Read the case below carefully and answer the questions which follow.
UNFAVOURABLE BUSINESS ENVIRONMENT
Garola Kubusa Limited is a Manufacturer of packaging products and has been in operation for several years. The manufacturing industry has been experiencing Challenges and setbacks in recent times, the packaging sector seems to be the worst hit. The operating environment had not been conducive in the areas of power supply, fluctuating value of currency and inconsistent government policies. The plastic packaging sub-sector in which Garola Kubusa operates is not left out in these problems. The company gets its raw materials some of which are polypropylene and wax from a petrochemical plant located in Port Harbey, Rivers State from where they are transported by the company's trailers 'and at times by hired vehicles to the factory site in Asaba, Delta State. The company has not had it smooth due to losses arising from damage to plant and machinery, competition, fire, explosion, pilfering of company's finished products by the employees as well as embezzlement of funds. In severe cases, the company had to shut down for some months before repairs were carried out A good number of the company's customers had absconded with huge debts yet to be paid and left for other companies who are Garola Kubusa's competitors. The company is now considering various alternatives such as importation of raw materials, partly finished goods and finished products in order to restore customers' confidence and meet their demands and tastes while contracting out some of their manufacturing operations as Well to other companies operating in the sector.
(a) Identify and explain four classes of insurance that could help Garola Kubusa Limited in its business operations.
(b) Should Garola Kubusa Limited take insurance cover against losses arising from competition? Give reason for your answer.
(c) If the company resort to importation of its raw materials and finished products; recommend and explain the appropriate insurance cover to take to that effect.
(a) Four classes of insurance that could help Garola Kubusa Limited
- Fire insurance: The company suffers losses from fire and explosion. Fire insurance would indemnify it for damage to its factory, plant, machinery and stock caused by fire, lightning and explosion.
- Fidelity guarantee insurance: The company loses through pilfering of finished products by employees and embezzlement of funds. Fidelity guarantee cover indemnifies the employer against loss caused by the dishonesty or fraud of named or classes of employees.
- Goods-in-transit / marine (inland transit) insurance: Raw materials are moved by the company's trailers and hired vehicles from Port Harcourt to Asaba. This cover indemnifies loss of or damage to goods while being transported.
- Business interruption (consequential loss) insurance: Since severe damage forces the company to shut down for months, this cover replaces the loss of profit and continuing standing charges during the period the business is interrupted following an insured peril such as fire.
Machinery breakdown (engineering) and burglary insurance are also relevant to the damage to plant and the theft of goods.
(b) Should it insure against losses arising from competition?
No, it should not, and it cannot. Losses arising from competition are a speculative (or trading) risk, not a pure risk. Insurance covers only pure risks, where there is a chance of loss or no loss but never gain. Competition may lead either to loss or to profit, it is a normal business hazard the entrepreneur must bear, and it cannot be measured or transferred to an insurer. It is therefore not insurable.
(c) Appropriate cover if it imports raw materials and finished products
The appropriate cover is marine (cargo) insurance. Because the imported raw materials and finished goods will be carried by sea from abroad, a marine cargo policy would indemnify the company against loss of or damage to the goods in transit from perils of the sea and other marine perils, protecting the company from the moment the goods leave the overseas supplier until they reach its warehouse.
(a) Four classes of insurance that could help Garola Kubusa Limited
- Fire insurance: The company suffers losses from fire and explosion. Fire insurance would indemnify it for damage to its factory, plant, machinery and stock caused by fire, lightning and explosion.
- Fidelity guarantee insurance: The company loses through pilfering of finished products by employees and embezzlement of funds. Fidelity guarantee cover indemnifies the employer against loss caused by the dishonesty or fraud of named or classes of employees.
- Goods-in-transit / marine (inland transit) insurance: Raw materials are moved by the company's trailers and hired vehicles from Port Harcourt to Asaba. This cover indemnifies loss of or damage to goods while being transported.
- Business interruption (consequential loss) insurance: Since severe damage forces the company to shut down for months, this cover replaces the loss of profit and continuing standing charges during the period the business is interrupted following an insured peril such as fire.
Machinery breakdown (engineering) and burglary insurance are also relevant to the damage to plant and the theft of goods.
(b) Should it insure against losses arising from competition?
No, it should not, and it cannot. Losses arising from competition are a speculative (or trading) risk, not a pure risk. Insurance covers only pure risks, where there is a chance of loss or no loss but never gain. Competition may lead either to loss or to profit, it is a normal business hazard the entrepreneur must bear, and it cannot be measured or transferred to an insurer. It is therefore not insurable.
(c) Appropriate cover if it imports raw materials and finished products
The appropriate cover is marine (cargo) insurance. Because the imported raw materials and finished goods will be carried by sea from abroad, a marine cargo policy would indemnify the company against loss of or damage to the goods in transit from perils of the sea and other marine perils, protecting the company from the moment the goods leave the overseas supplier until they reach its warehouse.
