The value of a insurance policy coverage at any time is the surrender value. The stipulated margin, usually 10% to 15% should be maintaining to the surrender value. By the surrender value, it is meant that the value which the company/corporation is prepared to pay to the assured on surrendering the policy. Normally a 3 year old policy acquires a surrender value.
Insurance coverage of the things offered as security is very important. If the goods are not properly insured, the banker’s ultimate objective of recovering money may not be possible. Usually the cost of insurance is born by the borrower. Regarding insurance coverage of the goods given as security, the following precautions may be undertaken.
- Policies must be taken out in the joint names of bank and the borrower or in the names of the bank for the account of the borrower. If the policy is in the name of the borrower, he should assign it in favor of the bank. The bank should get the assignment registered with the Insurance Company/Corporation. The only exception to this rule is made in the case of marine policies endorsed in blank. The original policy should remain in the custody of the bank. Due dates of the policies must be diarized to ensure that premiums are paid in time and receipt is kept with the documents executed by the party. Bank should maintain an Insurance Register wherein the particulars of all the policies are entered into.
- The banker should study the policy and ensure that the warranties and conditions are not violated by the borrower. The Insurance Company/Corporation may refuse to settle the claim when it arises, if any condition or warranty is not observed.
- Goods/commodities pledged/hypothecated should not be under-insured. They should be insured for the full value; otherwise, in the event of loss, the principal underlying the “Condition of Average” will apply when the Insurance Company/Corporation will not be liable for the full amount of the loss but will only reimburse the insured proportionately.
- Uninsured goods should not be allowed to be stored with insured goods. If they are stored in the same godown, the entire stocks would have to be fully insured.
- All policies must include the “Bank Clause”, also known as “Mortgage Clause” which generally gives better security to the bank. This clause provides, inter-alia, that notice in all matters shall be given to the bank by the Insurance Company/Corporation, and all claims shall be paid to the bank whose receipt shall be valid and complete discharge. Under this clause, the bank can settle or compromise the claim with the insurer without reference to the borrower. It also
protects the banker from anything done or omitted to be done by the borrower to the prejudice of the banker’s rights without his knowledge, provided he notifies the Insurance Company/Corporation as soon as he knows about the extra hazard and pays the extra premium, if any, on demand.
- If pledged goods are held in the custody of the clearing agents on behalf of the bank, a separate policy in the name of the bank, “A/C the borrower” should be taken.
- The goods or property, which is the subject-matter of insurance and the go-downs, where goods have been stored, must be correctly described in the proposal/policy. There should be no misrepresentation or misstatement on any point. They can avoid the contract on grounds of misrepresentation or fraud.
- In case of damage to the insured stocks or property, the Insurance Company/Corporation must be apprised immediately of the position, preferably by a telegram or over telephone. A letter of confirmation should invariably follow.
- In case a claim has been paid by the insurer, under a fire or any other type of insurance, the sum insured is reduced by the amount paid. If the policy has to be reinstated to the original amount, the insurer has to be approached for the purpose
and additional relative insurance policy duly assigned in his favor, should be handed over to him against his acknowledgement.
Margin and Drawing Power
Margin is the amount invested in the unit by the borrower himself and is asked for providing protection to bankers against a possible decline in value. It indicates the owner’s stake which very often governs his motivation. In other word, margin is a cushion against fluctuations in value of security. Difference between the value of the security and the amount up to which the borrower can draw is known as margin. On the other hand, the amount up to which the borrower can draw is called drawing power (DP). In other word value of the security less margin is DP. The drawing power of a limit is determined and fixed by the sanctioning authority, Margin will be determined on the basis of cost price and market price whichever is lower or any other prices as specified in the sanction letter. Percentage of margin depends on marketability and fluctuation in price of the security
Bangladesh Bank directives, credit worthiness of the borrower and banker-customer relationship. All release of limit must be channelized through drawing power register.