Dean's Office Official Model Question Paper

General (Non-Life) Insurance

General insurance contracts are contracts of indemnity that provide financial compensation to the insured for loss, damage, or liability resulting from specified contingent events (excluding human life contingencies).

Examples: Fire and Special Perils insurance, Motor Vehicle insurance, Marine Cargo insurance.

Named-Perils vs. All-Risks Policy

• Named-Perils Policy: Covers only the explicit losses caused by perils specifically enumerated in the contract (e.g., standard fire policy covering fire, lightning, explosion).
• All-Risks Policy: Covers all accidental physical loss or damage to property except for perils that are explicitly listed in the policy exclusions.

General Average vs. Particular Average

• General Average: A voluntary, intentional sacrifice or extraordinary expenditure made to preserve the entire maritime adventure in the face of imminent peril, shared proportionally by shipowner, cargo owners, and freight.
• Particular Average: An accidental, non-intentional partial loss affecting only one specific cargo owner, borne exclusively by that owner or their insurer.

Contractor’s All Risk (CAR) Insurance

CAR insurance is a comprehensive policy designed for civil engineering projects (roads, bridges, hydropower dams, buildings) that covers both accidental physical damage to contract civil works and plant machinery, and third-party liability claims for bodily injury or property damage.

Knock-for-Knock Agreement

A knock-for-knock agreement is an inter-insurer agreement in motor insurance where, upon a collision between two insured vehicles, each insurer settles the own-damage claim of its own policyholder without litigating fault or seeking subrogation recovery from the other insurer.

Marine Cargo Insurance: Institute Cargo Clauses

Standardized by the International Underwriting Association (IUA) of London, the Institute Cargo Clauses define international marine transit coverage:

[ICC (C): Minimal Cover] ---> [ICC (B): Intermediate Cover] ---> [ICC (A): All-Risks Cover]
  - Major Disasters             - ICC (C) Perils PLUS           - All Accidental Perils
  - Stranding, Sinking          - Earthquake, Volcanic Eruption - Subject to Explicit
  - Collision, Jettison         - Washing Overboard, Entry of Water Exclusions

1. Scope of Coverage Across Clauses

2. Universal Exclusions Across All Three Clauses (General Exclusions)

• Willful misconduct of the insured.
• Ordinary leakage, loss in weight, or normal wear and tear of cargo.
• Inherent vice or nature of the cargo (e.g., spontaneous combustion of damp grains, perishable decay).
• Insufficiency or unsuitability of packing or preparation of cargo.
• Insolvency or financial default of shipowners/charterers.
• Nuclear/atomic weapons and unseaworthiness of vessel (when insured was privy to it).
• War and Strikes perils (unless bought back via separate Institute War & Strikes Clauses).

Numerical Problem: General Average Contribution

1. Principle of General Average

Under the York-Antwerp Rules, when a voluntary sacrifice is made to save a maritime adventure, all saved interests (ship, surviving cargo, freight) must contribute ratably to reimburse the sacrificed interests.

$$\text{General Average Loss Rate } (L_r) = \frac{\text{Total General Average Loss (Sacrifice + Expenses)}}{\text{Total Contributing Capital Value of All Saved Interests}}$$

2. Determination of Total Contributing Capital Values

• Note: In General Average adjustment, the value of the sacrificed property itself is added to the surviving value to arrive at the true contributing capital base.

General Average Loss to be Shared:

• Cargo Sacrifice = Rs. 8,000,000
• Extraordinary Engine Expenses = Rs. 2,000,000
• Total GA Loss = Rs. 10,000,000

3. General Average Contribution Rate

$$L_r = \frac{\text{Rs. } 10,000,000}{\text{Rs. } 118,000,000} = 0.08474576\ (8.474576\%$$

4. Ratable GA Contributions by Each Interest

• Shipowner Share (on Rs. 60M):
  $$\text{Shipowner Contribution} = 60,000,000 \times 0.08474576 = \mathbf{Rs.\ 5,084,746}$$
• Cargo A Owner Share (on Rs. 24M):
  $$\text{Cargo A Contribution} = 24,000,000 \times 0.08474576 = \mathbf{Rs.\ 2,033,898}$$
• Cargo B Owner Share (on Rs. 24M total):
  $$\text{Cargo B Contribution} = 24,000,000 \times 0.08474576 = \mathbf{Rs.\ 2,033,898}$$
• Freight Earner Share (on Rs. 10M):
  $$\text{Freight Contribution} = 10,000,000 \times 0.08474576 = \mathbf{Rs.\ 847,458}$$
• Total Contributions Collected = $5,084,746 + 2,033,898 + 2,033,898 + 847,458 = \mathbf{\text{Rs. } 10,000,000}$

Settlement: Cargo B owner receives Rs. 8,000,000 for the jettisoned machinery, net of their own Rs. 2,033,898 contribution (Net payout = Rs. 5,966,102).

Engineering Insurance in Hydropower and Construction

Engineering insurance provides specialized risk protection for capital-intensive infrastructure projects:

+----------------------------------------------------------------------+
|                     ENGINEERING INSURANCE SPECTRUM                   |
+-------------------+--------------------+-----------------------------+
| 1. CAR            | 2. EAR             | 3. MBD                      |
| - Civil Works     | - Electromechanical| - Operational Turbines      |
| - Dams, Tunnels,  | - Penstocks,       | - Sudden Mechanical Failure |
|   Canals, Bridges |   Generators, Grid | - Electrical Short-Circuit  |
+-------------------+--------------------+-----------------------------+

1. Contractor’s All Risk (CAR) Insurance

• Application: Civil engineering projects (hydropower dams, tunnels, highways, building construction).
• Coverage Structure:
  • Section I (Material Damage): Covers accidental physical loss to permanent and temporary civil works caused by flood, landslide, earthquake, fire, and construction collapse.
  • Section II (Third-Party Liability): Covers legal liability for third-party bodily injury or damage to adjacent properties arising out of construction operations.

2. Erection All Risk (EAR) Insurance

• Application: Installation, testing, and commissioning of electromechanical equipment (e.g., hydroelectric Francis/Pelton turbines, transformers, substation switchyards).
• Testing Period Risk: Crucially covers the hazardous testing/trial run period (typically 4–8 weeks) when machinery is energized under full operational loads.

3. Machinery Breakdown (MBD) Insurance

• Application: Operational commercial factories and commissioned power plants.
• Coverage: Covers sudden and unforeseen physical damage resulting from internal operational causes: mechanical breakdown, electrical arcing, centrifugal force disruption, boiler explosion, or lubrication failure.

Motor Vehicle Insurance in Nepal

Motor vehicle insurance is the highest-volume non-life insurance class in Nepal, governed by the Motor Vehicles and Transport Management Act (2049 BS) and NIA directives:

1. Mandatory Third-Party Liability Insurance

• Legal Requirement: Mandatory for all private and commercial motorized vehicles before registration or annual tax renewal.
• Statutory Limits:
  • Third-Party Death Restitution: Statutory compensation of Rs. 500,000 (Rs. 5 Lakhs) per person for third-party fatalities.
  • Medical Expense Limit: Up to Rs. 300,000 for hospital treatment of injured third parties.
  • Third-Party Property Damage (TPPD): Covers damage to third-party vehicles, street poles, or storefronts up to prescribed statutory caps.

2. Comprehensive (Own Damage) Motor Policy

• Coverage Scope: Combines mandatory Third-Party Liability with Own Damage (OD) coverage for physical damage to the insured vehicle caused by:
  • Accidental collision, overturning, or transit impact.
  • External fire, explosion, or self-ignition.
  • Burglary, housebreaking, or theft of vehicle.
  • Natural perils (earthquake, flood, storm, landslide).
  • Riot, strike, and malicious damage (SRCC endorsement).

3. NIA Tariff Guidelines & No-Claim Bonus (NCB)

• Tariff Rating: Regulated premium tariffs based on cubic capacity (cc) for two-wheelers and passenger cars, and gross vehicle weight (tonnage) for commercial trucks.
• No-Claim Bonus (NCB): Rewards accident-free drivers with escalating premium discounts (20% after year 1, up to a maximum of 50% discount after 5 consecutive claim-free years).

Case Analysis: Trishuli Hydroelectric Project

(a) CAR Material Damage vs. Delay in Start-up / ALOP (7 Marks)

+------------------------------------------------------------------------------------------------+
|                       HYDROPOWER ENGINEERING RISK ARCHITECTURE                                 |
+-------------------+------------------------------------+---------------------------------------+
| Policy Section    | Coverage Scope                     | Financial Compensation Trigger        |
+-------------------+------------------------------------+---------------------------------------+
| 1. CAR Material   | Direct physical loss or damage to  | Pays replacement and repair costs of  |
|    Damage         | civil works, tunnels, turbines.    | damaged assets back to sound state.   |
+-------------------+------------------------------------+---------------------------------------+
| 2. Advance Loss   | Pure economic loss of gross revenue| Pays standing fixed charges, ongoing  |
|    of Profits     | & debt interest caused by physical | bank loan interest, and lost net      |
|    (ALOP / DSU)   | damage delaying commercial launch. | operational profits during delay.     |
+-------------------+------------------------------------+---------------------------------------+

1. Assessing ALOP Claims:

• Prerequisite (The Marine/CAR Clause): ALOP claims are payable only if the underlying physical damage is recognized and settled under the CAR Material Damage policy.
• Time Deductible: ALOP policies feature a Time Deductible (e.g., first 30 or 45 days of delay are borne by the project sponsor).
• Measurement: Compensation covers the actual operational delay (e.g., 9 months minus 1-month deductible = 8 months) for verified ongoing bank debt interest payments and lost PPA generation revenues.

---

(b) Claim Settlement & Net Payout Calculation (7 Marks)

1. Adjusting Gross Claim Elements:

• Claimed Physical Damage = $\text{Rs. } 350\text{ Million}$
• Less Uninsured Batching Plant: Excluded because mobile contractor machinery must be insured under a separate Contractor’s Plant and Machinery (CPM) policy, not civil CAR.
• Surveyor’s Verified Physical Damage = $\mathbf{\text{Rs. } 300,000,000}$

2. Deductible Application:

• Policy Deductible = $10\%$ of claim amount, minimum $\text{Rs. } 10,000,000$.
• Calculated $10\%$ Deductible: $0.10 \times 300,000,000 = \mathbf{\text{Rs. } 30,000,000}$.
• Since Rs. 30 Million exceeds the Rs. 10 Million minimum, the applicable deductible is Rs. 30,000,000.

3. Net Claim Payable under CAR Material Damage:

$$\text{Net Claim Payable} = \text{Verified Loss} - \text{Deductible} = 300,000,000 - 30,000,000 = \mathbf{Rs.\ 270,000,000}$$

• Loss Borne by Project Developer: Rs. 30 Million deductible + uninsured batching plant replacement costs.

---

(c) Multi-Tier Reinsurance Program for Mega-Infrastructure Risks (6 Marks)

Because a Rs. 8.0 Billion hydropower project exceeds the capital retention capacity of any single Nepalese insurer, the lead underwriter must structure a multi-layered reinsurance program:

+-------------------------------------------------------------+
|               GLOBAL EXCESS OF LOSS REINSURANCE             |
|  - Layers: Rs. 1.0 Billion to Rs. 8.0 Billion               |
|  - Backed by International Reinsurers (Munich Re, Swiss Re) |
+-------------------------------------------------------------+
|                   SURPLUS TREATY REINSURANCE                |
|  - 10 to 20 Lines of Surplus Treaty Capacity                |
|  - Domestic Reinsurers: Nepal Re (30%), Himalayan Re (30%)   |
+-------------------------------------------------------------+
|                     PRIMARY QUOTA SHARE                     |
|  - Domestic Insurer Retention: 5% - 10% (Max Rs. 50-100M)   |
+-------------------------------------------------------------+

1. Primary Net Retention: The domestic insurer retains a conservative 5% (maximum Rs. 50–100 Million) matching its statutory net worth.
2. Proportional Surplus Treaty: Automatically cedes risk up to 10 to 20 times the insurer’s retention line to domestic reinsurers (Nepal Re and Himalayan Re) and regional treaties.
3. Catastrophe Excess of Loss (CAT-XL) Treaty: High-level non-proportional cover placed in international Lloyd’s/European reinsurance markets that absorbs catastrophic flood and earthquake losses exceeding treaty retentions.