Chapter 7

Question 1

Define indemnity

Answer 1

Financial compensation sufficient to return the insured to the same financial position they were in before the loss occurred

Question 2

What tort case established the importance of the principle of indemnity?

Answer 2

Castellain v. Preston (1883)

Question 3

What kind of policies are exempt from the principle of indemnity

Answer 3

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

Question 4

What four settlement options are available to insurers

Answer 4

1. Cash payment
2. Repair
3. Replacement
4. Reinstatement

Question 5

What is cash payment

Answer 5

Payment of money by the insurer to the insured

Question 6

What is repair

Answer 6

where it is possible insurers may opt to repair any damage to an insured item

Question 7

What is replacement

Answer 7

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.

Question 8

What is reinstatement

Answer 8

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

Question 9

Why would an insurer have approved or recommended retailers

Answer 9

They can guarantee quality of workmanship and may be able to negotiate discounted rates to lower costs

Question 10

What is the difference between reinstatement and repair

Answer 10

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

Question 11

In property insurance where the subject matter is completely destroyed (total loss), what is the measure of indemnit

Answer 11

The replacement cost of the property, minus an allowance for wear and tear

Question 12

In property insurance where the subject matter is only partially damaged, what is the measure of indemnity?

Answer 12

Repair cost, minus an allowance for wear and tear

Question 13

In liability insurance what is the measure of indemnity

Answer 13

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

Question 14

What is an agreed value policy?

Answer 14

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)

Question 15

valued policy

Answer 15

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)

Question 16

betterment

Answer 16

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.

Question 17

Reinstatement memorandum

Answer 17

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%

Question 18

Day one reinstatement

Answer 18

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

Question 19

New for old cover

Answer 19

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

Question 20

First loss policies limit

Answer 20

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

Question 21

Farming

Answer 21

the local market price is the basic of indemnity.

Question 22

Wholesalers and retailer stock in trade

Answer 22

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.

Question 23

Stock manufacturers stock in trade

Answer 23

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

Question 24

Excess

Answer 24

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

Question 25

Inner limits or item limits

Answer 25

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

Question 26

underinsurance

Answer 26

The average condition is applied whereby only that part of

the loss that is proportionate to the sum insured is paid

Question 27

What for old cover

Answer 27

Is more popular and almost universally used within the UK. It modifies the principle of indemnity by making no allowance for wear and tear

Question 28

Agreed value policies

Answer 28

The value of the subject matter of the insurance is agreed at the start of the contract ans the sum insured is fixed accordingly

Question 29

Limiting factors

Answer 29

There are a number of situations where insurers mah provide less than a full indemnity

Question 30

What is deductible

Answer 30

There is a lack of consistency in the market regarding the use of the term