5.4 - Basis of Claim Payment Flashcards
Basis of Claim Payment - Introduction
-the details of how the amount of indemnity for a loss will be calculated are found in the basis of claim payment clause
-the clause opens with a statement limiting the insurer’s liability for LoD to the dwelling, detached private structures, and personal property to the insured’s financial interest or the amount of insurance, whichever is less
-limiting the insurer’s liability in that way serves the principle of indemnity, which is to leave the insured in the same financial position as before the loss
Guaranteed Replacement Cost
-an undertaking by the insurer to pay the cost of repairs to or replace the dwelling building even if it is more than the amount of insurance on the dwelling building, provided certain conditions are met in addition to those that normally govern settlement at replacement cost
-called “enhanced replacement cost” in Quebec
Basis of Settlement - Dwelling Building and Detached Private Structures
-many policies enhance the coverage from ACV to RC
-the homeowners forms allow the insured an option, on certain conditions, to settle a building loss (after the fact) at RC without deduction for depreciation
-if the insured fails to repair or replace the damaged structure, the insurer will pay the ACV of the damage on the date of loss
-for the dwelling only, the form also offers another option - GRC
-the insurer will not pay increased costs due to bylaws - that is, due to any law regulating the zoning, demolition, repair, or construction of buildings and their related services. This applies to settlement at either the RC or ACV basis of valuation
Basis of Settlement - Dwelling Building and Detached Private Structures - ACV
-may be calculated in different ways
-most often ACV is understood as the cost of replacing the the property, less any depreciation to it
-in some cases the life expectancy of the property alone might reasonably reflect the reduction in its value
-but most insurers expand their definitions of ACV to recognize that a fair estimate of depreciation at the time of loss depends on several factors: not only the life expectancy of the property but also its physical condition, its resale value, and it obsolescence
> Downsides:
-serves the principle of indemnity by denying insureds a profit from their losses, but several factors involved in determining ACV can make it subjective and sometimes unfair
-property can have a personal value to an insured greater than its economic value
-changes in technology may not allow a fair comparison of damaged property with the new property that replaces it
-may impose financial hardship on an insured to pay the difference between ACV and the cost to replace the item, and for damage to a dwelling, the difference could be catastrophic
Basis of Settlement - Dwelling Building and Detached Private Structures - Replacement Cost
-in the IBC Homeowners forms, the insured must satisfy certain conditions to receive the replacement cost of a damaged or destroyed building:
-If the insured
>repairs or replaces the damaged or destroyed “dwelling” or detached private structure
>on the same location
>with a “dwelling” or detached private structure of the same occupancy
>constructed with materials of similar quality
>within a reasonable time after the damage
-the insurer will pay the cost of repairs or replacement (whichever is less) without deduction for depreciation
Basis of Settlement - Dwelling Building and Detached Private Structures - Guaranteed Replacement Cost
-for the dwelling only, HO forms also offer GRC, in which the insurer will not only ignore depreciation, but in some cases will pay more than the amount of insurance
-costs for construction and labour can be difficult to calculate for RC and insured may end up with insufficient coverage to pay the full cost of replacing all property after a catastrophic loss
-GRC extends the concept of replacement cost, and offers what is effectively unlimited coverage to replace the dwelling building (Coverage A only), on the condition that:
>the amount of insurance on the dwelling building be kept at not less than the cost to replace the dwelling building, as determined by a valuation guide acceptable to the insurer;
>the amount of insurance on the dwelling building not be reduced below the amount determined by the valuation guide; and
>the insured notify the insurer within 90 days of the start of the work on any improvement, extension, or addition to the dwelling
-many insurers have been moving away from GRC, and some policies that include it will not apply it in certain circumstances (ex. natural disaster like EQ), because some contractors will use the disaster to artificially inflate the true cost of construction, especially if they know the insurer is paying GRC, and it can also be difficult for insurers to negotiate reinsurance when the max potential exposure cannot be determined
Basis of Settlement - Personal Property
HO forms specify 3 alternative bases of settlement:
1. For electronic media, the insurer will pay the cost or reproduction from duplicates or from originals of the previous generation of the media. It will not pay for the cost of gathering or assembling information or data for reproduction
2. For other records, including books of account, drawings, or card index systems, the insured will pay the cost of blank books, pages, cards, or other materials, along with the cost of actually transcribing or copying the records
3. The insurer will settle losses at replacement cost for all other property except the below which would be as ACV:
>articles that are inherently irreplaceable, including antiques, fine arts, paintings and statuary;
>articles whose value largely depends on their age or history, such as memorabilia, souvenirs, and collector’s items;
>property that has not been maintained in good or workable condition; and
>property that is no longer used for its original purpose
-limiting these exceptions to ACV is not a penalty but more a necessity as some articles will be impossible to replace, reproductions may be costly
-insured should obtain a written estimate by an accredited appraiser, share it with the insurer, and update it as necessary
-insured should be aware prior to a loss what property may not be covered under Coverage C
Basis of Settlement - Pair and Set Clause
-under the pair and set clause, if any articles are lost or damaged that were part of a set, the HOs forms calculate the loss as a reasonable and fair proportion of the total value of the set
-such loss or damage will not, however, be constructed to mean total loss of the set
Basis of Settlement - Parts Clause
-the parts clause complements the pair and set clause as it provides that loss or damage to any part or property that consists of several parts will be settled for not more than the insured value of the part lost or damaged, including the cost of installation
Basis of Settlement - Deductible Clause
-the first paragraph of the deductible clause limits the insurer’s liability to the amount by which loss exceeds the deductible
-the second paragraph applies to the special limits of insurance under Coverage C. It provides that, where the special limits apply, they will apply to losses that exceed the deductible amount
-that ensures that the insured will not be doubly penalized by having the deductible apply to a loss after the special limit has been applied to it
-deductible is applied first, then the special limit
EX:
$3000 loss of tools, and there is a special limit on tools of $2000, deductible of $500
> $3000 - $500 (ded) = $2500
> $2000 limit on tools so final amount payable to the insured is $2000
Basis of Settlement - Amounts not Reduced Clause
-this clause provides an automatic reinstatement of the policy limits after a loss
EX. dwelling is insured for $600,000, fire causes $200,000 damage to the home
-the policy limit is reset at $600,000 after the repairs to the damage have been completed
Basis of Settlement - Insurance under More Than One Policy Clause
-this clause mainly applies where one or more separate policies cover property on a scheduled basis, typically this can occur when an insured has jewellery or other valuable property for which special policies are available
-where the insured has other insurance on specifically described property, the HOs forms become excess to that scheduled insurance and will pay only after the scheduled insurance has been exhausted
-in all other cases, the HOs forms will pay only their rateable proportion of an insured loss
-multiple policies are rare in personal property policies due to differences in coverages between insurers, and most insurers require amounts of insurance between 80 and 100% of RC, more common in commercial
-the clause in the HOs basic form is typical, as less complexity is needed than commercial insurance business
Basis of Settlement - Subrogation Clause
-transfers the insured’s rights of recovery against others to the insurer and entitles it to sue in the insured’s name when the insurer has made payment or assumed liability
-also preserves the insured’s right to recover from the insurer against any release from liability the insured entered into before a loss
-the insured has no right to recover from a person they have released from liability; the insurer has no rights of its own to proceed against a TP for a loss under its policy (if the insured has no right, then neither does the insurer)
-it is important that the insured and the affected TP be able to produce evidence of the release, ideally it should be in writing, signed and dated by the named insured
Duties After Loss Clause
-is a response to a disturbing number of fraudulent claims, it requires the insured, after submitting a proof of loss and at the insurer’s request, to submit to examination under oath, produce relevant documents, and allow the insurer to make copies of them
-it supplements Statutory Condition 6 but places a greater burden on the insured
Statutory Conditions Clause
-provides that the Statutory Conditions apply uniformly to all perils covered by the policy but allows for modifications of those conditions by the policy or endorsements to it
