MC EXPLAINER Sigachi explosion: What the insurance covers & how claims will be settled

Here’s how Sigachi’s insurance claims are likely to play out, what families of workers can expect, and why claim settlement could take months:

What type of insurance does a company like Sigachi Industries take for a chemical manufacturing plant?

Companies in the chemical and pharmaceutical manufacturing space typically purchase an Industrial All Risk (IAR) policy. This covers a wide range of risks, including fire and explosion, machinery breakdown, natural disasters, and other accidental damage to the plant and machinery.

The IAR policy includes property damage as well as business interruption (BI).

Property damage

In Sigachi’s case, reports suggest the company had a full-coverage IAR policy in place at the time of the explosion.

Given the scale of operations at their Sangareddy plant, the sum insured for property damage is estimated to be anywhere between Rs 200 to Rs 300 crore, said experts. This would include coverage for physical damage to structures, equipment, raw materials, and finished goods.

The estimated sum insured for property damage at the Sangareddy plant is based on the replacement cost of all tangible assets, including buildings, machinery, raw materials, and finished goods.

The estimation is typically done on a reinstatement value basis, meaning it reflects the cost to replace the assets with new ones, without factoring depreciation.

Insurers and brokers arrive at this figure through detailed risk assessment, on-site inspections, and engineering reports, considering factors like the scale of operations, type of machinery, inventory levels, and potential fire or chemical hazards, experts explained.

A separate limit under the same policy would apply to BI, which covers loss of profits during the period of plant shutdown caused by the insured peril, in this case, fire and explosion.

BI cover

Sigachi’s BI cover is reported to have a 90-day indemnity period, meaning the policy will compensate the company for lost profits and fixed expenses for up to three months following the incident.

BI covers net profit that would have been earned during the shutdown, continuing overheads like salaries and lease payments, and sometimes even costs related to temporary relocation or outsourcing of operations. It also covers operating costs that continue even when production stops such as electricity bills for unaffected units, bank EMIs, etc.

The BI claim must be supported by historical financials, projected sales data, and production logs, and it typically takes longer to assess and settle than property damage claims because of the subjective nature of loss estimates.

Who pays for the damages and how are the claims processed?

The primary insurer, whose identity has not been publicly disclosed, is responsible for settling the claim.

However, due to the high value involved, the insurer generally does not retain the full risk. Instead, a significant portion of the exposure is transferred to reinsurers.

According to experts, insurers typically cede around 85-95 percent of the risk to reinsurers.

“In this case, assuming a Rs 250 crore property damage claim, the lead insurer may retain only Rs 25-40 crore on its own books, with the remaining Rs 210-225 crore borne by a panel of reinsurers,” they said.

If the factory was properly insured and there were no major breaches of policy terms, reinsurers are expected to pay their share of the claim, whether under “treaty” (pre-agreed) or “facultative” (case-specific) reinsurance, they said.

The claims process begins with the appointment of an insurance surveyor or loss assessor, who inspects the site and submits a preliminary loss report. This document contains an estimate of the physical damage, potential downtime, and any risks that could affect the BI cover.

The final settlement could take 7-8 months or more, depending on the extent of damage and complexity of documentation, but an interim payout is often made to help with the immediate rebuilding and provide cash flow support, experts noted.

Typically, interim payouts cover 20-40 percent of the estimated loss but can go higher if the damage is clearly extensive and documentation is promptly provided.

What kind of insurance coverage exists for worker deaths and injuries in such accidents?

Employee fatalities are typically covered in three ways: workmen’s compensation insurance, group personal accident (GPA) policies (if taken), and statutory liability under India’s labour and industrial laws.

GPA insurance is not mandatory, clarified experts. Employers may provide it as an additional benefit, but are not legally required to do so.

For employees not covered by a GPA policy, compensation still applies through the other two modalities.

First, workmen’s compensation insurance is a legal requirement and covers death or disability during the course of employment.

Second, there is statutory liability under Indian labour laws, such as the Employees’ Compensation Act and the Factories Act, which mandate compensation to the employee’s family in case of a fatal workplace accident.

However, without a GPA policy, the family would not receive the additional lumpsum benefits or ex-gratia payments that GPA insurance can offer. As a result, the total compensation may be lower in such cases.

Workmen’s compensation insurance is based on the employee’s wages and age. “For instance, if the average age of the deceased worker is around 35 and their monthly wage was Rs 15,000, the claims per the Workmen’s Compensation Act would typically range between Rs 7–10 lakh per worker,” experts said.

In addition, companies may take GPA policies that offer lumpsum payouts, for instance, Rs 10 lakh per person, for accidental death or permanent disability. If Sigachi had such a policy, dependents of the 40 reportedly deceased workers could receive additional compensation on top of statutory payouts.

Lastly, the Telangana government has announced ex-gratia payment, which often ranges between Rs 5-10 lakh per family. These are state-funded, voluntary, and independent of insurance-linked payouts.

In case of worker deaths or injuries due to industrial accidents, for claims related to workmen’s compensation and GPA (if applicable), the responsibility lies with the employer or their insurance broker to initiate the claim process.

Once the incident is reported, the employer must notify the insurer, submit documentation such as the FIR, post-mortem reports, wage records, and proof of employment, and coordinate with the loss assessor appointed by the insurance company.

Insurers are expected to process and settle workmen’s compensation claims within 30 to 90 days, depending on the thoroughness of the documentation and the complexity of the case.

GPA claims, if applicable, may have a similar or slightly shorter timeline since they are usually lumpsum payouts.

Families usually do not have to pursue the claims themselves unless there’s a dispute or delay, as the legal and insurance framework puts the onus on the employer to ensure timely compensation.

Can insurance payouts be denied or reduced in case of negligence?

Most industrial insurance policies have standard exclusions for gross negligence, wilful misconduct, or violation of safety norms. If the loss assessor finds that safety systems were poorly maintained, safety audits were ignored, or worker warnings were dismissed — as some early reports suggest happened at Sigachi, then insurers may raise objections, experts explained.

However, insurance contracts typically provide coverage unless there is proven, deliberate negligence.

Gross negligence has a high threshold. For instance, if outdated machinery was known to be hazardous but was kept running to meet production deadlines without servicing, that could be construed as gross negligence.

In such cases, insurers may reduce the payout proportionally or delay it pending further investigation.

Are public liability claims involved in this case, like in Vizag or Bhopal?

A public liability claim arises when a third party, such as a worker’s family, a visitor, or someone living near the factory, suffers injury, death, or property damage due to an accident involving hazardous substances handled by a company.

Under the Public Liability Insurance Act, 1991, companies engaged in hazardous operations are legally required to take out a public liability insurance policy. This ensures that affected individuals will receive immediate relief, even without proving fault or negligence.

Such claims can include medical expenses, compensation for death or disability, or property damage. The insurance company settles these claims, allowing victims to access compensation quickly, without going through long court battles.

In such cases, victims can claim limited compensation (capped at Rs 25,000 for death and Rs 12,500 for injury) directly from the insurer via the district collector’s office.