Basic terminology in the general insurance market

Question 1

Explain the principle of good faith.

Answer 1

The duty of disclosure during contract negotiation between the insurer and the insured. The insured must disclose all material facts and know what is material.

Question 2

Under the principle of good faith, what must the insurer NOT do?

Answer 2

1. Introduce new non-standard terms that were not discussed during negotiations
2. Withhold the fact that discounts are available for mitigating risk

Question 3

Under the principle of good faith, what must the insured NOT do?

Answer 3

1. Introduce new non-standard terms that were not discussed during negotiations
2. Withhold the fact that discounts are available for mitigating risk

Question 4

In the principle of good faith what must the insurer NOT do?

Answer 4

1. Introduce new non-standard terms that were not discussed during negotiations
2. Withhold the fact that discounts are available for mitigating risk

Question 5

In the principle of good faith what must the insured do?

Answer 5

• disclose all material facts
• know what is material

Question 6

Define what circumstances are material.

Answer 6

“Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk.”

Question 7

What is the legal position of the insured if they are a consumer?

Answer 7

The policyholder is buying insurance mainly for purposes UNrelated to their business, trade or profession.

Question 8

What is the legal position of the insured if they are NOT a consumer?

Answer 8

The policyholder is buying insurance related to their trade, business, or profession (not an individual).

Question 9

What is a ‘Proximate cause of loss’?

Answer 9

The dominant cause of a loss or a peril.

It does not have to first cause of the loss.

Question 10

What is the principle of ‘indemnity’?

Answer 10

Putting the insured back in the financial position that they were in before the loss. Indemnity does NOT anticipate the insured making profit.

Question 11

What policies do NOT offer indemnity?

Answer 11

Some policies cannot put the insured back in the position they were in prior to their loss.
- life insurance
- personal accident

Question 12

What methods do insurers use to provide insured’s with indemnity?

Answer 12

(CRRR)
1. cash
2. repair
3. replacement
4. reinstatement

Question 13

How does ‘cash’ provide indemnity?

Answer 13

Money is paid by the insurer directly to the insured.

Question 14

How does ‘repair’ provide indemnity?

Answer 14

Any damage to an insured item is repaired by the insurer.
Insurers use ‘recommended’ repairers.

Question 15

How does ‘replacement’ provide indemnity?

Answer 15

The policyholder orders a replacement item and the item is paid for by the insurer.

Question 16

How does ‘reinstatement’ provide indemnity?

Answer 16

The insurer restores a building that has been damaged by an insured peril.

Reinstatement involves ‘occupation’ of the premises whereas repair does not.

Question 17

How is indemnity measured?

Answer 17

The value of the subject matter of insurance is its value at the time and place of loss.

E.g. indemnity for property is the cost of repair at the time of the loss.

Question 18

What is an agreed value policy?

Answer 18

The value of the subject matter of insurance (indemnity) is agreed at the start of the contract and its value is fixed.

This is one way indemnity can be modified.

Question 19

What is a first loss policy?

Answer 19

Indemnity is calculated by the sum of the perils that the policyholder wants insured, or all of the perils that the policyholder wants insured at a price less than its full value.

Question 20

Name some limiting factors to indemnity.

Answer 20

1. sum insured
2. inner limits or item limits
3. average

Question 21

How does the average limit indemnity?

Answer 21

The principle of ‘average’ ensures that the payment for any damage/loss is proportional to the sum insured.

Question 22

What is the formula used to calculate a claim payment?

Answer 22

sum insured/value of all goods at risk X loss.

Question 23

What is an excess?

Answer 23

Is an amount that is deducted from each claim and is paid by the client.

Question 24

What is a deductible?

Answer 24

Also referred to as ‘retention’. Is the amount the policyholder can ‘retain’ and pay themselves before the insurance kicks in.

Question 25

What is dual insurance?

Answer 25

When two different insurance policies cover the same subject matter of insurance.

Question 26

Explain the principle of ‘contribution’.

Answer 26

the right of an insurer to call upon others similarly, but not necessarily equally, liable to the same insured to share the cost of an indemnity payment.

The loss is shared fairly among all insurers who cover the loss.

Essentially:
One insurer has the right to ask another insurer to pay their share of the indemnity payment.

Question 27

How does contribution arise?

Answer 27

1. by a common peril
2. by a common subject matter

Question 28

What two ways can you calculate an insurers contribution?

Answer 28

1. By sum insured
   = policy sum insured/total sums insured X loss.
2. By independent liability
   = independent liability under this policy/total of independent liabilities under all policies X loss.

Question 29

How can contribution be modified?

Answer 29

1. non-contribution clauses
2. more specific insurance clauses
3. market agreements

Question 30

What is meant by subrogation?

Answer 30

Subrogation is the right of the insurer, having indemnified the insured, to seek repayments for losses from the at-fault third party.