Chapter 7 Flashcards
Define indemnity
Financial compensation sufficient to return the insured to the same financial position they were in before the loss occurred
What tort case established the importance of the principle of indemnity?
Castellain v. Preston (1883)
What kind of policies are exempt from the principle of indemnity
Benefit policies - these instead provide a fixed agreed amount. Used when you cannot place a financial value on the loss, usually for health and sickness related policies
What four settlement options are available to insurers
- Cash payment
- Repair
- Replacement
- Reinstatement
What is cash payment
Payment of money by the insurer to the insured
What is repair
where it is possible insurers may opt to repair any damage to an insured item
What is replacement
The most common example of replacement as a means of providing indemnity is glass
insurance. Quick replacement means further losses are minimised, such as when shop front
windows are smashed.
What is reinstatement
Reinstatement is the fourth way that an insurer can provide indemnity. Reinstatement means that the insurer agrees to restore a building (or piece of machinery) that has been damaged by an insured peril
Why would an insurer have approved or recommended retailers
They can guarantee quality of workmanship and may be able to negotiate discounted rates to lower costs
What is the difference between reinstatement and repair
Reinstatement usually only applies to buildings and sometimes complex machinery. The insurer takes occupation of the property, whereas repair does not have this or the same degree of project management. Reinstatement is not a popular option with insurers whereas repair is common, especially in motor
In property insurance where the subject matter is completely destroyed (total loss), what is the measure of indemnit
The replacement cost of the property, minus an allowance for wear and tear
In property insurance where the subject matter is only partially damaged, what is the measure of indemnity?
Repair cost, minus an allowance for wear and tear
In liability insurance what is the measure of indemnity
The cost required to cover the insured’s legal liability to pay damages and costs. Varies so not set by the policy, and often decided by the courts. Limited to a maximum amount set out in the policy
What is an agreed value policy?
The insured value is agreed at inception by the insurer and insured. Also called a valued policy. The insurer will pay the agreed amount in the event of total loss with no allowance for wear and tear or change in value (either up or down)
valued policy
which is the same as an agreed value policy), the insurable value is agreed between the insured and the insurer. The insurable value in an unvalued policy must
be calculated using the formula in the Marine Insurance Act 1906 (MIA 1906)
betterment
They make an allowance
for any improvements that may result from the repair or reconstruction; for example, new
plumbing or new decoration. This is termed betterment. It is very unusual for buildings to be
insured on this basis. Insurance on reinstatement conditions is much more common.
Reinstatement memorandum
The most important aspect of insurances subject to the reinstatement memorandum is that the sum insured must represent the full value at the time of reinstatement 85%
Day one reinstatement
The insured is required to state the reinstatement amount on the first day of the cover.
Insurers provide an automatic uplift to allow for inflation (usually an extra 50% of the ‘declared value’) but only charge a modest increase for this inflation element (15% of the premium
New for old cover
New for old cover is more popular and almost universally used within the UK. It modifies the principle of indemnity by making no allowance for wear and tear. Most insurers retain the
deduction for wear and tear for items of household linen and clothing, but apply cover for all
other items on a ‘new for old’ basis
First loss policies limit
the sum insured to an amount that the insured feels is the maximum potential loss where this is not the full value of the subject matter of the insurance
Farming
the local market price is the basic of indemnity.
Wholesalers and retailer stock in trade
Indemnity here is the cost of replacing the stock, at the time of the
loss, including the costs of transport to the insured premises and handling costs. It is not possible to insure
stock on any kind of reinstatement basic.
Stock manufacturers stock in trade
this stock generally consists of raw materials, works in progress and
finished stock. Indemnity value is the cost of raw materials at the time and place of loss, plus labour and other costs incurred in respect of work in progress and finished stock
Excess
is an amount that is deducted from each claim and is paid by the insured; some excesses are voluntary; this means that the insured receives some premium reduction for agreeing to carry the excess
Inner limits or item limits
There are many policies that contain limits within the overall sum insured. The most common of these is a household contents policy. There is usually a single item limit (for gold silver or similar item) of 5% of the sum
insured
underinsurance
The average condition is applied whereby only that part of
the loss that is proportionate to the sum insured is paid
What for old cover
Is more popular and almost universally used within the UK. It modifies the principle of indemnity by making no allowance for wear and tear
Agreed value policies
The value of the subject matter of the insurance is agreed at the start of the contract ans the sum insured is fixed accordingly
Limiting factors
There are a number of situations where insurers mah provide less than a full indemnity
What is deductible
There is a lack of consistency in the market regarding the use of the term
