Maritime transport is known to have a higher degree of risk as compared to other modes of transportation for goods and commodities. Ships and cargos are constantly exposed to various problems, including adverse weather conditions, theft, collisions, cargo spillage, or spoilage.
That is why every party involved in this transportation must invest in marine insurance online from their trusted insurer.
However, simply buying marine insurance protection is not enough. Businesses should also pay attention to the terms and clauses. One such importance marine clause is the franchise clause. Let’s discuss it in detail.
What is the Franchise Clause in Marine Insurance?
The franchise clause in marine or transit insurance communicates that the policyholder must pay for the amount of loss or damage that occurs up to a pre-agreed-upon amount. If the loss or damage exceeds the agreed amount, then it will be covered by the insurance company.
The amount of the franchise gets determined on the basis of sum insured percentage. The insurance company is not liable to pay for any loss or damage if it is below the agreed-upon franchise amount.
Example:
Mr A is a furniture importer who has bought marine insurance online to safeguard his goods. The sum insured amount of the policy is ₹50 lakhs and has a franchise clause of 5% making the minimum threshold amount for the franchise clause ₹2,50,000.
Now, to understand how the franchise clause can work for Mr A, let us take two situations.
Situation 1: Mr A received an import of antique furniture. Upon arrival, it is discovered that he had incurred a loss of ₹1,00,000 due to damage to goods during transit. Because this loss amount is less than the agreed-upon franchise amount of ₹2,50,000, the insurance company will not pay this amount. Mr A has to pay this loss himself.
Situation 2: Mr A, upon import arrival, declares the loss of ₹6,00,000 to the insurance company. In this situation, the loss amount exceeds the franchise amount of ₹2,50,000. It means the insurance company is liable to pay the entire loss amount, provided that all policy terms are fulfilled.
Reasons to Use Franchise Clause in Marine Insurance
These are the justifiable reasons for which the franchise clause is used:
- The cost of recovery or salvage should be lower than the claim payable
- Having a higher recovery cost affects the insurance company’s sustainability
- The insurance company will try to recover or salvage the loss
Typically, the franchise clause in insurance is applied to marine and transit insurance to reduce the number of claims per year and justify the reasons mentioned.
Although the use of this clause is reduced nowadays, some insurance companies still employ it. Therefore, it is essential to read policy documents carefully when purchasing marine insurance online.
Summing Up
A franchise clause in marine insurance may be useful in some cases, but one should consider all available options before making a final decision. If there is a franchise clause in your plan, you have to pay for the losses below the agreed-upon franchise amount yourself.
On the other hand, if you suffer a substantial loss exceeding the franchise amount, the insurance company will cover all the losses.
In such cases, choosing a reliable insurer becomes crucial, someone as TATA AIG. They are transparent in their policy wordings. Most importantly, their transit insurance is known for providing coverage against a wide range of risks, offering flexibility tailored to business needs. The best part is that they offer competitive rates, making their policy affordable for businesses and individuals of all sizes.