Alternative Basis Clause

Which of these three wordings has the least contract certainty?

Wording 1
“It is agreed and declared that, whenever found necessary, the term ‘Output’ may be substituted for the term ‘Turnover’ and for the purpose of this policy ‘Output’ shall mean the sale value of goods manufactured by the ‘Insured’ in the course of the business at the premises,”

Wording 2
“At the option of the insured, the term ‘Output’ may be substituted for the term ‘Turnover’ and, for the purposes of this section, output shall mean the sale or transfer value, as shown in the insured’s books, of goods manufactured or processed by the insured at the premises.”

Wording 3
“Output Basis of Loss Settlement: Subject to agreement between the Insured and Insurers the term Output may be substituted for the term Turnover. Provided that
Output shall mean the sale or transfer value of goods manufactured or processed by the Insured in the course of the Business at the Location shown in the Schedule,
Only the term of Output or the term of Turnover shall be operative in connection with any one Accident.”

Wording 2 clearly mentions insured can decide and Wording 3 clearly says if either insured or insurer objects, Output basis cannot be changed to Turnover basis.

Wording 1 has the least contract certainty, since it leaves it vague as to who has to find it necessary-insured or insurer or loss adjustor. This is the Indian market wording.

One of the insured’s once told me: “Why do I require contract certainty? I know how to get my claims”.

There are many believers in Indian Insurance world that it is a relationship business and with relationships, it is better not to have contract certainty, since it allows flexibility to interpret either way.

This blog is not going into the aspect whether underwriters should agree for Output basis or should insist only for Turnover basis. That subject could be for another blog some other day,

There cannot be a better basis than “Turnover Basis” To quote “Denis Riley”, the authority on business interruption:

” …….Use of various alternative forms of specifications which have had at best limited appeal over past years has declined to the point of now being of little more than historic interest. To recall them indicates the evolution over some 80 years to the present standard use of the turnover basis …….”.

Blog by Atmaram Cheruvu