ASSESSING V.A.

R AND AMOUNT OF LOSS OF PLEDGED STOCKS

On the happening of any loss/damage to the subject matter of insurance (stocks
pledged to the Bank as security against loans or otherwise etc) a claim is initiated
by the mortgages or mortgagors to the Insurers concerned. Consequently a
Government license holder, qualified, independent Insurance Surveyor/Loss adjuster
is appointed by the Insurers who as per requirements and rules laid down in the
relevant sections of Insurance Ordinance 2000, Insurance rules 2000 & 2002
examines the goods, property, or any interest insured under a contract of non-life
insurance to express an independent opinion as to cause, extent, location and
amount of any loss incurred or claimed to be incurred under that contract & submits
his independent expert opinion in form of survey report
To discharge mandatory duties the Surveyor has to work-out the value at risk in
order to check the adequacy of sum insured under the Policy(s) of Insurance. The
under Insurance factor is highlighted which bears an important role in adjustment of
loss. Following rules are followed while assessing the value at risk.
a. Value at risk is determined only for the stocks/property which is declared for
insurance and included in the policy of insurance as subject-matter of insurance.
Any un-declared/un-insured stock is not taken in to account while assessing the
value at risk as the same would be considered as out of policy ambit and the
insured will not be indemnified for any loss or damage sustained as the result of
damage to that particular stocks/property being un-insured.
b. That particular stocks/property will be taken to determine the value at risk for
which the insured has an insurable interest at the time of entering in to contract of
insurance as well as at the time of loss. Under marine insurance contract it is little
different as maintaining an insurable interest at the time of entering in to the
contract is not necessary but it is essential that the claimant must have an
insurable interest at the time of loss.
c. That stocks/property will be considered as included in the value at risk which is
present/stored/lying/kept at the location mentioned in the relevant policy(s). All
other stocks/property will be taken as out of ambit.
d. Description/identification of the stocks/property is important factor as only the
stocks/property which is described in the schedule of relevant policy of insurance
will be considered to determine value at risk. All other stocks/property will be
excluded.
e. It is also necessary that the stocks/property which are mentioned in the policies
which are contributing in the losses should only be considered to be included in
value at risk. The stocks/property insured by any policy which is non-contributing to
the loss will not be added up to the value at risk. For this purpose the total sum
insured will also exclude the sum insured of non-contributing policy(s). For example
One Insurance policy covers the stock of cotton bales worth Rs. 10 million and the
other two policies cover the stocks of cotton bales as well as un-ginned cotton worth
Rs. 40 million and loss occurs in stock of un-ginned cotton the value at risk will
include the value of cotton bales as well as the value of un-ginned cotton while the
total sum insured will include the two policies of 40 million covering both the stocks
but not the policy worth 10 million which covers stock of cotton bales because no
loss occurs in the stock of cotton bales and this policy would stand as noncontributing.

f. The stocks/property which is excluded from the ambit of Insurance policy(s)

coverage because of breach of warranty/condition for which the insurers assume no
liability will not be included in the value at risk.
To determine the value of stocks/property following rules are followed.
a. Prevailing market value of the stocks/property is taken in to account.
b. Value of stocks/property is taken at the time of loss.
c. Value of stocks/property is taken at the place of loss.
d. Value is taken for the stocks/property of exactly the same description as the
description of the stocks/property in which loss occurs is.
e. Value is taken for the stocks/property of the same kind, type, quality as the
damaged stock/property is. If however the stocks/property is of different
kind/type/quality then it should be dealt accordingly for each type/kind/quality.
f. For this purpose the values declared by the mortgagees Bank as well as the
mortgagors for determining the drawing power (D.P) or whatever shall be ignored if
this value is not in line with the prevailing market value at the place, at the time of
loss for the same type/kind/quality of stocks/property. Similarly the quantum of
stocks shown in the Bank stocks report will also be ignored while assessing the
value at risk or amount of loss because the stocks report submitted to the Bank by
the mortgagors cannot reflect the quantum of stocks at one particular time e.g time
of loss because of various factors which are summarized below.
a. The stocks registers on the basis of which such stock statements are made do not
follow the time line. For example these statements usually reflect the stock position
either at the start of day or at the closing of day. Now if loss occurs at mid of day
while the stock position is changing because of process, fresh purchases, disposal
etc the stock report may not be taken as reflection of stock present at the time of
loss.
b. In some cases for instance cotton bales the Bank choose to opt the fixed values
of stocks other than the actual values. For example the average weight of cotton
bales, quantum of un-ginned cotton consumed to press 100 cotton bales, average
weight of one bora of un-ginned cotton, tare etc. Similarly the stocks movements
are not closely monitored for changes according to time line. The changes in stocks
are not recorded in stock registers according to time line. Sometimes the stock
delivery orders are issued and bank record is maintained according but the stock
does not move out physically. Sometimes the arrival of fresh stock are entered in to
books and included in D.P on the assurance of mortgagors whereas it is not yet
arrived in the premises. Value of the stocks/property is also determined by applying
certain margins and also do not reflect the actual cash value of the stocks/property
at the time/place of loss. In case of certain type of commodities such as cotton the
by-products ratio is also fixed by the bank. For example in case of cotton the Bank
fixes the G.O.T by fixing the quantum of un-ginned cotton to press 100 bales of fixed
average weight which is not possible in real term. Also to assess the extent of loss
the surveyor would not rely on Bank stock report because the stock reports are not
maintained stock-wise. For example 2 heaps of un-ginned cotton out of 10 caught
fire. Now the Bank stock report would not help to determine quantum of un-ginned
cotton in those 2 particular heaps of cotton.
Under these circumstances where possible the surveyor would always prefer to go
for physical verification of quantum, quality and value of stocks/property at the time
of loss.

Note: The basis for determining the value of stocks/property for the purpose of loss
assessment remains the same as for assessing the value at risk. Most of the
Insurance contracts are based on indemnity and surveyor follow the law of
indemnity while assessing any loss. The alternative as provided by the insurers is
to determine the liability on the basis of re-instatement. So the surveyor acts in
accordance with the provision of insurance policy. There are few other arrangements
for example insurance on the basis of fixed values (for imported stocks in trade
etc) which are rarely in practice for which the information is available with the
Insurers for whom it may concern.
Few Insurance terms used above or might be used in this context are being defined
below for ease of reference.
SUBJECT-MATTER
Object/Item/property proposed/declared to the Insurers for Insurance.
INSURABLE INTEREST
The ownership/relationship of the proposer/insured with the subject matter of
insurance. To establish an insurable interest under property insurance following 3
pre-requisites are to be followed.
1. The property proposed to be presented for insurance must exist physically.
2. Such physical object must be the subject matter of insurance.
3. The proposer/insured must have an equitable/legal relationship with that subject
matter of insurance in the manners that at the time of any loss/damage to that
subject matter he is affected adversely and by safety of the subject matter he is
among the beneficiaries legally.
INDEMNITY
Indemnity is the basis of loss assessment/settlement by which the insured/claimant
is placed in the same financial position as he was immediately before the
occurrence of loss. It is in fact depreciated value of that particular property i.e. the
actual cash value or the prevailing market value of the property in the same
condition, at the same place on the date of loss or in some cases the new
replacement value less depreciation. Procedure and practices of application of
different rate of depreciation on different subject matter is followed.
Insured can only be indemnified for actual sustained loss due to physical
damage/loss and not the consequential loss under the law of indemnity. If the
Insured intends to get covered for any consequential loss another form of policy is
available for that particular purpose.
In case of partial loss the insured will be indemnified only to the tune of actual loss
he has sustained.
In all cases the value of salvage and the ownership right under rights of subrogation
are surrendered in favor of insurers.
The choice to repair/restore/replace or reinstate the property is always with the
Insurers. Insured cannot abandon any property at their own unless it is so provided
by the Insurers under the terms of contract.
Where more than one Insurers or policies are on risk against the same property the
loss will be apportioned among all the insurers/policies proportionately so that the
insured may not gain any undue advantage out of insurance policy(s).
In case of under insurance the Insured would be allocated the proportionate benefit
of salvage.

RE-INSTATEMENT
Placing the Insured in the same financial position after the occurrence of loss as he
was immediately before the loss by paying the amount of loss of affected property
as replacement value if new. That is calculated without application of depreciation.
This type of insurance is usually affected for building and machinery.
QAYYUM PERVEZ MALIK
MULTAN
qayyum@qpmalik.com
www.qpmalik.com