9. Principle of Indemnity

Question 1

What is the definition of indemnity?

Answer 1

Financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before

Question 2

How is indemnity applied to property insurance?

Answer 2

Measure of indemnity is the replacement cost less wear and tear
Value at date and place of loss

Question 3

How is indemnity applied to liability insurance?

Answer 3

Measure of indemnity is damages and costs but there will be a limit on how much is paid

Question 4

How is indemnity measured for Marine insurance?

Answer 4

Valued policy (same as agreed value) where insurable value is agreed
Undervalued policy must be calculated using formulas in MIA 1906 and is unaffected by market price variation

Question 5

How is indemnity measured for Property insurance (buildings)

Answer 5

1. Basic cover - indemnity settlement calculated for loss / damage as the costs of repair or reconstruction at time of loss making allowance for improvements (betterment), unusual for this cover
2. Reinstatement conditions - on the basis of the full reinstatement value at the time and most common types are reinstatement memorandum and day one reinstatement

Question 6

How is indemnity measured for Property insurance (household goods)

Answer 6

1. Basic cover - based on cost of replacing items at time of loss with wear and tear deduction
2. New for old cover modifies the principle with not allowance for wear and tear - full replacement cost

Question 7

How is indemnity measured for Property insurance (machinery and contents)

Answer 7

1. Basic cover - depends if there is second hand market
2. Reinstatement conditions (as before)
   If no reinstatement insured only entitled to settlement on strict indemnity (no wear and tear/depreciation taken into account)

Question 8

How is indemnity measured for Property insurance (manufacturer’s stock in trade)

Answer 8

Raw materials, work in progress and finished stock
Cost of raw materials plus labour

Question 9

How is indemnity measured for Property insurance (wholesalers and retailers stock)

Answer 9

Replacing stock and cost of transporting/handling costs
Not entitled to payment for expected profit

Question 10

How is indemnity measured for Property insurance (farming stock)

Answer 10

Local market price and insured is entitled to potential profit

Question 11

How is indemnity measured for Liability insurance?

Answer 11

Amount court awards plus costs and expenses arising in connection with the claim

Question 12

What are the 4 methods of indemnity?

Answer 12

Only available if stated in policy if not insured entitled to financial compensation
1. Cash payment
2. Repair
3. Replacement
4. Reinstatement

Question 13

Explain cash payment as a method of indemnity

Answer 13

Historically most settled with payment of money but trend to use replacement though own supply chains or nominated retail stores (bulk buying bower = discounts)
Insured refuses and wants cash then only have to pay the discounted amount

Question 14

Explain repair as a method of indemnity

Answer 14

Repairing the damage can usually be done at lower price that what insured can achieve due to negotiating power

Question 15

Explain replacement as a method of indemnity

Answer 15

Quick replacement can minimise further losses eg glass insurance
Nominated retailers can lower claim costs and minimise fraudulent claims

Question 16

Explain reinstatement as a method of indemnity

Answer 16

Insurer agrees to restore building or machinery but bound to reinstate to same condition as before the loss

Question 17

What is an indemnity policy?

Answer 17

Most short term (non-life insurance)
Short term because option of inviting renewal at end of each period
Can place value on subject matter

Question 18

What is a benefit policy?

Answer 18

Not indemnity policy as provide fixed benefits
No price can be placed on loss of a limb so in event of claim a defined amount or benefit will be paid

Question 19

How is indemnity modified by Agreed Value policies?

Answer 19

Value of subject matter is agreed at the start and sum insured fixed accordingly
At time of loss value doesn’t need to be proved
Common in marine, works of art and vintage cars

Question 20

How is indemnity modified by First loss policies?

Answer 20

Total loss or very substantial loss seems impossible, insured can request policy has sum insured less than full value

Question 21

How is indemnity modified by New for Old cover?

Answer 21

Usually for household contents, attempt to replace at current costs

Question 22

When might less than full indemnity be provided?

Answer 22

• Sum insured
• Inner/item limits
• Average
• Excess / deductibles

Question 23

Explain how sum insured can produce less than full indemnity

Answer 23

Max amount recovered under property policy is limited it sum insured

Question 24

Explain how inner/item limits can produce less than full indemnity

Answer 24

Limits within overall sum insured eg single item limit of 5% of sum insured

Question 25

Explain how average can produce less than full indemnity

Answer 25

Sum insured is total value declared by insured and used to set premium
Understating value = underinsurance
Limit liability by applying average condition
(sum insured / value goods at risk) x loss

Question 26

What is special condition of average?

Answer 26

If value at time of loss is at least 75% actual value, average won’t be applied
For agricultural produce and livestock

Question 27

What is two conditions of average?

Answer 27

Apply to contents or stock arranged on floating basis (more than one location)
More specific insurance then only the excess value is used to check if average applies