The Franchise Clause in Insurance applies the minimum amount of claim acceptable by the insurer. Generally, insurers decide the franchise limit based on the type of insurance and the feasibility of recovering the loss from the erring party.
The following reasons justify the use of the franchise clause in Insurance :
- The insurer will try to recover/salvage the loss
- The cost of recovery/salvage should be lower than the claim payable
- A higher recovery cost affects the insurer’s sustainability
The franchise Clause in Insurance was usually applied to marine policies to reduce the number of claims in a policy year and to maintain the above justifications. Nowadays very few insurers use it for Marine Cargo and Hull Policies. However, still, use while covering the ship operator’s interest in the cargo.
Franchise works as a percentage of the sum insured, below which no claim is admissible by the insurer. However, when the claim amount is beyond the franchise limit, the entire claim is admissible by the insurer.
When a claim becomes payable deductible (see What is Deductible?) & co-pay (see What is Co-Pay?) come into the picture if applicable.
Additional Read: For what duration Marine Inland Transit Insurance clauses apply?
A Case for Franchise Clause in Insurance
Ankur Jain is an exporter and uses the services of shipping company Chandan Shipping for his regular shipments. The usual size of shipment is approximately Rs. 5.7 crores (CIF) for Ankur.
His insurer uses a franchise clause of 10% of the S.I. (for shipments above Rs. 5 Crores, with other rates for lower-value shipments) for covering his cargo to ensure that in the case of damage to the goods, the claim is sufficiently large.
The insurer, as explained by the advisor, is to reduce the burden of filing small claims.
On a voyage to Europe, the pirates hijacked one of the ships near Nigerian cost. And it remained stranded for nearly six months. While most of the heavy shipment made it to a European port, Ankur’s consignment of clothes went completely.
Since the loss was more than 5 lakhs (10% of Sum Insured), the insurer reimbursed the whole amount plus 10% for loss of profit to Ankur.