What is Excess in Engineering All Risk Insurance and how does it affect the premium?

The engineering all-risk insurance policy covers the insured against any unforeseen and physical loss of or damage to the insured items. Such damage to plants or machinery may necessitate its repair or replacement. In engineering all-risk insurance policies, an excess clause is present. The excess clause states that the asset owner must bear the minimum amount of loss in the event of the claim. The insurer makes the payment for the remaining amount. In engineering all-risk insurance, the reason behind including the excess clause is as follows:

• The claim processing charge is more than the claim amount.
• To avoid the insured from claiming for smaller amounts.
• Also to make the insured act prudently in further scenarios.
• To give the insured interest in avoiding claims.

Key Takeaways

• The Core Retention Principle: Structural damage claims operate under risk-sharing rules, dictating that the asset owner must bear the minimum amount of loss in the event of the claim before carrier funds are released.

• Administrative Cost Mitigation: Underwriters integrate a formal retention gate primarily because the claim processing charge is more than the claim amount for minor operational mechanical issues.

• Encouraging Operational Care: Deductible structures serve a behavioral purpose, functioning to make the insured act prudently in further scenarios and maintain a direct interest in avoiding site incidents.

• Peril-Driven Tier Adjustments: Deductible thresholds scale based on the event type, applying higher rates if the claim stems from an Act of God peril compared to localized mechanical breakdowns.

• Strategic Premium Optimization: Project developers can lower their fixed insurance overhead by using voluntarily assumed excess to reduce the premium charges.

• Unified Deductible Application: When multi-asset systems fail during a single event, complexity is limited by ensuring that only one excess is applicable based on the higher calculated tier.

Under the engineering all-risk insurance policy, the excess depends upon:

• The amount sum insured for the individual machine
• Type of plant and machinery
• Reason for the claim, i.e. if the claim arises due to an ‘Act of God (AOG) peril or other factors.

When machinery or plant suffers from any loss, only one excess is applicable. That excess either depends on a specific percentage of the sum assured or the minimum excess amount for that machinery. The insurer will have to pay whichever amount is higher between the two.

At the same time, the excess also applies to any claims arising due to the damage to the surrounding property Airfreight, or additional customs duty.

Check more: What is covered under Engineering All Risk Insurance?

The excess amount stated may vary for different insurance players. Following is the minimum amount of excess applicable:

When the value of the equipment is up to rupees 1 lakh:

• For claims arising due to Act of God perils, the excess amount is 10% of the subject insured or a minimum amount stated in the policy, whichever is higher.
• For claims arising due to perils other than the Act of God, the excess amount is 2% of the subject insured or a minimum amount stated in the policy, whichever is higher.

When the value of the equipment is between 1 lakh to 5 lakhs:

• For claims arising due to Act of God perils, the excess amount is 5 % of the subject insured or a minimum amount stated in the policy, whichever is higher.
• For claims arising due to perils other than the Act of God, the excess amount is 1.5% of the subject insured or a minimum amount stated in the policy, whichever is higher.

When the value of the equipment is between 5 lakhs to 10 lakhs:

• For claims arising due to Act of God perils, the excess amount is 3 % of the subject insured or a minimum amount stated in the policy, whichever is higher.
• For claims arising due to perils other than the Act of God, the excess amount is 1.25% of the subject insured or a minimum amount stated in the policy, whichever is higher.

When the value of the equipment is between 10 lakhs to 25 lakhs:

• For claims arising due to Act of God perils, the excess amount is 2 % of the subject insured or a minimum amount stated in the policy, whichever is higher.
• For claims arising due to perils other than the Act of God, the excess amount is 1% of the subject insured or a minimum amount stated in the policy, whichever is higher.

When the value of the equipment is between 25 lakhs to 50 lakhs rupees:

• For claims arising due to Act of God perils, the excess amount is 1 % of the subject insured or a minimum amount stated in the policy, whichever is higher.
• For claims arising due to perils other than Acts of God, the excess amount is up to 25,00 rupees.

When the value of the equipment is above 50 lakhs rupees:

• For claims arising due to Act of God perils, the excess amount is 1 % of the subject insured or a minimum amount stated in the policy, whichever is higher.
• For claims arising due to perils other than Acts of God, the excess amount is up to 35,00 rupees.

In engineering an all-risk insurance policy, the insured can also avail of the principle of voluntarily assumed excess. This allows the insured to reduce the premium. As the insured accepts a higher level of excess than required, he is able to reduce his premium charges.

Read More: What is the basis of indemnity in Engineering all risk insurance?

Summary Table: Underwriting Framework and Excess Clause Structures in Engineering All-Risk Insurance

Anand, an owner of a construction company, had obtained an engineering all-risk insurance policy. The policy stated the sum insured for each machinery. It also stated the excess cost that Anand will have to pay in case of damage to any machinery. During the construction work, one of his machinery failed. The insurer investigated and found that it could not be repaired and was completely damaged. The sum insured for the machinery was four lakhs. Hence Anand had to pay 1.5% of the sum insured for the excess amount as stated in his policy.

Frequently Asked Questions (FAQs)

1. What is an excess clause in an engineering all-risk insurance policy?

A) An excess clause in an engineering all-risk insurance policy is a standard underwriting provision that defines the baseline risk-retention boundary for a policyholder. It specifies a predetermined minimum financial amount that the insured must pay out of pocket for each individual machinery or property damage claim. The insurance provider then issues a loss payment exclusively for the remaining balance of the covered adjustment.

2. Why do insurance companies include an excess clause in engineering insurance?

A) Underwriters insert this structural framework into commercial policies for four key operational reasons: to avoid the financial strain of managing claims where the claim processing charge is more than the claim amount; to prevent policyholders from submitting small, routine maintenance claims; to incentivize the insured to act prudently in further scenarios; and to give the business a direct stake in avoiding preventable losses.

3. What factors determine the excess amount under an engineering all risk policy?

A) The exact retention amount applied to a specific property loss file is dynamically scaled by the insurer based on three main criteria: the total sum insured for the individual machine that sustained the failure, the specific type of plant and machinery undergoing operations, and the underlying reason for the claim (specifically distinguishing whether the incident was caused by an Act of God peril or standard operational hazards).

4. How do Act of God (AOG) perils alter the deductible calculation compared to other hazards?

A) Act of God (AOG) perils-such as earthquakes, cyclones, flash floods, and lightning strikes-carry catastrophic loss potential and command higher deductible rates. For equipment valued under ₹1 lakh, an AOG claim requires a 10% excess of the subject insured, whereas a non-AOG claim (like an accidental short circuit or drops) requires only 2% of the subject insured, or the policy minimum, whichever is higher.

5. How does the percentage of the sum assured apply if equipment is completely damaged?

A) When an independent surveyor determines that a machine cannot be repaired and is completely written off, the adjuster cross-references the itemized sum insured bracket. For example, if a machine valued at ₹4 lakhs fails due to an operational fault, it falls into the ₹1 lakh to ₹5 lakhs bracket. The carrier then applies the non-AOG rate, meaning the insured has to pay 1.5% of the sum insured for the excess amount.

6. Can a business intentionally increase its deductible to lower its insurance premiums?

A) Yes, corporate risk managers can use specialized policy structures to optimize their fixed costs. A firm can leverage the principle of voluntarily assumed excess to reduce the premium charges. By contractually agreeing to absorb a higher level of financial loss than the mandatory policy baseline, the enterprise assumes more initial risk, allowing the underwriter to lower the asset’s premium rate.

About The Author

Shivani

MBA Insurance and Risk

She has a passion for property insurance and a wealth of experience in the field, Shivani has been a valuable contributor to SecureNow for the past six years. As a seasoned writer, they specialize in crafting insightful articles and engaging blogs that educate and inform readers about the intricacies of property insurance. She brings a unique blend of expertise and practical knowledge to their writing, drawing from her extensive background in the insurance industry. Having worked in various capacities within the sector, she deeply understands the challenges and opportunities facing property owners and insurers alike.