CHAPTER 6

PROPERTY AND LIABILITY INSURANCE

Property and liability insurance consists of those forms of insurance that are designed to provide
protection against losses resulting from damage to or loss of property and losses resulting from a legal
liability.
1. Property Insurance
It is when property may be exposed to a wide range of perils – fire, theft, perils of the sea and damage
by persons (whether accidental or carelessness).
i. Fire Insurance:
It is designed to indemnify the insured for loss of, or damage to buildings and personal property by fire,
lighting, windstorm, hail, explosion and a vast array of other perils. The coverage may be provided for
both the direct loss (that is actual loss represented by the destruction of the asset) and indirect loss
(defined as the loss of income and or extra expenses caused by the loss of use of the asset protected).
Originally, only fire was an insured peril, but the number of perils insured against has gradually been
extended. Business may therefore, purchase fire insurance contracts covering their building and its
contents to both the peril of fire and lightning. The standard fire policy promises in its insuring clause to
indemnify the insured for “direct loss by fire, lightning and by removal from premises endangered by
the perils insured against.”
Insurers, however, may offer protection against a very great number of perils other than fire and
lightning by extending the contract in relation to the interest of the insured through additional premium
payment. For additional premium the standard fire policy may be extended to cover any of the
following perils: windstorm, explosion, damage by aircraft, damage by vehicle, flood, earthquake, fire
and shock, bursting of pipes and water damage etc.
Not all fires are covered under the fire insurance contract, but the exclusions are few:
 Fires caused by war.
 Fires intentionally set by public authorities, and
 Fires set intentionally by the insured.
Policy Format: Most of the first page of the standard fire policy is a declarations section in which it is
printed such information as the insured’s name and address, the policy inception and expiration dates,
the description and location of the property covered, the peril insured against, the amount of insurance

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applicable to each peril, and the code numbers of the forms and endorsements that are attached. The
standard fire policy plus the descriptive form may be modified by one or more than forms or
endorsements. These other forms may add, for example, business interruption insurance or extra
expense insurance. Endorsements may increase or decrease the coverage. For example, they may add
additional peril or exclude some parts of a covered building, such as the foundations.
The first page also contains a brief insuring agreement that states the insurer’s basic promise. The
second page describes such matters, as perils not included, uninsurable and excepted property,
cancellation, and requirements in case a loss occurs.
Types of Fire Policies:
There are different types of fire policies; some of the important polices include the following:
a) Valued Policy: This is a policy where the value of the property to be insured against fire and
allied perils is determined at the time the policy is issued. Valued policy also referred to as
“ordinary fire insurance policy.” The insurer pays to total value of damaged property irrespective
of the market value of the property at the time of destruction or loss.
b) Valuable (Automatic Reporting) Policy: Under this policy the indemnity to be paid by the
insurer is to be determined at the time of loss or after the loss has taken place. This policy is
often used for properties whether their value cannot be accurately determined at the inception of
the contract, example a building in process.
c) Floating Policy: Under this policy the insurer covers the interest of the insured on assets in
different locations.
d) Comprehensive Policy: This form of fire insurance policy give full protection, not only against
the risk of fire but all related perils such as riot; theft; damage by vehicles, animals or articles
from the air, including aircraft and the like.
e) Specific Policies: Under these policies the insured would get protection to a given type of
property in a given location for a specified value of property.
ii. Marine Insurance:
It is designed to protect against financial loss resulting from damage to, or destruction of owned
property, due to the peril primarily connected with transportation. It is a contract of transport insurance
whereby the insurer undertakes to indemnify the insured in the manner and to the extent thereby agreed,
against losses and damages involved in being transported. In consideration of the payment of a certain

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sum called the “premium” the insurer (underwriter), agrees to indemnify the insured (the client) against
loss or damage caused by certain specified peril termed “maritime perils”.
The marine cargo policies of Ethiopian Insurance Corporation are internationally accepted, worded and
standardized insurance policies. Accordingly, the coverage it affords is to indemnify the insuring public
as per the terms, conditions, warranties, and exceptions of the policy in respect of loss of or damage to
the cargo insured mainly resulting from maritime perils: (heavy weather, stranding, collision, etc.,) or
inland-transit accident (such as collision, overturning of the carrying conveyance, explosions, fire, theft,
non-delivery of the goods etc.,)
Marine insurance is divided into two classes:
 Ocean Marine and
 Inland Marine.
Ocean Marine Insurance: is a contract concerned primarily with water transportation. For a
considerable time ocean marine insurance was the only kind of modern insurance. Insurance has been
developed and has attained a high degree of refinement in modern-day commerce. As world trade grew
and values at risk became larger, the needs for coverage become more apparent. Larger ships and more
refined instruments of navigation made long voyages possible, and with this development insurance
protection was looked upon almost a necessity.
Types of Coverage:
The four chief interests to be insured in an ocean voyage are:
 The vessel, or the hull
 The cargo
 The shipping revenue or freight received by the ship owners.
 Legal liability for proved negligence.
If a peril of the sea causes the sinking of a ship in deep water, one or more of these losses can result.
However, each of these potential losses can be covered under various insurance policies.
Hull Policies: Policies covering the vessel itself or hull insurance are written in several different ways.
The policy may cover the ship only during a given period of time, usually not to exceed one year. The
insurance is commonly subject to geographical limits. If the ship is laid up on port for an extended
period of time, the contract may be written at a reduced premium under the condition that the ships
remain in port. The contract may cover a builder’s risk while the vessel is constructed.

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Cargo Policies: Contract insuring cargo against various types of loss may be written to cover only
during a specified voyage, as in the case of hull contract, or on an open basis. Under the open contact,
there is no termination date, but either party may cancel upon giving 30 days written notice to the other,
otherwise the insurance is continuous. All shipments, both incoming and outgoing, are automatically
covered. The shipper reports to the insurer at regular intervals as to the values shipped or received
during the previous period.
Cargo policies written on a voyage basis cover that single voyage, but open policies usually cover all
shipments made on and after a certain date. If an open policy is cancelled, the coverage continues on
shipments made prior to the cancellation date.
Freight Coverage: The money paid for the transportation of the goods, known as freight, is an
insurable interest because in the event that freight charges are not paid, someone has lost income with
which to reimburse expenses incurred in preparation for a voyage. The earning of freight by the hull
owner is dependent on the delivery of cargo unless this is altered by contractual agreements between the
parties. If a ship sinks, the freight is lost and the vessel owner loses the expenses incurred plus the
expected profit on the venture. The carrier’s right to earn freight may be defeated by the occurrence of
losses due to perils ordinarily insured against in an ocean marine insurance policy. The hull may be
damaged so that is uneconomical to complete the voyage, or the cargo may be destroyed, in which case,
of course, it cannot be delivered. Also the owner of cargo has an interest in freight arising from the
obligation to pay transportation charges. Freight insurance is normally made a part of the regular hull or
cargo coverage instead of being written as a separate contract.
Legal Liability for Proved Negligence: In ocean marine insurance policies; the hull owner is protected
against third party liability claims that arise from collisions. Collisions loss to the hull itself is included
in the peril clause as one of the perils of the sea. The liability insurance is intended to give protection in
case the ship owner is held liable for negligent operation of the vessel which is the proximate cause of
damage to certain property of others. The vessel owner or agent of that owner who fails to exercise the
proper degree of care in the operation of the ship may be legally liable for damage to the other ship and
for loss of freight revenues.
Loss Settlement:
If the cargo is totally destroyed, the insurer must pay the face value of the policy. If the cargo is only
partially damaged the insured and the insurer must agree on the percentage of damage. If they cannot

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agree, the damaged cargo is to be sold for the account of the owner and the amount received compared,
with what would have been received had the cargo been in sound condition. In either case, the liability
of the insurer is determined by applying the percentage of damage to the amount of insurance.
Illustration;
Assume that a cargo insured for birr 4000 could have been sold for birr 6000 in sound condition but it
worth only birr 4500 in damaged condition. Since the damage is 25 %, the insurer must pay 25% of birr
4000 or birr 1000 computed as follows;
Value at sound condition Birr 6,000
Value at damaged condition Birr 4,500
Loss Birr 1,500
Loss settlement= 1500/6000 X 4000 = Birr 1000
Inland Marine Insurance: Inland marine cargo insurance covers shipments primarily by land or by air.
Although the trucker, railroad, or airline may be common carrier with the extension liability (called
liability exposures), the shipper may still be interested in cargo insurance because:
 It is usually more convenient to collect from an insurer than a carrier.
 A common carrier is not responsible for perils such as an act of war, exercise of public authority,
or inherent defects in the cargo.
No one cargo insurance contract exists. Instead, different insurers may issue different contracts, and a
given insurer will tailor the contract to the insured’s needs. A convenient way to classify the contracts is
according to the type of transportation covered. One or more of the following modes of transportation
may be covered – railroad, motor truck, or air. Shipments by mail are covered under separate first –
class mail, parcel port, or registered mail insurance.
iii. Fidelity Guarantee Insurance:
Fidelity guarantee insurance indemnifies an employer for any loss suffered at the hands of dishonest
employees. It provides guarantee against loss through the dishonesty or incapacity of individuals who
are trusted with money or other property and who violate this trust. Cashiers and other who handle
money, and other persons employed in positions of trust, are frequently required by the employers to
provide security as protection against their personal dishonest usually in the form of fidelity guarantee
policy. The policy indemnifies the employer against losses from the dishonesty of his employees. The

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employer himself often takes out the policy. He may insure a number of employees either individually
or in a group basis under a variety of policies.
Unlike other policies, fidelity guarantee policies specify a time limit to discover the loss and report it to
the insurer after the resignation, dismissal retirement, or death of the employee in question. Hence,
while the insurer undertakes to make the insured’s financial losses lighter, it is also a requirement that
the insured should:
 Inform the insurer of such fraudulent act immediately upon discovery.
 Either obtain admission of fraud or take appropriate legal action to establish fraud,
 Cooperate with the insurer to bring the defaulter before the court of law.
In addition, before accepting the risk the insurer considers employers type of establishment, methods of
selecting employees, working conditions, employments and benefits in relation to the responsibility
assigned, supervision and control measures effectiveness.
iv. Theft Insurance:
Although theft is generally one of the perils covered under an all risks policy, the contract usually
excludes or limits the amount of protection on certain types of property, such as money, that is highly
susceptible to theft losses. Theft insurance protects a business against losses by burglary, robbery, or
some other form of theft by persons other than employees. Fidelity guarantee insurance or dishonesty
insurance covers losses caused by dishonest acts of employees.
Burglary is the act of unauthorized entry, with criminal intentions into any building or residence. It is
the unlawful taking of property from within premises closed for business, entry to which has been
obtained by force. There must be visible marks of the forcible entry. Thus, if a customer hides in a
store until after closing hours, or enters by an unlocked door, steals some goods, and leaves without
having to force a door or a window, the definition of burglary is not met under a burglary policy.
Robbery, on the other hand, is defined to mean the unlawful taking of property from another person by
force, by threat of force, or by violence. Personal contract is the key to understanding the basic
characteristic of the robbery peril. However, if a burglar enters a premise and steals what wallet of
sleeping night guard, this crime is not one of robbery because there was no violence or threat thereof.
The person robbed must be cognizant of this fact. On the other hand if thief knocks out or kills the
guard and then robs the guard or the owner, the crime would be classed as robbery. Robbery thus means
the forcible taking of property from a messenger or a custodian.

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According to EIC burglary policy is does not cover losses or theft committed by:
 Members of the insured’s household,
 The insured himself or his assignee.
 Theft connected with war or any kind of population uprising, or
 Theft of valuables including documents and works of art unless agreed pre hand.
In addition, failure to disclose materials facts at the time of writing the policy will also make any theft
claims null and void.
2. Liability Insurance:
It is contract that protects the insured against legal responsibility of losses to the person or property of
others.
 Automobile Insurance:
Most automobile insurance contracts are schedule contracts that permit the insured to purchase both
property and liability insurance under one policy. The contract can be divided, however into two
separate contracts. One is providing insurance against physical damage to automobiles and the other
protecting against potential liability arising out of the ownership or use of an automobile.
The objective of automobile insurance is to indemnify the insured against accidental loss or damage to
high auto and / or his liability at law for bodily injury or material damage caused by the use of motor
vehicle, subject to the terms and conditions and to the cover granted. There are two main types of
insurance covers in motor commercial and motor private insurance, i.e. Comprehensive cover and Third
party cover.
 Comprehensive Cover: A comprehensive cover provides protection against a wide range of
contingencies. It includes indemnity in respect of the insured’s legal liability for death or bodily
injury or damage cause to the property of third parties arising out of the insured’s vehicle. The
policy also indemnifies the insured in respect of all damages to the vehicle caused by an
accidental, external physical means as a result of collision, overturning, fire self-ignition,
lightning, explosion, and burglary. The policy excludes, among other things, the following:
 Consequential loss sustained by the insured.
 Wear and tear, depreciation of motor vehicle,
 Mechanical or electrical breakdown or failure of any part of a motor vehicle,
 Death of or injury to members of insured family or his employees,

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  Damage to property of the insured or held by him in trust or in custody.
 Third Party Cover: There are two parties involved in an insurance contract, the insurer and the
insured. Accordingly, any other person who may become linked in some way with the insurance
is regarded as third party. A third party only policy covers the insured’s legal liability (i.e.
property damage, death, and injury) towards other people in the event of an accident arising out
of the use of a motor vehicle. A third party policy may be extended to include at an additional
premium the policy holder’s vehicle against the risks of fire and theft as follows:
 Third party, fire and theft.
 Third party and fire.
 Third party and theft.
The basic cover guaranteed by the Ethiopian Insurance Corporation’s policies can be extended to cover
additional risks at an additional premium.
Classification of Risks:
There are various categories of automobile risks and a distinction is made in accordance with the use of
type of the vehicles. The main classifications are as follows:
Private Vehicles: A motor vehicle used solely for private (social, domestic, pleasure, professional
purpose or business calls of the insured) purposes are classified as “private vehicles” and are insured
under the “private motor vehicles policy.” The term “private purposes” does not include use for hiring,
racing, and carriage of goods in connection with any trade or business.
Commercial Vehicles: A wide range of vehicles which carry goods and passengers are classified under
this heading and different rates of premium are supplied depending on their use and type.
 Aviation Insurance:
It is a comparatively recent phenomenon that has been developing with the development of passenger
plans, particularly “Jumbo Jets.” The overall increase in the number of different passenger plans and the
increase in their value called for aviation insurance. Aviation insurance in insurance provides protection
against losses or damages to the different types of passengers, cargo planes and associated losses.
Like automobile insurance, aviation insurance includes both property insurance, on the planes and
liability insurance.
Types of Policies:
The most common types of policies under aviation insurance are:

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  Aircraft Comprehensive Policy.
 Freight Liability Policy which includes airmail liability policy.
Aircraft Comprehensive Policy: This policy covers against three types of potential losses.
 Accidental damage to the aircraft, where protection is provided for damage to the aircraft by
accidents except those that are specifically excluded on the policy.
 Third party legal liability, where the insurer assumes the responsibility to indemnify the insured
for death of or bodily injuries to third parties (excluding passengers) and ground damage.
 Legal liabilities of the insured in respect of death of, or bodily injuries to passengers, passenger’s
baggage and personal effects, which are registered, are also covered by the insurance.
Freight Liability: In addition to passengers and crew, an aircraft carries cargo and mail. The airline
operating the aircraft is liable if the cargo or mail is lost or damaged. The freight liability policy
provision requires the insurers to indemnify the insured against all sums which the insured may become
legally liable to pay to owner of cargo as a result of loss or damage or mishandling of the cargo. The
limit to the amount of indemnity is generally stated in the freight liability policy.
 Worker’s Compensation/ Employers’ Liability Insurance
Worker’s compensation insurance covers loss of income, medical, and rehabilitation expenses that result
from work related-accidents and occupations disease. Insured workmen always retain the right to claim
damages. Employers’ liability claims become much more common aided by Trade Unions.
If an employee is killed or injured at work as a result of an accident arising from defective premises or
equipment that a court may award damages against the employer, any employer is liable for an
employee who suffers accidental bodily injury or disease while working for him. The employee is thus
entitling to compensation for injuries that may be temporary or permanent. This compensation being
unforeseen expenditure, the employer finds it difficult to compensation such losses especially when it
involves a high amount. An employer may therefore, take out an insurance policy insuring himself
against such claims by his employees.
The insurance which provide protection for injuring to employees while at work, and as a result make
the employer liable for the loss, is called worker’s compensation insurance. In addition to buying
insurance, the insured (employer) can lower the loss claims by:
 Providing a safe place of work to his employees.
 Proper plant tolls, machinery and working implements, and

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  Hiring competent and sober fellow employees.
 Public Liability Insurance
Public liability insurance was developed with employee’s liability insurance. Once, public opinion had
accepted the morality of being able to insure one’s liability, and the availability of such insurance
became known, the business grew rapidly.
The policy provides compensation for legal liability for death, injury, or disease to people other than
employees (which should be covered by employer’s liability policy). Public liability insurance provides
what is popularly termed “third party cover”. It indemnifies the insured in respect of his legal liability
for accidents to members of the public, or for damage to their property, occurring in circumstances set
out in the policy. Under public liability insurance, policies are available to cover liabilities attaching to:
 Pedal Cyclists.
 Private individuals. The so called “personal liability” policy is available to protect private
persons from claims arising due to injury caused by such things as polished floor, a loose roof
tile or by pet animal. A pedestrian, for example, can incur heavy liabilities by causing a serious
road accident.
 Product Liability: Liability arising out of defects of goods produced or sold.
 Professional men such as doctors, dentists, solicitors, and bankers may take out policies to
protect themselves from claims arising out of negligence or mistake committed in the exercise of
their professional duties.
It should be noted that this form of cover might include or be included with other risks. For example, a
householder’s policy covering loss or damage to the building and / or contents can be extended to cover
the personal liability of the owner and his family towards the public. Whereas liability arising from the
use of motor vehicles is always exclude, and must be covered by a separate motor policy.

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