9. Underinsurance

Question 1

What are the penalties for underinsurance?

Answer 1

1. Change of the basis of settlement
2. Pro Rata Average
3. Reinstatement Average
4. Day one Average

Question 2

What is the change of the basis of settlement usually related too?

Answer 2

• Domestic policies
• Settlement is based on the replacement cost of items of contents or rebuilding cost of buildings.

Question 3

If SI is not adequate on change of basis of settlement policy, what are the penalties?

Answer 3

• Value of item at DOL instead of new for old or reinstatement
• Second hand values paid in event of underinsurance

Question 4

What are room based & bedroom rated policies?

Answer 4

• SI simpler encouraging PH to be adequately insured
• May be set with either unlimited or banded SI depending on no of bedrooms/rooms

Question 5

What is the main principle of average on a commercial policy?

Answer 5

• In the event of underinsurance the PH bears the loss in direct proportion to the extent of underinsurance.

Question 6

What are the types of average on a commercial property?

Answer 6

1. Pro rata condition of average
2. Special condition of average
3. Two conditions of average

Question 7

What is the pro rata condition of average (ABI definition) & calculation?

Answer 7

1. Sum Insured/Value at risk x Loss
2. If SI less than value of property, amount payable by Insurer will be proportionately reduced.

Question 8

What is the special condition of average (ABI definition) & calculation?

Answer 8

1. Sum Insured/Value at risk x Loss
2. Average clause only applied if SI is under 75% of the VAR
3. If SI 75% or more of VAR then full loss covered up until SI

Question 9

When is the special condition of average applied?

Answer 9

• Only if the SI is less than 75% of the VAR

Question 10

What is the two conditions of average (ABI definition) & calculation?

Answer 10

Condition 1: Sum at commencement of damage be less than the value of property covered in SI, amount payable by Insurer will be proportionately reduce but
Condition 2: If any property covered by more insurance, policy shall only insure the same for any value in excess of such more specific insurance

Question 11

What is the two conditions of average intended for?

Answer 11

Use on stock/contents insurances arranged on a floating basis where specific insurance also applies