Introduction

Property damage (also known as material damage) policy indemnifies the insured in the event of accidental damage to the physical assets of the business. It pays for the repair or replacement of assets damaged or lost by a peril (or risk) insured against.

The main subjects of property insurance are buildings, machinery and equipment, stock and merchandise and all other contents.

Coverage

Insured perils or risks

A “peril” or “risk” is the cause of a loss. Fire, theft, storm or water damage are examples of perils (or risks).

The insurance market offers 2 types of policies, i.e “named perils” and “all risks”.

A “named peril” is a risk specified in the insurance policy and any physical loss or damage to the property resulting from the occurrence of such a peril is covered. By default, any peril not named in the policy is excluded. The most common perils named are fire, storm, water damage and theft. Other perils that can be insured are:

  • Explosion
  • Aircraft
  • Riot, strikes and civil commotion
  • Malicious damage
  • Earthquake, volcanic eruption and tsunami
  • Subterranean fire
  • Spontaneous fermentation or heating
  • Flood
  • Impact by vehicles
  • Sprinkler leakage
  • Subsidence, ground heave and landslip

Each peril can be subject to individual limitations and exclusions.

All risks”, is the opposite of named perils. Instead of mentioning which perils are covered, under “all risk” coverage everything is assumed to be covered unless specifically excluded. Of course, “all risk” coverage is much more comprehensive than “named perils”.

Main exclusions

It is important to realise that whether your coverage is “named perils” or “all risks” there are always exclusions in property insurance policies. Some catastrophic risks are always excluded from basic policies, such as war risks, nuclear accidents and fraud and dishonesty. Other typically excluded perils, such as riots, strikes, civil commotion and malicious damage (RSCCMD), natural catastrophes (Acts of God), terrorism and pollution and consequential loss (business interruption) can be added to the coverage of the policy at an additional premium.

In addition, there is certain type of property that is excluded from the subject matter of the insurance such as motor vehicles, watercraft, aircraft, livestock, standing timer and crops, buildings in course of erection, money, jewellery, glass, computers and goods in transit, which are more appropriately insured under a specific policy

While in “named perils” policies the insured perils need to be listed, in “all risk” policies the exclusions need to be described in more detail. In addition to the general exclusions, in “all risk” policies we will typically find the following excluded perils:

  • Perils that are not sudden and accidental, such as corrosion, rust, extremes or change in temperature, normal wear and tear, normal cracking of buildings, etc.
  • faulty or defective design, materials or workmanship, inherent vice, latent defect gradual deterioration, deformation or distortion or normal wear and tear
  • Theft without forcible entry, mysterious disappearance and stock tacking losses
  • Mechanical or electrical breakdown of machinery and equipment
  • Wind, rain, hail, frost, snow, flood, sand or dust to property in the open

Basis of indemnity

In the event of a loss or damage the property insurers will indemnify the Insured on the following basis:

  • In case of lost or destroyed property: the cost of rebuilding of any buildings or the replacement of any other property by similar property, in either case in a condition equal to but not better or more extensive than its condition when new;
  • In case of damaged property: the repair of the damage and the restoration of the damaged portion of the property to a condition substantially the same as but not better or more extensive than its condition when new.

Underinsurance

Many insurance policies are subject to the Condition of Average. That means, that if the sum insured is less than it should be (you are underinsured), then the Condition of Average will reduce the net amount you will receive from any valid claim in direct proportion to the amount of underinsurance.

You should, therefore, ensure that the amount stated in the policy is the full value at risk, in accordance with the basis of indemnity as described in the policy.

Coverage extensions

Property policies can be extended to provide reimbursement of all kind of cost related to the reinstatement of lost or damaged property, such as:

  • architects’, surveyors’, consulting engineers’, legal and other fees
  • the temporary protection and safety of Property Insured
  • the removal, storage and disposal of Debris
  • customs, excise and other duties
  • fire extinguishing costs
  • extra cost of reinstatement to comply with the requirements of any statute or regulation or of any municipal or statutory authority

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