim is responsible for the loss, her damages will be lessened.
C. Phua will pay Lim the full sum of the loss.
D. Regardless of her level of responsibility, Lim may only be able to recover 50% of
the damages she claims.

4. One of the most important reasons to purchase liability insurance, out of the options
listed below, is:
A. A reason to work with that good looking agent who is selling it to you.
B. Defense Costs.
C. Proof of Liability for a job.
D. To pay for injuries when customers come to your premises.

5. An unintentional ball strikes a baseball game spectator in the head, causing damage.
She claims negligence against the stadium's owners. Which of the following would the
owners most likely assert as a defence against negligence?
A. Assumption of risk.
B. Comparative negligence.
C. Contributory negligence.
D. Statute of limitations.

6. The example injuction order given by the court is
A. to provide financial compensation to the plaintiff.
B. required to carry out the promised to do under the contract.
C. prohibited unlawful activity that harms others.
D. to pay for the medical cost occurred.

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7. We are legally liable for our actions
A. whenever our actions harm others.
B. when we harm others because we have failed to satisfy a legally defined or
standard level of care.
C. whenever our insurance coverage falls short of complete indemnification.
D. when we engage in activities involving pure risk.

8. Hanini is tired of having to clean up after living things. The statement refers to
A. breach of statutory duty
B. defamation.
C. negligence.
D. nuisanse.

9. Tresspas to land occurs when
A. someone unlawfully remains on the land after permission for him to enter has
terminated.
B. someone vandalizing private property.
C. someone unlawfully restrains a person, impairing their freedom of movement.
D. an intentional or negligent act which directly interferes with the goods in the
possession of another.

10. ______________ is the publication of a statement that has a negative impact on a
person's reputation and causes people of society to despise him or avoid him.
A. Tresspas
B. Assault
C. Tort
D. Defamation

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2.0 SCOPE OF COVERAGE OF LIABILITY INSURANCE

2.1 PUBLIC LIABILITY
Public liability insurance policy in Malaysia is used by business to pay claims for injury and
damage to the public or other third parties. The insurance company pays the claimant when
the claim is found to be legally valid.

Scope of cover
• Accidental physical injury to any person who is not a member of the insured's family or

who is working for the insured.
• Accidental damage to property not belonging to or in the custody or control of the insured.
• The insured's legal cost incurred in defending legal proceedings.
• In the event of a claim against the insured for damages incurred during the policy period,

arising from business activity, and occurring anywhere within the situation of risk to which
the indemnity expressed in this policy applies.

Exclusions
• Property in the care, custody, and control of the insured, or property worked upon (eg:

automobile, aircraft, vessels).
• Sudden and accidental pollution (unless a separate smaller limit is allowed).
• Contractual or assumed liability.
• War-related, radiation, radioactive contamination, nuclear losses, SRCC, terrorism.
• Fines, punitive or exemplary damages, penalties.
• Asbestos liability.
• Workmen's compensation/ Employers' liability.
• Liability in respect of any breach of professional duty or service.
• Liability through or in consequence of fire, explosion or flood.
• The excess stated in the Schedule

2.2 PRODUCT LIABILTY
When a manufacturer or seller is held accountable for putting a faulty product in the hands of
a customer, this is referred to as product responsibility. All sellers of the goods who are
involved in the distribution chain are accountable for any product flaw that results in harm. In
general, the law demands that a product live up to typical consumer expectations. A product
cannot be said to meet the typical expectations of the consumer if it has an unforeseen flaw
or risk.

Scope of cover
• Provides indemnity to the insured for legal liability for damages in respect of bodily injuries

and damage to their property arising from defects and danger in goods sold, repaired,
serviced installed or supplied.

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Figure 2.1: Types of defects

2.2.1 Product Guarantee
• Liability may arise from breach of a condition of contract.
• The seller/repairer/supplier/etc may also be liable for the breach of condition of contract.
• Therefore, they are required to replace the defective goods or rectify the defects.
• Product Guarantee Insurance – is a complement to Product Liability Insurance to cover

expenses incurred in repairing/ replacing defective goods
2.2.2 Product Recall
• A manufacturer/seller/supplier/etc are morally obliged to withdraw the goods from

circulation upon becoming aware of the defects in their goods.
• It is not covered by PLI or PGI
• For protection against such expenses product recall insurance becomes necessary. This

form of cover is obtained by appropriately extending the existing cover of the product
guarantee.
• Provides an indemnity to the insured for expenses incurred in connection with the recall
or the withdrawal of goods as a result of a potentially harmful defect

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Exclusions
• Recall of products.
• Products guarantee/ warranty - Cost of replacement of defective products.
• Liability arising from within certain designated geographical limit.
• Action for damages brought outside designated jurisdiction.
• Liability for faulty design.
• Contractual liability.
• Aircraft products.
• Asbestos.
• Expected or intended injury.
• Fines, punitive or exemplary damages, penalties.

2.3 EMPLOYERS LIABILITY
Employers in Malaysia are bounded by certain legislative considerations SUCH AS
Employment Ordinance 1955, Workmen’s Compensation Acts 1952-1982, and SOCSO. The
provision of the law were designed to serve as a protective measure in safeguarding the safety
aspects and well-being of all blue-collared workers in Malaysia. This policy protects you as an
employer because you may be sued by employees who are not covered under the Workmen's
Compensation Acts or SOCSO.

Scope of cover
• An employer’s liability policy is intended to give protection by providing an indemnity to the

insured for legal liability for damages he may incur in respect of an employee’s death, or in
respect of bodily injury sustained or disease contracted by an employee, provided the
death, injury or disease is caused during the period of the policy and arises out of and in
the course of employment.
• Arising out and in the course of employment:

o Arises out of employment: and injury which is caused by nature of employment. Eg;
company driver involves in accident.

o Arises in the course of employment: Injury to the employee during the time of
employment.

Exclusions
• Liability assumed by agreement - founded on contract rather than tort.
• War, civil war and terrorism.
• Radioactive and nuclear energy risks claims arising from ‘Latex Protein Toxic Syndrome’

and asbestos.
• Liability for compensation payable as a result of the provisions under the Workmen’s

Compensation Act 1952.
• Liability for injury to family members of the insured.

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2.3.1 Workmen’s Compensation
Compensation for injury to an employee or worker arising from and in the course of
employment, paid to the employee or dependants.The liability imposed on the employer is not
fault based. The employer thus obliged to pay the compensation notwithstanding that the injury
to the employee is caused by the employee’s very own negligence. Workmen Compensation
Act 1952 makes it compulsory for an employer to effect the policy to cover his liability to provide
the compensation to workmen.
Exclusions

• Any injury that does not result in a fatality or disability within 3 days of the accident.
• The first 3 days of a temporary disability if the period does not exceed 28 days.
• Any non-fatal injury caused by an accident that is directly attributed to:

o Influence of alcoholic beverages or drugs.
o Willful disregard for an order that would have ensured the worker's safety.

2.3.2 Social Security Organisation (SOCSO)
A government agency formed in 1971 under the Ministry of Human Resources. Under the
Employee’s Social Security Act 1969, all private companies in Malaysia are required to register
with SOCSO. The purpose of SOCSO is to give social security protection in terms of cash and
benefits to employees in the private sector in case of workplace injuries, emergencies,
occupational sickness, and death.
Employees below 60 years old who work for a private company in Malaysia are covered by
SOCSO. This said, the following are not qualified for SOCSO coverage:

o Permanent employees of the Federal and State Government.
o Self-employed (except for self-employed taxi drivers, individuals who run similar

services including e-hailing such as Grab and self-employed bus drivers).
o Spouses of sole proprietors and owners of a partnership.
o Domestic servants

Figure 2.2: SOCSO Website Interface

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2.3.3 Foreign Workers Compensation Scheme
Effective 1 January 2019, employers who hire foreign workers shall register their employees
with Social Security Organisation (SOCSO) and contribute to the Employment Injury Scheme
under the Employees’ Social Security Act 1969 (Act 4).

2.4 PROFESSIONAL INDEMNITY POLICY
A professional refers to "someone who earns money by doing a job that requires special
education and training, or someone who has a lot of experience and does something very
skillfully". Anyone who specialises in specific skills and professes to use those skills in the
affairs of others is required to use the care and skill of ordinary, competent practitioners in
their profession.

Scope of cover
• To indemnify against the insured's legal liability to compensate for loss sustained by a

third party, as a result of negligent act, error or omission committed by the insured in the
course of conducting the profession.
• To pay for legal costs and expenses in connection with the court proceedings where the
limit of indemnity is inclusive of legal costs and expenses.

Exclusions
• Defamation - libel or slander.
• Liability for dishonesty or fraud.
• Professional services for insured's family member.
• Public liability.
• Contractual liability.
• Known circumstance or incident.
• Expected or intended Loss.
• SRCC.
• Fines, exemplary or punitive damage, penalties,
• Radiation or nuclear.
• Directors' & Officers' Liability

2.5 DIRECTOR AND OFFICER’S LIABILITY
Under common law and statues, D&O must fulfill the following three essential requirements in
discharging their duties;

o to act honestly, prudently, and diligently.
o to behave honourably and refrain from abusing their position of trust for their own

benefit.
o to guarantee that their actions and those of the corporation do not contravene the

relevant laws and corporate charter.

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Scope of cover
• Coverage of Director and Officers

o pay the loss on behalf of the insured for any wrongful act committed in their respective
capacities as D&O of the insured company, unless and until the insured company is
required or permitted by law to indemnify them for such loss.

• Company Reimbursement Coverage
o pay on behalf of the insured company, the loss resulting from any claim brought
against the insured person for any wrongdoing committed in their respective
capacities as directors and officers of the insured company, provided that the claim
is allowed and that the insured company is permitted or required by law to
compensate the insured person for the loss.

Exclusions
• Any dishonest, deliberate, fraudulent, or criminal act or omission or any wilful breach of

any statute, rule or law, by any insured person.
• Any insured person having obtained any profit, remuneration or advantage to which such

insured person was not legally entitled for.
• Any wrongful act of any insured person.
• All past and ongoing legal disputes, as well as all known prior claims and circumstances

Intellectual property rights violations.
• Professional liability; product liability; asbestos liability.
• Physical injury and/or property damages.
• Claim brought by one insured insured against another insured.
• Claim brought by a major shareholder.
• War and terrorism.

2.6 ERROR AND OMISSION LIABILITY

Type of professional liability insurance that protects companies and their employees or
individuals against claims made by clients for inadequate work or negligent actions. It covers
business in services-related disputes. Errors and omissions insurance protects businesses
against claims of negligence, errors in services provided, omissions, misrepresentation,
breach of good faith and fair dealing, or incorrect advice.

Scope of cover
• Protect the business owner, salaried and hourly employees, and subcontractors working

on the company's behalf.
• It protects the insured and insured's business from claims if a client sues for negligent

acts, errors or omissions committed during business activities that result in a financial loss
for the client.
• Vary from company to firm and are written to reflect typical exposures and inherent
hazards specific to various categories of organisations.
• The majority of errors and omissions insurance policies pay verdicts, legal expenses,
court costs, and settlements up to the policy's limitations.

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Exclusions
• Customer’s bodily injury or property damage
• Illegal acts/ Fraudulent acts /Intentional Wrongful Acts/ Misconduc.
• Any services you might render on behalf of any other company, nonprofit, or group that

is not listed as a covered insured in the policy.
• Employee injuries or illness.
• Copyright, patents and trade secrets/infringement.
• Discrimination or harassment.
• Insolvency.
• Vehicles used by a business.

2.7 MAID AND FOREIGN WORKERS LIABILITY
A legally required insurance contract that covers losses from both work-related and unrelated
accidents for domestic workers. Because foreign domestic employees are not covered by the
Workman Injury Compensation Act, the government mandates that employers buy the policy
as soon as they recruit one.

Domestic workers covered under Employees' Social Security Act (Act 4) and Employment
Insurance System (Act 800). A domestic worker is a person who works solely for or in
connection with a private residence, not in the employer's trade, business, or profession that
is conducted there.

Scope of cover
• SOCSO (under Act 4):

o Employment Injury Scheme: Medical benefit, Permanent benefit, Temporary
disablement benefit, , and Dependant's benefit.

Exclusions
• Common law liability.
• War, terrorism and civil war.
• Illegal act, suicide, and willful self-harm.
• Flying or travelling by air, unless you are a paying passenger in an authorised commercial

aircraft travelling on a set itinerary.
• Alcohol or drugs that have not been prescribed by a licenced medical professional.
• Risky sports such as car racing, scuba diving, and mountaineering.

2.8 PERSONAL LIABILITY
A large part of a businessman’s time may be expanded on non business activities (an activities
done apart from activities carried out in his factory/office/etc). As an individual, in his private
capacity, he may involve in negligent act, etc which incur liability on his part.

Scope of cover
• Protection from personal liability insurance is in the form of;

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o “ …indemnity to the insured for legal liabilities for damages incurred by the insured in
respect of accidental injury to a third party or accidental damage to his property
arising from or in connection with non business activities carried out by the insured
during the period of the policy.”

Exclusions
• Contractual liability.
• Property owned by and within the insured's control.
• Houseowner's or householder's policy.
• Motor accident.
• Intentional physical harm or property damage brought on by you or a member of your

family.
• Any harm or losses incurred by you or any other residents of your home who are

protected.
• Physical harm or property damage resulting from any business you undertake or from

your professional activity.
• Responsibility for wild animals.

2.9 CONTIGENCY LIABILITY

A contingent liability is a debt that might become due if a certain circumstance materialises. It
is a potential duty that could materialise or not, depending on how a future event plays out.
When a contingent liability can be estimated, it is recorded; otherwise, it must be disclosed.

Scope of cover
• Contingent Liability Transportation

o Insurance to ensure that the business transporting the goods or payload is covered
for the loss of the payload in the event of an accident. The specifics of what is being
transported will rely on numerous factors when determining the maximum
compensation.Specific Contingency Insurance product

o Which is designed to respond to "one-off" legal, judicial and legislative risks.
• Creditor Liability Contingency Insurance

o The policy protects the trustee or personal representative from a claimant who
establishes or attempts to establish a legal right of recovery for a debt owed from the
deceased person's estate.

Exclusions
• Contractual liability.
• Cheating.
• Consequences loss.
• Criminal breach of trust.
• Wilfull act.
• Loss of use.

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2.10 GOLFER INSURANCE

Each golfer should have insurance. No matter how skilled you are at the game or how cautious
you are, there is always a chance of getting hurt while playing golf. Golfers are held
accountable if a misplaced shot (or even their club) injures someone else.

Scope of cover
• Section I – Liability to the Public

o Accidental physical harm or damage to another person's property when you are
playing golf within the boundaries of the territory.

o All court fees and other expenditures that a claimant has obtained against you.
o All legal fees and expenses related to claims against you that are incurred with our

express consent.

Exclusions
• Wear and tear or depreciation.
• War and related risks.
• Terrorism.
• Nuclear or radioactive contamination.
• Acts of authorities or government regulations.
• Suicide, self-inflicted injury or wilful exposure to peril.
• Loss or damage occurring outside the territorial limits.
• Loss of or damage to watches, jewellery, glass, cameras, portable radio, money,

securities, stamps, vehicles and accessories.
• Fines, penalties, punitive and exemplary damages.

2.11 FIDELITY GUARANTEE INSURANCE

The Fidelity Guarantee insurance can reduce employee infidelity risk by indemnifying the
employer against loss of money or property as a result of any employee's acts of fraud or
dishonesty, such as forgery, embezzlement, larceny, or fraudulent conversion. Most business
owners are unprepared to deal with employee infidelity and its negative consequences. It is
not uncommon to hear of cases in which employees go missing with a large sum of company
money or assets.

Scope of cover
• Individual policy (Named Basis)

o Insures against the dishonesty of individual persons named in the policy. Eg: Hamid
Hassan

• Collective policy (Position Basis)
o This policy applies to a specific group of employees. The amount of guarantee
required for each individual is determined by the Insured based on his or her
responsibility and position. Eg: Cashier, Accountant, Storekeeper.

• Blanket policy

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o A form of unnamed policy which includes all employees without reference to names
or positions. The premium is usually adjustable upon expiry based on the number of
employees.

• Floater policy (Limit Per Person Basis)
o The Policy shows a single amount that represents the Insurer's liability for any one
individual as well as its total liabilities for all employees guaranteed who are
individually named in the schedule. Such policies are issued when the number of
people to be guaranteed does not fall below five.

Exclusions
• Any indirect or consequential loss.
• Any third party losses.
• Stock taking or inventory losses.
• War and related risks.
• Radioactive and nuclear energy risks.
• Any act of terrorism.

2.12 CREDIT INSURANCE

Credit insurance guarantees a lender will be repaid if a borrower is unable to pay his or her
debt due to, for example, unemployment, death or disability. Although credit insurance is solely
for the benefit of the lender, it is purchased and paid for by the borrower.

Scope of cover
• Credit life insurance

o Helps pay off the debts in case of the sudden death of the insured person.
• Credit disability insurance

o If the insured faces permanent disability due to any reason, the insurer will pay off
existing debts.

• Credit involuntary unemployment insurance
o It aids in paying some or all of existing debts if the insured is involuntarily unemployed.

• Credit property insurance
o It protects the insured’s collateral property subject to the theft, loss or damage.

• Trade credit insurance
o It provides indemnity for bad losses in case of debt receivables due to the failure of
customer repayment.

Exclusions
• Any nuclear risk or contamination due to a radioactive substance.
• Customer disputes with the buyer that may result in withholding of partial or full payments

by the buyer.
• Any interest amount that gets accrued after the original due payment date.
• Amount owed by any government entity which cannot be declared insolvent.
• Currency fluctuations, Reverse Factoring Policies, pre-shipment risks.

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2.13 EXERCISE 2.1

1. Both personal liability and public liability covers are the same. The need for differentiate
the coverage are
A. the defences cost involve.
B. the method payments for the loss.
C. the method in solving the disputes might be occur.
D. the one policy is meant to cover the personal basis, whereas the other is designed
to cover the organization against any lawsuit.

2. Professional indemnity policies frequently exclude
A. defences fees.
B. claimant’s costs.
C. liquidated damages.
D. financial losses.

3. Typically, coverage for directors' and officers' liability is arranged on the basis of a limit
expressed as
A. any single loss.
B. unlimited liability.
C. any single occurance.
D. a total aggregate of liability.

4. A public liability policy's operative clause always includes coverage for property damage
that includes
A. a third party’s tangible property.
B. the insured’s material property.
C. third party’s intangible property.
D. an employee’s non‐intellectual property rights.

5. Which of the following incidents would an employee NOT be able to successfully claim
for bodily injury in an employer's liability policy?
A. Anxiety.
B. Chronic pain.
C. Defamation of character.
D. Post‐traumatic stress disorder.

6. Which of these statements concerning personal liability coverage are correct?
A. bodily injury or property damage for insured’s family members.
B. It applies to the insured's personal, nonbusiness activities that occur anywhere.
C. It protects against damages caused by an insured's intentional actions.
D. The insurer will not defend unfounded or false liability claims brought against the
insured.

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7. Employer’s Liability Insurance basicly NOT protects employers from claims brought by
employees for
A. discrimination.
B. wrongfull termination.
C. harrassment, including sexual arressment.
D. liability suits for work-related injuries.

8. The process of recovering defective and/or potentially unsafe goods from consumers
while compensating those consumers is referred to as
A. contractual liability.
B. liability for fault design.
C. product recall.
D. product guarantee.

9. Defamation and dishonesty are general exclusions for
A. Directors and officers liabillity.
B. Personal liability.
C. Professional indemnity.
D. Public liability.

10. The flaw is the failure to notify the user on how to use the product safely, resulting in the
creation of a hazard. The statements refers to the type of
A. design defects.
B. instruction defects.
C. manufacturer defects.
D. post marketing defects.

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3.0 RISK ASSESSMENT AND UNDERWRITING OF LIABILITY INSURANCE

3.1 UNDERWRITING
Underwriting is the process of evaluating the subject matter of insurance, whether it is a
person, property, profession, business, or other entity, and deciding whether or not to accept
it.
Purposes of underwriting

Figure 3.1: Purposes of underwriting

Process of underwriting
• Risk identification and assessment

o When an insurance proposal is submitted, the underwriter must evaluate the proposed
risk.

o The proposal form, which the proposer completed, includes information on the
hazards. If the underwriter requires additional information, he or she may take one or
more of the following actions:
➢ request for a survey report
➢ make direct inquiries

• Selection of Risk
• After identifying and evaluating the risks connected with the proposed risk, the
underwriter is ready to decide whether to accept or reject the proposal.
• An underwriter will not reject a proposal until the physical and/or moral risks are
deemed too great to make the risk uninsurable.

• Determination of Premiums, Terms, and Conditions
• The terms and conditions that will be imposed will be determined by whether the risk
taken has normal or extraordinary risks.

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• Under the typical terms and conditions for each type of insurance, normal hazardous
risks are acceptable.

• Risks with unusual hazards are acceptable if the following underwriting measures are
met:
o risk improvement
o warranties
o exclusions
o restricted cover
o excess

• Confirmation and Acceptance
o If the proposer accepts the terms and conditions, the insurer will issue a cover note
or e-cover as proof of interim coverage until the policy is issued.

3.2 RATING FACTOR

Class Rating

• There are trustworthy data that can forecast future losses, or the variables producing
losses can be simply measured.

• The class rating system is occasionally referred to as a manual rating because these rates
are published in a manual.

• The class is defined by statistical research as a set of individuals who share a set of traits
that may be relied upon to anticipate their insured losses.

• In order to ensure that the premium covers the risk of loss and is reasonable for each
class member, a class rating must be applied to a rate class that is both large enough to
reliably estimate losses through statistical analysis and small enough to maintain
homogeneity.

Individual Rating

• A wide range of variables, which differ greatly between people, are utilized to forecast
losses.

• People can take precautions to prevent losses, which will cut their losses and lower their
premiums.

• There are no statistics that can accurately predict the likelihood and magnitude of future
losses due to the intricacy of the components that impact possible losses, hence judgment
ratings are utilized in these situations. Therefore, an underwriter must assess each
exposure separately and rely on instinct based on prior knowledge.

Merit Rating

• Based on a class rating, however, the premium is modified for each customer individually,
based on their actual losses.

• Are employed when a class rating can provide a good estimate, but the components are
sufficiently varied to produce a wider range of losses than they would have if the class's
composition were more consistent.

• Therefore, based on specific criteria or actual losses incurred by the customer, merit
ratings are utilized to adjust the premium from what the class rating would produce.

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3.3 RISK ASSESSMENT
Hazard
• Hazard is defined as 'a risk that cannot be avoided' and something that may be

dangerous, and cause accidents'.
o Physical Hazard - physical element that visible to everyone
o Moral hazard - nothing tangible for any rational thinking person to evaluate in the

moral hazard.
Chance of loss or injury
• Any condition that presents a possibility of loss, whether or not an actual loss occurs.
Degree of probability
• Known as a proximate maximum loss.
• Public and Product Liability much dependent on the situation and condition of risk.
• PI and D&O policies, the degree of probability depends on a different set of criteria.
A person, a thing or a factory likely to cause loss or damage
• A person with a criminal record would undoubtedly be regarded as a greater moral danger

than someone who has only been issued a caution notice.
• The things refer to the products that are covered by Products Liability insurance.
• When compared to other items, complex products including harmful substances or parts

may be regarded high-risk factors.

3.4 UNDERWRITER
Roles and Responsibilities
• On the basis of actuarial, statistical, and background information, analyse risk in insurance

proposals, define policy terms, and compute premiums.
• Responsible for deciding whether or not to accept applications for insurance cover.

Figure 3.2: Duties of underwriter

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Qualification

• Specialist medical knowledge or a scientific, technical, or engineering degree may be
required for some jobs, notably those within life assurance.

• Some companies prefer a certification in insurance, risk management, finance,
economics, law, the management, or business studies.

3.5 UNDERWRITING CONSIDERATION

Sources of Underwriting Information
• Proposal Form - basis of contract.
• Site visits/surveys.
• Meetings or interviews.
• Agents/Brokers feedback.
• Reports – health, maintenance.
• Reinsurers.
• Websites.
• Common knowledge.

3.5.1 Public Liability

• Name & Address.
• Types of business entity.
• Deductible.
• Year in business.
• Employees.
• Other insurance.
• Prior insurance.
• Prior claims.

3.5.2 Product Liability

• Insured.
• Types of company –business description.
• Claim history.
• Year established.
• Specification of company.
• Product information.
• Territorial limit.
• Limit of indemnity.
• Excess.

3.5.3 Employers Liability

• Business description and activities.
• Total of employees – full/part/subcontractor.
• Employees work activities.

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• Information related workplace safety programs.
• Sum of insured.
• Limit of liability requested.
• Territorial limit.
• Claims experience.

3.5.4 Professional Liability

• Name & Address Insured.
• Professional qualifications.
• Type of business entity/work
• Professional services description – profession.
• Other business activity.
• Year established.
• Prior claims.
• Employees – experience/ number of staff.
• Limit of liability – excess/ deductible

3.5.5 Director and Officers Liability

• Financial conditions.
• Business activities/description.
• Quality of management.
• Diversity and business activities.
• Length of time in business – year established.
• Public listed/non-public listed.
• International operating exposure.
• Claim history.
• Limit of liability Excess

3.5.6 Errors and Omission Liability

• Insured.
• Claim history.
• Types of business entity.
• Years in business.
• Contractors and subcontractors.
• Legal or disciplinary action against applicant.
• Other insurance.
• Type of property.

3.5.7 Personal Liability

• Occupation of the policyholder.
• Claim history.
• Sum insured.
• Lifestyle of the policyholder.
• Cover required and extensions requested.
• Cover limit request by insured.

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3.5.8 Golfer Liability
• Sum insured.
• Limits of liability.
• Claims history.
• Excess.

3.6 OPERATION OF POLICY WORDINGS
3.6.1 Risk Occurrence Policy
• Losses that occur over a specific time period are covered by occurrence forms (the policy

term).
• Although the loss may have occurred years ago, the crucial date is when it occurred.
• Regardless of whether claims for damages are filed, coverage is provided for any physical

harm or property damage that takes place within the policy period.
• These policies can be more expensive than a claims-made policy because of how long

coverage applies.

3.6.2 Claim Made Policy
• A claims-made insurance provides coverage for claims made within a specific time frame.

Even if the loss may have occurred years ago, it is reported during the current policy term.
• Regardless of when the loss-causing incident takes place, coverage is available for claims

made while the policy is still in effect.
• A claims-made policy covers the business only if the claim is for a loss occurring on or

after your retroactive date filed during your policy period or within your extended reporting
period.

o Retroactive date:
A retroactive date is a specific date a policy's coverage begins. This is generally the
policy's effective date or a past date agreed on by the insured.

o Extended reporting period:
This helps cover claims made during a specified time after your policy expires.
Generally, it lasts between 30 and 60 days. So, if your policy expires in December
2021 and you have a 60-day extended reporting period, your insurer can help cover
claims reported in this window. This is also known as tail coverage.

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3.7 EXERCISE 3.1

1. The discrimination if only those with high risks obtain insurance coverage is an example
of
A. adverse selection.
B. replacement.
C. risk subrogation.
D. contribution.

2. Why should an employer's liability underwriter be concerned about the risk posed by
nanotechnology?
A. It is always a frequency hazard.
B. It can lead to industrial deafness.
C. It may lead to an asbestos-type exposure.
D. It has the potential to be a catastrophe hazard.

3. An underwriter has determined that the risk of a proposed public liability insurance policy
for multi-tenanted premises is low. The risk is most likely to be
A. an office complex.
B. a shopping centre.
C. an industrial estate.
D. a manufacturing plant.

4. For what primary reason would a directors' and officers' liability insurer seek information
about the likelihood of claims arising from past events in relation to a proposed new
risk?
A. To index link specific claim reserves in line with inflation.
B. The previous aggregate liability limits may have already been eroded in part.
C. It may be exposed to claims as cover would be provided on a claims-made basis.
D. To determine whether previous year's insurers can be approached for a claim
contribution.

5. When a professional indemnity policy has a discovery period condition, it normally
means that the insurer will
A. only pay claims that are discovered during the period of insurance.
B. pay losses occurring and discovered during the period of insurance.
C. continue to remain liable for a fixed period of time for claims that become apparent
after the expiry date.
D. continue to remain liable until expiry of all exposure for losses that occurred during
the period of insurance.

6. When an underwriter considers adding a specific exclusion to an employers' liability
insurance policy, it should always refer to a
A. type of injury.
B. type of disease.
C. activity of the employee.
D. activity of the employer.

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7. A children's daycare that is in charge of 10 children submits a public liability proposal to
an insurer. The standard rating procedure for the premium will be centred on
A. estimated wages.
B. number of children.
C. qualification of staff.
D. square footage of the nursery.

8. The discovery period condition under a standard directors’ and officers’ liability policy
shows that it
A. allows the insured to report claims on a claims occurring basis.
B. allows the insurer to refuse claims which are made and not reported within 10 days.
C. allows the insurer to exclude liability for all claims in relation to non‐executive
directors.
D. allows the insured to pay a pre‐agreed premium so that for a set period after
renewal, the insured can notify claims occurring prior to expiration of the policy.

9. A major underwriting rating factor for a professional indemnity insurance risk is the
A. insured’s request for policy cover on a claims-made basis.
B. relevant qualifications and experience of the partners or directors.
C. number of support staff employed by the firm in areas such as human resources.
D. firm being well-established and its size increasing steadily over the last 10 years.

10. The premium rating for directors’ and officers’ liability insurance is typically based upon
the
A. limit of indemnity and the net profit.
B. limit of indemnity and the number of directors.
C. number of employees and the net profit.
D. number of employees and the number of directors.

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4.0 CLAIMS PROCEDURES AND DOCUMENTATIONS

4.1 CLAIM PROCEDURE

Notification of Loss

• Any notification of a claim or circumstance should be made immediately and before the
policy expires, otherwise there is a significant risk that insurers may refuse to indemnify
the insured.

• Any notification of a claim or circumstance should be made immediately and before the
policy expires, whether it be in writing or verbally.

• These are the conditions before the claim are made:
o The loss/damage must be occurred
o The insurer must be told (Notification)
o Proof must be furnished
o The claim must be legal
o The insurance contract must be enforceable
o The policy must cover the appropriate type & cause of loss
o The size of claim must be decided

Checking Coverage

• Conditions for a Valid Claim
o Is the policy in force?
o Was the premium paid?
o Was the damage brought on by an insured peril?
o Is the subject matter involved in the loss the same as what the policy insures?
o Was there an unjustified delay in the notice of loss?

Claims Register
• Every insurer is required by law to keep an up-to-date register of all insurance claims as

soon as the insurer becomes aware of them, according to section 47 of the Insurance Act
1996.
• As long as the insurer is liable for the claims, none of these claims will be deleted from
the register. The claims register is a formal record of claims that have been reported to
the insurer.

Investigation of claims

• Depending on the amount and complexity of the claim, the investigation's scope and
methodology will change.

• A modest claim is typically paid depending on the supporting documentation provided by
the claimant.

• A claim official working for the insurer or a loss adjuster who is an independent expert will
investigate claims that are higher than a specific threshold in further detail.

• Verifying the following factors will determine whether a claim is valid:
o a loss occurred.
o the loss was brought on by a peril covered by the policy.

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o the loss did not fall under a policy exclusion.
o the subject matter affected by the loss is the same as that covered by the policy.
o the claim was submitted in accordance with the terms of the policy.

Ascertaining the amount of loss
• In liability claims, the amount to be paid to the insured is the subject of discussion between

the insurance company and the party who has been injured or sustained property
damage.
• Where property is damaged or lost, the amount of loss is determined from proof of the
value of lost items or estimates of repair, replacement, or reinstatement.

Ascertaining Subrogation Rights and Contribution Duties
• The insurer will be able to take action to make the necessary recoveries from third parties

if it can be determined that subrogation rights exist.
• On the other side, if contribution exists, a condition of the policy may oblige the insurer to

cover a portion of the loss.

4.2 DOCUMENTATION OF CLAIM

Public Liability
documents needed for the completed claim form from the insured:

o When necessary, file a police report.
o Employee and incident witnesses' statements.
o Any additional data or records that can help the insurer defend the insured.
o Third-party claimants must provide certain documents.
o Written evidence indicating the damage or injury was caused by the insured's, their

employees', or representatives' negligence.
o When necessary, file a police report.
o Where necessary, a medical or specialist report.
o Images, bills or invoices for the damages.
o Additional supporting documentation for their claim.

Product Liability
o In tort law, the plaintiff must demonstrate carelessness.
o Customers who purchase defective products and incur personal hurt or property
damage may file a product liability claim.
o They use a product that is dangerous, which leads to injuries or inconveniences.

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Employer Liability
o Proof of employer breach of care
o Prove that the injuries and/or financial loss sustained are a result of employer
negligence.
o Must proof that any potential claim has been raised within the permitted time limit.

Professional Liability
o It is necessary to prove professional negligence or a failure to discharge your
professional obligations.
o The person who suffers the injury or loss can prove that errors and omissions caused
the loss of client data, software or system failure, allegations of non-performance, or
intentional overselling.

4.3 METHOD OF CLAIM SETTLEMENT

Repair
• When choosing repair, insurers believe they have a responsibility to explain the effects of

any decisions taken by either party.
• Where a policyholder insists on having a specific repairer perform the work, the

policyholder will typically be responsible for the quality of the work.
• If the repairer is chosen by the insurer or its agents (such as loss adjusters), then it is

typically the insurer who will be liable to make good any deficiencies in the repair.
• This does not imply that any repairer who has given a claimant an estimate is

automatically considered to be the claimant's preferred contractor.

Replacement
• The insurer's decision to choose "replacement" is only rational if the item being claimed

for is replaceable.
• For instance, if the item is antique jewelry, the insurer cannot demand that the claimant

buy a contemporary replacement from a national retailer.
• Similar worries arise when replacement options are scarce.
• For instance, it might be unreasonable to restrict a policyholder's replacement alternatives

to a single retailer.
• Policyholders should be given the option of where to buy a replacement, and if they are

unable to find an appropriate substitute, they are entitled to a financial payout.

Cash
• In such a situation, we would not consider it reasonable for the insurer to deduct from the

cash settlement any discount it would have received if the policyholder had purchased a
replacement from one of the insurer's designated suppliers, nor would it necessarily be
appropriate for the insurer to provide vouchers to the policyholder.
• In such a case, we would not deem it reasonable for the insurer to deduct from the cash
settlement any savings it would have realized had the policyholder purchased a

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replacement from one of the insurer's designated suppliers, nor would it necessarily be
appropriate for the insurer to issue vouchers to the policyholder.

4.4 PRINCIPLE OF AVERAGE

A claim under the policy will only be paid in the proportion that the sum insured bears to the
total worth of the property at the time of loss where under-insurance is present and the policy
is subject to average.
In order to penalise the insured who has underfunded his property, the principle of average is
used.

When a loss is subject to average, the insured will be regarded as the insurer for the
underinsured share and will be responsible for a portion of the loss.

Amount payable = Sum Insured x Amount of Loss

Value of Property

4.5 DISPUTES OVER CLAIMS

Disputes is disagreement followed by opposition against something. Disputes over insured
and insurer:

o the question of whether the insurer is liable.
o the quantum of loss if the insurer is liable.

4.5.1 Method Solving Disputes

Negotiation
• Reach an agreement by discussion.
• If the dispute concerns a claim that the insurer has denied, the claim representative will

attempt to explain why the claim was denied.
• On the other hand, if the disagreement is over the size of the damage, the official can try

to broker a peaceful settlement.
• In practice the majority of general insurance policies contain an arbitration clause that

may stipulate that all disputes or disputes pertaining to only the amount must be referred
to arbitration before the insured can file a lawsuit.
• Generally speaking, arbitration is favored to litigation since it is quicker and less expensive
than court proceedings, and hearings take place in private rather than in public.
• Frequently, the contract's provisions will include an arbitration clause.

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Arbitration
• The majority of general insurance contracts have an arbitration clause that may stipulate

that all disputes or disputes pertaining to solely the amount must be referred to arbitration
before the insured can file a lawsuit.
• Prior to any legal action starting, the contract's provisions stipulate that arbitration must
be completed.

Mediation
• The civil court would encourage the use of mediation as an alternative to legal action.
• The mediator is an independent body, set up as an alternative to court settlement to assist

the claimant to settle their disputes with the financial services provider.
• In Malaysia, the FMB set up by BNM is meant to play this crucial role.
• The mediator facilitates both the complainant and the financial service provider institution

concerned to resolve the complaint by first investigating the complaint including all the
issues involved, by a process.
• Includes investigating the complaint through various sources based on the facts
presented, having face-to-face discussions, having meetings with all the parties
concerned or conducting an enquiry, considering industry practices, and consulting legal
basis/sources before a decision is made.

Figure 4.1: OFS website interface

Litigation
• A claimant has the right to sue the insurer in court if he is dissatisfied with the resolution

of his conversation or negotiation with the claim official.
• unless it involves a sizable claim or a crucial issue of principle, would try to reach an out-

of-court settlement and views litigation as a last choice.

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4.6 EXERCISE 4.1

1. An insurer under a liability policy may deny responsibility for a third-party claim if
A. The policy was in forced.
B. The loss was caused by a peril stated in the policy.
C. The insured and the claimant are the same persons.
D. There was no loss or damage reported by the insured.

2. The purpose of keeping the claims register is
A. to acts as a monitoring tool.
B. to gives the details of all insureds.
C. to serves as a reminder of the number of claims.
D. to serves as an official record of claims notified to the insurer.

3. An insurer will apply the average principle when
A. the insurer does not receive proper documentation.
B. there are multiple policies that cover the same risk.
C. the loss was caused by a third party.
D. the sum insured is insufficient.

4. An assessment of the amount of loss is performed by
A. a solicitor.
B. the agent.
C. the adjuster.
D. the underwriter.

5. Arbitration is concerned with dispute between the claimant and the insurer over
A. the facts of law.
B. the amount of the loss.
C. the extension of the loss.
D. the subject matter of the insurance.

6. Fateema was unsatisfied with the mediator and arbitrator’s decision about her financial
disputes. She could refers to another method which is
A. negotiation.
B. litigation.
C. financial consultant.
D. arbritration.

7. The insured must make a claim notification,
A. immediately.
B. in writing
C. by a notice in writing within 15 days.
D. immediately, followed by a written notice with all relevant details of the claim.

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8. Mr Razak valued his property of RM500,000 instead of the market value of RM600,000.
He made a claim for a loss of RM300,000. The total amount that he could received for
his claim is
A. RM250,000
B. RM280,000
C. RM300,000
D. RM500,000

9. The choice for replacement settlement is only reasonable option if
A. the object claimed for can be replaced.
B. the insurer offers voucher for the claimant.
C. the insured responsible for the quality of the work.
D. the insurer responsible for the quality of the work.

10. The reasons for early notification of a claim are as follows:
I. The memories of individual fade away.
II. Delay may affect the investigation process.
III. Delay may affect the property which was unaffected by the peril.
IV. Insurer may have to advise the reinsurer for serious loss.
A. I, and II
B. I, II and III.
C. I, III and IV.
D. I, II, III and IV.

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5.0 POLICY ADMINISTRATION

5.1 INSURANCE DOCUMENTATION
• Proposal form.
• Cover note.
• Certificate of insurance.
• Policy form.
• Endorsement.
• Renewal notice.
• Renewal certificate.
• Claim form.
• Discharge form.

5.2 POLICY WORDING

5.2.1 Heading
The first page of an insurance policy is typically this one. It specifies the insured, the risks or
items that are covered, the policy limits, and the length of the policy.

5.2.2 Preamble
This lists what is covered as well as a summary of the insurance company's main guarantees.
The insurer makes a number of commitments in the insuring agreement, such as paying
losses for covered risks, offering specific services, or committing to represent the insured in
a liability case.

5.2.3 Operative Clauses
Give specifics on the range of coverage. They define what is covered by the policy and
constitute the core of the policy.

They could consist of a single clause defining coverage or, more frequently, a number of
such clauses, each of which deals with a distinct part of the policy and frequently has
exceptions and extensions that are unique to each individual operative clause.

• Limits of Indemnity
The sums designated as the limit of responsibility in the schedule shall, subject to the
terms and circumstances of this policy, represent the maximum aggregate obligation
that may be owed under this policy for all covered financial loss.

• Cross Liability
Cross-liability offers coverage for both parties if one files a claim against the other
when an insurance contract covers multiple parties. When two insured parties are
covered by the same policy, cross-liability means that one insured party may bring a
claim against the other. For instance, the founding partners of a legal firm may file
lawsuits against one another for harms or losses that they both claim the other is to
blame for.

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• Jurisdiction Clause
A clause outlining the parties' consent to submit any disputes arising from or related to
an agreement to a specific national court. Indicate that a contract's parties are
permitted to resolve legal problems through adjudication. Determining the place in
which disputes should be settled is crucial for everyone concerned because vendors
and buyers are frequently in different regions.

• Electronic Recognition Date Clause
The following are not covered by this insurance:
o The calculation, comparison, differentiation, sequencing, or processing of data
involving the date change to the year 2000,
o or any other date change, including leap year calculations, by any computer
system, hardware, program, or software, and/or any microchip, integrated
circuit, or similar device in computing.

• Car Park Liability Clause
It is thus declared and accepted that the insurance provided by this policy is expanded
to include the insured's legal obligation for loss or damage to vehicles in their care or
under their control while in the insured's parking lot. Provided the vehicles are locked
and properly secured.

5.2.4 Exclusions
Exclusions are restrictions on the scope of the insurance and inserted in a policy because
certain perils and losses cannot be covered under the policy.

Figure 5.1: General exclusions

5.2.5 Conditions
Conditions that must be satisfied for the coverage to be effective. Otherwise, the insurance
may reject the claim. Common policy conditions include the need to submit a proof of loss to
the insurer, to safeguard property after a loss, and to cooperate with the insurer during an
investigation or the defense of a liability claim.

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5.2.6 Warranties

A declaration from the insured party stating that information impacting the contract's validity is
accurate. The statement must be specifically mentioned in the contract in order to qualify as
a condition or warranty, and the provision must unmistakably demonstrate that the parties
intended that the rights of the insured and insurer would depend on the statement's veracity.

Promissory Warranty: is a promise that fact about the future or that something will remain true
during the duration of the policy.

An affirmative warranty: is a declaration of a truth that existed at the time the contract was
signed. When a promissory warranty is proven to be accurate, the insurer has the right to
revoke coverage. An insurance contract is immediately void if the affirmative warranty is
untrue.

• Duty of Disclosure
A duty to disclose any information that could reasonably be expected to be known to
be relevant to the decision to accept the risks and determine the rates and terms to be
applied. Failing to do so could lead to the avoidance of the insurance contract, denial
or reduction of the claim(s), modification of the terms, or termination of the insurance
contract.

• Cancellation
The policy may be cancelled at any time:
o by the insurer on 30 days ' notice to that effect being given in writing to the
Insured' s last known address and in such event the insurer will return a pro
rata portion of the premium for the unexpired part of the Period of Insurance.
o by the Insured on 7 days’ notice and provided no claim has arisen during the
current Period of Insurance, the Insured shall be entitled to the difference if any,
between the premium paid and the premium calculated at the insurer’s short
period rate for the time the policy had been in force.

• Premium Warranty
The payment and receipt by the insurer of the premium payable within sixty (60) days
after the date on which this Policy/endorsement/renewal certificate was issued
constitutes a fundamental and absolute special condition of the Policy. This policy is
automatically cancelled if this stipulation is broken, and the insurer is entitled to pro
rata payment for the time the insurer was at risk.

• Disputes
All disputes arising out of or under the policy shall be subject to determination by any
court of competent jurisdiction within the country in which the policy was issued
according to the law applicable to that jurisdiction.

• Condition Precedent
The validity of the policy is subject to the condition precedent that:
o For the risk insured, the named insured has never had any insurance
terminated in the last twelve (12) months due solely or in part to a breach of
any premium payment condition.

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o If the named insured has declared that it has breached any premium payment
condition in respectof a previous policy taken up with another insurer in the last
twelve (12) months:
➢ The named insured has fully paid all outstanding premium for time on
risk calculated by the previous insurer based on the customary short
period rate in respect of the previous policy.
➢ A copy of the written confirmation from the previous insurer to this effect
is first provided by the named insured to the insurer before cover
incepts.

• Alteration of Risk
Anytime something happens that materially affects the risk insured, the insured must
notify the insurer in writing within seven days and pay any additional premiums that
may be necessary. The additional risk exposure will not be covered by this policy if the
insured refuses to abide by the requirements.

• Claim Notification
As soon as feasible and to the extent practicable, the insurer must be notified in writing
of any event that could result in a claim under the policy. Before the insurer has had a
chance to inspect, no changes or repairs may be made. Any anticipated criminal
prosecution, inquest, death investigation, or civil procedure involving the incident
requires the insured to notify the insurer immediately and to supply all pertinent
documents.

• Other Insurance
The insurer shall not be obligated to pay or contribute more than its rateable
percentage of any such claim and related fees and expenditures if, at the time any
claim occurs under this policy, there is any other insurance covering the same liability.

• Subrogation
The insured will execute and deliver any relevant documents and instruments, as well
as take any other actions required to support the insurer in the exercise of its rights, in
the event that a payment is made to or on behalf of the insured under the terms of this
policy.

5.2.7 Definition

Insurance policies include words and phrases that have extremely particular, often quite
unusual meanings to specify the area of coverage. A single definition of the term or phrase is
contained in the definitions part of the insurance policy as opposed to being repeated each
time the term is used because these terms and phrases are frequently used throughout the
insurance policy.

5.2.8 Information and Facilities

The customer service standards statement outlines the possible expectations of the insured
with regard to the service offered, possibly in terms of courtesy and response times.

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Procedures for handling complaints: Policyholders are urged to contact a designated
individual within the insurer's organisation in the first instance by referring them to internal
processes.
Information on claims: It's typical to have a section that instructs the policyholder what to do
in the event of a claim. Include a claims help line number as well, typically.

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