General Insurance

The Franchise Clause applies the minimum amount of claim acceptable by the insurer. Generally, insurers decide the franchise limit based on the type of insurance and feasibility of recovering the loss from the erring party.

Following reasons justify the use of franchise clause:

  • Insurer will try to recover/salvage the loss
  • Cost of recovery/salvage should be lower than the claim payable
  • A higher recovery cost affects the insurer sustainability

This clause was usually applied to marine policies to reduce the number of claims in a policy year and to maintain above justifications. Nowadays very few insurers use it for Marine Cargo and Hull Policies, however, it is still used while covering 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.

A Case for Franchise Clause

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, this is done to reduce the burden of small claims being filed.

On a voyage to Europe, one of the ships was hijacked by the pirates 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 was completely gone.

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.

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