9 - Measuring The Loss: Principle Of Indemnity

Question 1

What is the difference between indemnity insurances and non-indemnity insurances?

Answer 1

Indemnity insurances return to the Insured to the pecuniary position they enjoyed before the loss. Non-indemnity insurances pay a pre-agreed sum when a particular defined event occurs. Does not require the Insured to prove that they have suffered a loss or how much, only that the event has occurred

Question 2

What is the accepted legal term for non-indemnity insurances?

Answer 2

Contingency insurance

Question 3

What common law case established non-life insurances as a contract of indemnity?

Answer 3

Castellain v Preston (1883)

Question 4

What are some circumstances in which the principle of indemnity may be altered?

Answer 4

Deductibles/excesses
New for old cover
Underinsurance/average
Policy limits
Reinstatement
Agreed Value

Question 5

What is the general measure of indemnity for property insurances?

Answer 5

The financial value of the property at the time and place of the loss

Question 6

What is the general measure of indemnity for buildings? What about if the building is up for sale?

Answer 6

Reinstatement - the cost of repairing or reconstructing the building at the time of the loss with a deduction for betterment

If up for sale then it may be more appropriate to settle for the current market cost as outlined in Great Lakes Reinsurance (UK) SE v Western Trading Ltd (2016)

Question 7

What is the general measure of indemnity for machinery and equipment?

Answer 7

The cost of repair less than an allowance for wear or tear

Or the cost of replacement less wear and tear if beyond repair

Question 8

What is the general measure of indemnity for stock?

Answer 8

The cost to replace the stock and transport it to the Insured’s site plus any possible labour costs

An exception is farming stock (livestock or produce) where it is normally settled based on local market price. This is the only settlement which will allow for betterment

Question 9

How is the measure of indemnity assessed in pecuniary insurances? (eg in Business Interruption)

Answer 9

The aim is to indemnify the Insured for their financial loss. In BI this is usually done by projecting gross profit for the upcoming year based on past performance and assessing the shortfall over an Indemnity Period following an Insured Peril

Question 10

What is a Trends Clause?

Answer 10

Allows an Insurer to take into account outside exceptional circumstances that would have decreased the Insured’s profit without the occurrence of an Insured Peril.

An example would be a famous restaurant that gave notice to their head chef then suffered a BI loss. During the Indemnity Period their chef then leaves. It could be argued that this would have resulted in a loss of profit not caused by the Insured Peril so the loss of profit from the chef leaving should not be taken into account when settling the claim

Question 11

What is the measure of indemnity in liability insurances?

Answer 11

The amount of any court award or settlement plus costs and expenses related to the claim, as well as any other expenses incurred with the agreement of Insurers

Question 12

What is the measure of indemnity in marine insurances?

Answer 12

Depends if it is a valued or unvalued policy (although in practice most are valued)

Valued policies are agreed value

Unvalued policies will pay out the insurable/declared value in the event of total loss. For a partial loss it depends on the subject matter. For example a damaged ship may be reasonable cost of repairs

Question 13

What is the difference between a costs inclusive or costs exclusive limit and how might this affect the principle of indemnity?

Answer 13

If a policy is costs inclusive then the limit of indemnity will include any costs and expenses in connection with the claim. If a policy is costs exclusive then the costs and expenses may be payable over and above the limit of indemnity

A costs inclusive policy may provide less than a full indemnity in circumstances where a costs exclusive policy would, for example if the actual claim was just below the limit of indemnity but the costs and expenses took it over the limit.

Question 14

What is an average clause?

Answer 14

Where the Sum Insured is found to be less than the actual full value the claim payment may be scaled down proportionately to reflect the fact that the correct premium has not been paid into the common pool

Question 15

How is the liability of an Insurer calculated when average is applied?

Answer 15

(Sum Insured at the time of loss * amount of loss) / Value at risk at time of loss

Question 16

Can average be treated as an implied term?

Answer 16

In marine insurance yes as it is covered by the Marine Insurance Act 1906

In general insurance no although if the sum insured is not adequate it may be a breach of the duty of disclosure

Question 17

What is reinstatement and how does this modify the principle of indemnity?

Answer 17

No deduction is made for wear and tear and the property is rebuilt or replaced to it’s condition when new

This gives the Insured more than a full indemnity so a premium is levied for this cover

Question 18

When is the Elcock principle applied and what does it state?

Answer 18

It applies for agreed value policies in the event of a partial loss. It states that the settlement should be the same percentage of the agreed value as the reduction in value of the subject matter

Question 19

What are the four main methods of providing indemnity?

Answer 19

Payment of money
Reinstatement
Replacement
Repair

Question 20

When the Insured receive money to settle their claim do they have to spend it restoring the property in question?

Answer 20

In general no they can spend it as they wish although this may affect the amount of the settlement if for example there was new for old or reinstatement cover

Question 21

What is salvage?

Answer 21

When the Insurer pays for total loss they will be entitled to any property left over (eg remains of a vehicle that has been written off or materials left by a fire)

Question 22

What happens to the policy cover in the event of successive partial losses?

Answer 22

In theory each loss reduces the sum insured by the same amount and so “uses up” the cover. The Insured can pay a reinstatement premium to restore the sum insured or some policies offer automatic reinstatement of sum insured following a loss

Question 23

What happens to the policy cover in the event of a total loss?

Answer 23

The policy is terminated as either the contract has been completed by the Insurer settling the claim or the subject matter has been destroyed.

If the subject matter is restored then a fresh insurance must be placed although some Insurers will allow the old policy to remain in force and have the new property substitute the destroyed property

Question 24

What is the difference between an excess/deductible and a franchise?

Answer 24

The Insured is responsible for the excess/deductible as the first part of any claim.

A franchise is a limit which, when passed, makes the whole sum payable by the Insurer

Question 25

What is abandonment?

Answer 25

The action of giving up the subject matter in marine insurance to the Insurer following total loss

Question 26

Under marine insurance what is constructive total loss and how does the Insured claim for this?

Answer 26

The subject matter is damaged or the Insured is deprived of possession but the subject matter is not destroyed but unlikely to be recovered or the cost of repairing or forwarding the goods would be uneconomical

The Insured must give notice of abandonment to the Insurer if they wish to paid for total loss