5 - Pecuniary insurance

Question 1

What is pecuniary insurance concerned with

Answer 1

Intangibles such as income, revenue or value

Question 2

What is the basic purpose of legal expenses insurance

Answer 2

The basic purpose of legal expenses insurance is to provide indemnity for costs arising out of the need to seek legal advice or to pursue or defend a civil action.

Question 3

What are the two standard policy covers

Answer 3

1. Group legal benefit policies

2. Commercial legal protection policies

Question 4

Under group legal benefit policies what is employment cover

Answer 4

• Defence of any claim brought against a member in the course of their employment
• Defence and compensation awards resulting from specified legislation, such as Equality Act 2010
• Costs of claiming for compensation arising out of member’s employment eg wrongful dismissal, racial or sexual discrimination arising out of employment

Question 5

Under group legal benefit policies what are the 4 sections of cover

Answer 5

1. Employment cover
2. Personal cover
3. Motor cover
4. Conveyancing cover

Question 6

What are commercial legal protection policies

Answer 6

Designed to cover firms or companies in their capacity as employers, manufacturers, property owners etc, where their business activities may expose them to litigation.

Question 7

What are the 5 main sections of commercial legal protection policies

Answer 7

1. Employment cover- defending an action by an employee against the firm
2. Criminal prosecution defence cover- defending an action brought against the company usually under Health and Safety at Work legislation
3. Property disputes cover
4. Motor cover
5. Patents, registered designs, copyright and trademarks cover

Question 8

What are the 4 optional extensions for commercial legal protection policies

Answer 8

1. Defending libel and slander charges
2. Involvement in public enquiries
3. Investigations by professional bodies
4. Taxation proceedings

Question 9

What are the limitations for legal expenses cover

Answer 9

No cover where legal action is pursued against advice

Question 10

Slapdash Sportswear employs 50 people at their factory in London. A member of staff is seriously injured when using a faulty cutting machine and Slapdash is found liable under the Health and Safety at Work Act.

For what can Slapdash claim under their Reliable Accident commercial legal protection policy?
A)The cost of defending the action only
B) The cost of the fine only
C) Both the cost of defending the action and the cost of the fine

Answer 10

A) The cost of defending the action only

They can recover the costs of defending the action. However, insurance cannot compensate someone for the consequences of an illegal act. To do so would be against the public interest.

Question 11

What are the basic features of BI

Answer 11

• the monetary amount that needs to be insured and

- the time the interruption will affect the business

Question 12

What is the turnover in relation to BI

Answer 12

Turnover is the total income arising from the activities of the business

Question 13

How is the turnover broken down in regards to BI

Answer 13

Costs are divided between those that

• vary in direct proportion of the turnover (eg raw materials) and
• those that not vary in this way (eg rent)

Question 14

Slapdash Sportswear is confident that it can fully recover from an interruption of business within 12 months and chooses a maximum indemnity period of this duration.

Would you suggest that its BI policy sum insured should be based on?
A) Last year’s reported gross profit
B) This year’s anticipated gross profit
C) Next year’s predicted gross profit

Answer 14

C) Next year’s predicted gross profit

This may well be the profit that is affected by an interruption, so if the business is growing it is the safest option.

If a fire or other peril badly damages the business on the last day of the current year, it is the next year’s profits that will be affected. An allowance therefore needs to be made for future business growth when fixing the BI sum insured.

Question 15

What two items may result in a loss to the insured under BI

Answer 15

Net profit and fixed charges

Question 16

What terms do insureds use for the addition of net profit and standing charges

Answer 16

‘Gross profit’

Question 17

What is the ‘difference basis of cover’ under BI

Answer 17

Works by deducting the uninsured working expenses (the variable charges) from the turnover.

Question 18

What are the two basis of fixing sums insured under business interruption

Answer 18

1- taking the projected turnover for the forthcoming years and assuming a worst case scenario

2- declaration linked- declare figures for the forthcoming year then a one third uplift is automatically taken into account

Question 19

What is increase cost of working cover

Answer 19

Where certain expenses will increase following loss or damage (eg, rent for new premises, more staff employed, advertising, etc)

Question 20

What is a material damage warranty

Answer 20

A policy covering the physical damage must be in place for BI to be covered

Question 21

Why does material damage warranties not always apply to engineering business interruption

Answer 21

Insurer knows that there are fund for completing the rebuild

Insurer will obtain the benefit of the warranties that may apply to the material damage cover

Question 22

What are the three most common business interruption policies

Answer 22

Fire and special perils

All risks

Engineering

Question 23

What are the standard perils for a business interruption policy

Answer 23

Same as covered under a material damage policy - extended to include:

The explosion of ANY boilers on the premises

Question 24

What are the special perils for a business interruption policy

Answer 24

Relating to engineering cover:

Explosion and collapse of steam pipes

Explosion of vessels

Collapse of boilers

Overheating of tubes

Overheating of boilers

Question 25

What are the extensions to an all risks business interruption policy

Answer 25

1. Specified suppliers
2. Unspecified suppliers
3. Specified customers
4. Transit
5. Prevention of access
6. Public utilities
7. Notifiable disease, vermin, defective sanitary arrangements

Question 26

What are the two perils covered under an engineering BI Policy

Answer 26

Failure of the public supply of gas, electricity etc

Sudden and unforeseen damage from an accidental cause

Question 27

What 4 things are excluded on an engineering BI policy

Answer 27

Perils covered by the standard fire and special perils policy

General market exclusions (war etc)

A scheme which rations supplies

Deliberate act of a supply authority

Question 28

What, in one sentence, is the basic purpose of legal expenses insurance?

Answer 28

Legal expenses insurance provides indemnity for costs arising out of the need to seek legal advice or to pursue or defend a civil action

Question 29

What is the purpose of business interruption insurance?

Answer 29

Business interruption insurance covers the actual or potential loss of earnings (‘gross profit’) and additional expenses incurred as a result of material loss

Question 30

In what way do the standard perils covered by the business interruption policy differ from the standard perils in the material damage policy?

Answer 30

The business interruption policy cover explosion of both domestic and non-domestic boilers, whereas the material damage policy covers explosion of domestic boilers only

Question 31

Under a typical legal expenses policy, what limit of cover, if any, usually applies within the period of cover?
A) cover is usually unlimited
B) overall cover is usually limited but there is not further limit per claim
C) overall cover is usually unlimited but that is a limit per claim
D) overall cover is usually limited and there is also a limit per claim

Answer 31

C

Overall cover is usually unlined, but there is a limit per claim

Question 32

What is the effect of the material damage warranty in relation to the inclusion of non-domestic boilers or economisers as a policy extension to the standard business interruption policy?

Answer 32

Since the material damage warranty applies, it is essential, if the insured has non-domestic boilers or economisers, that they have material damage cover against explosion in respect of these items. Otherwise they will lose the benefit of the additional cover. This applies if cover is required for explosion damaged from neighbouring premises

Question 33

Slapdash Sportswear suffers a fire which causes extensive damage to their factory. Which of the following costs will they still have to pay whilst the factory is being repaired?
Select all that apply.

A) The mortgage on the factory building
B) Packing and carriage
C) Staff costs
D) Raw material costs

Answer 33

A) The mortgage on the factory building and
C) Staff costs

Insurers also recognise the fact that certain expenses may increase following loss or damage and provide ‘Increase in Cost of Working’ (ICOW) cover to allow for this on the proviso that there is an equivalent saving in the claim that would otherwise be paid. This would cover, for example, the cost of paying staff overtime to maintain production.

Question 34

Why do you suppose the material damage warranty is necessary in a BI policy?

Answer 34

To avoid the possibility of an otherwise extended indemnity period

The main reasons for inclusion of the warranty are: the insurer knows there are funds available for rebuilding which will limit the time of the interruption; and the BI insurer will obtain the benefit of any warranties that apply in the material damage policy (there are no equivalent warranties in a BI policy).

Question 35

A fire at their main supplier’s premises means that Slapdash Sportswear have no stock and cannot open their retail shop.

They make a claim for the subsequent loss of profits under their fire and special perils BI policy.

Would you expect this claim to be covered under the BI policy?

Answer 35

It depends on the extent of their cover

The basic policy only covers an interruption due to damage at the insured’s own premises, but cover can be extended to include other premises such as those of suppliers on whom the insured is dependent for the operation of their business, or customers.

Question 36

A case of salmonella poisoning at her restaurant means that Lisa is required to close her business for a while and she makes a claim for loss of profits during this period under her Reliable Accident BI policy.

How would you expect the claim to be handled?

Answer 36

It will be covered if Lisa has extended her BI policy to include this contingency

With some perils such as this, the material damage warranty is not applicable. If Lisa’s BI policy has been extended to include this risk, she will be covered, even though there is no material damage cover in force.