Have you ever thought about what happens when several shipments covered by the same policy meet up in one place on their way? This is where the marine insurance accumulation clause comes in handy. It is always moving for goods in the world of international trade and logistics.
Some shipments may have their own insurance, but sometimes events occur that bring a large number of insured goods together in one place, which significantly increases the insurer's risk. The accumulation clause is a key component of marine insurance policies that cover this type of risk.
What is the accumulation clause in marine insurance?
The accumulation clause in marine insurance limits how much an insurer pays when multiple shipments face the same risk under one policy. It sets a maximum payout amount, regardless of the number of claims resulting from a single event or location.
This clause provides insurance companies with significant protection in the event of an incident, such as a storm or fire, that damages multiple shipments stored together. In this case, the insurance company only has to pay up to the agreed-upon maximum amount, even if the total loss exceeds the policy limit.
How accumulation clause works in marine insurance?
The accumulation clause serves as a protective mechanism for insurance companies, placing a cap on their financial liability. Here is how it typically works in practice:
- It limits the amount the insurer must pay under the policy, even if there are multiple claims from the same event or location.
- The clause applies when a single loss event, like a fire, explosion, or natural disaster, affects multiple consignments stored in the same warehouse, port, or on the same ship.
- The insurer's maximum liability is clearly defined, no matter how much the goods affected by a single peril are worth.
For example, think of a business owner in India who has set up to send several shipments of goods from Mumbai to London. Their marine insurance policy only covers up to ₹1 crore per location or event. If an unexpected event, like a fire at the port, destroys several shipments worth more than ₹1 crore, the accumulation clause would limit their claim to ₹1 crore, no matter how much the goods were worth.
Key benefits of accumulation clause
While the accumulation clause primarily protects insurers, it offers several advantages to policyholders as well:
- Clear limit knowledge: The clause sets firm boundaries on how much money can be claimed. This helps companies better organise their safety plans. When businesses understand exactly what their insurance covers, they can make more informed choices about protection.
- Better distribution of goods: Companies tend to ship their goods at different times and to different places because they know there is a limit on claims for goods in one place. This smart move makes it less likely that they will lose everything at once.
- Matches worldwide rules: This clause ensures that shipping insurance operates in accordance with international standards. This makes the system more reliable because everyone knows the rules in the same way.
- Keeps insurance firms healthy: The clause protects insurance companies from bankruptcy by limiting the amount they must pay for a single major accident. This keeps them in business and allows them to continue offering insurance to those who need it.
How to manage accumulation risks in marine insurance?
To better handle the risks that come with the accumulation clause, companies should think about using the following strategies:
- To lower the risk of losing everything at once, companies should not have all of their goods in transit at the same time or stored in the same place.
- As a business grows, it should periodically review its insurance policy limits to ensure they remain sufficient for the value of the goods being shipped.
- Companies should consider obtaining additional or umbrella policies that provide more protection than their primary single transit marine insurance policy.
- Seeking advice from marine insurance brokers or risk management experts can help develop a comprehensive risk management plan.
IRDAI on accumulation clause
The Insurance Regulatory and Development Authority of India (IRDAI) is responsible for regulating the insurance industry in India. IRDAI doesn't set rules for every part of an insurance policy. Still, it ensures that all insurance products sold in India are fair, clear and protect the best interests of policyholders.
The general rules set out by IRDAI for policy wording, clarity, and disclosure also apply to the accumulation clause. The policyholder should be provided with a clear explanation of the accumulation clause's terms, including what it covers, the extent of coverage and any applicable conditions.
Conclusion
The accumulation clause is a crucial component of marine insurance policies that people often overlook. This is especially true for companies that conduct business globally. It acts as a safety net by giving coverage when all the insured items are in one place, which makes them more likely to be damaged.
The clause may limit the total payout for multiple shipments affected by a single event, but it also encourages businesses to employ smart risk management techniques, such as sending different types of shipments and regularly reviewing policy limits.
Disclaimer: The information provided in this blog is for educational and informational purposes only. It is advised to verify the currency and relevance of the data and information before taking any major steps. Please read the sales brochure / policy wordings carefully for detailed information about on risk factors, terms, conditions and exclusions. ICICI Lombard is not liable for any inaccuracies or consequences resulting from the use of this outdated information.