Chapter 7

Question 1

Define indemnity

Answer 1

Indemnity is financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occurred.

Question 2

Name types of benefit policies

Answer 2

Personal accident, sickness, critical illness, payment protection indemnity, hospital cash plans, permanent health and travel insurance.

Question 3

What is a benefit policy?

Answer 3

When a price cannot be placed on the loss, therefore the principle of indemnity cannot apply. In the event of a claim, a defined amount or benefit will be claimed.

Question 4

Name the options of indemnity

Answer 4

Cash payment, repair, replacement, reinstatement

Question 5

Why are there different options for indemnity?

Answer 5

It is so that insurer can find the most economical way o providing indemnity.

Question 6

What happens if the insurer offers replacement but the insured wants cash?

Answer 6

The insurer will only be required to pay to the insurer the amount they would have paid to the retailer.

Question 7

Benefits to repairing an item

Answer 7

The insurer has more negotiating power as it is a larger organisation so will get a better rate than if the insured were to try. This too provides the repairer with a flow of business from the insurer.

Question 8

Benefits of replacement

Answer 8

quicker replacement means further losses are minimised

Question 9

Benefits of using nominated retailers

Answer 9

1. discounts they receive means lower claims costs 2. can prevent fraudulent claims 3. customer experience is improved as insured can have a new appliance delivered to their door and the billwill be paid directly by the insurer

Question 10

What does reinstatement mean?

Answer 10

Reinstatement means that the insurer agrees to restore a building that has been damaged by an insured peril

Question 11

Do insurers like reinstatement?

Answer 11

No

Question 12

Why is reinstatement not popular with insurers?

Answer 12

Because unless the policy specified otherwise they are bound to reinstate the property so that it is largely in the same condition it was before the loss. In any event they are their own insurers of the risk during the period of reinstatement.

Question 13

Name examples of contracts of indemnity

Answer 13

Property and liability policies

Question 14

Measuring indemnity: Marine insurance

Answer 14

The insured value is agreed between the insured and the insurer. In an unvalued policy, the value must be calculated using the formula in the Marine Insurance Act 1906 (MIA 1906).

Question 15

When is the insurable value identified?

Answer 15

It is effective from the start period of insurance (policy inception) and in unaffected by subsequent market price variation.

Question 16

Measuring indemnity: Property Insurance Basic Cover

Answer 16

Calculate the indemnity for loss as the cost to repair or reconstruction at the time off loss. They make an allowance for any improvements that might result from the repair and this is called betterment. This is very unusual for buildings to be insured on this basis.

Question 17

Measuring indemnity: Property Insurance Reinstatement Cover

Answer 17

Full reinstatement value at the time of reinstatement

Question 18

Reinstatement Memorandum

Answer 18

Insured pays a premium based on the higher amount however it states that the insured value must be at last 85% of the actual value otherwise claim payments will be reduced.

Question 19

Day one reinstatement

Answer 19

Insured is required to state the reinstatement amount on the first day of cover. Insurers provide an automatic uplift to a allow for inflation but only charge a modest increase for this inflation element.

Question 20

Measuring indemnity: Household goods, Basic Cover

Answer 20

Cost of replacing the item at the time of loss subject to wear and tear deduction

Question 21

Measuring indemnity: Household goods, New for Old

Answer 21

Modified the principle for indemnity by making no allowance for wear and tear. This is reflected in the sum insured and the premium paid.

Question 22

Measuring indemnity: Machinery and contents, Basic Cover

Answer 22

This is a limited form of cover. Usually where there is a second hand market this is the cost of indemnity. Where there is no second hand market indemnity is the cost of repair/replacement less and allowance for wear and tear

Question 23

Measuring indemnity: Machinery and contents, Reinstatement conditions

Answer 23

The sum insured must be calculated on the same basis as the proposed settlement formula

Question 24

Cash settlements, reinstatements

Answer 24

Wear and tear and depreciation will be taken into account

Question 25

Manufacturers stock in trade

Answer 25

Stock consists of raw materials, work in progress and finished stock. Indemnity if the cost of raw materials, at the time and place of loss, plus labour and other costs incurred in respect of work progress and finished stock

Question 26

Wholesalers and retailers stock in trade

Answer 26

Indemnity is the cost of replacing the stock, at the time of the loss, including the costs of transport to the insured’s premises in handling costs.

Question 27

Measuring indemnity: Farming Stock

Answer 27

The local market is the basis of indemnity. In farming the insured is entitled to receive any potential profit on sales. This is because the market price is both the buying price and selling price at any time and there is no way of separating out the profit element.

Question 28

Measuring indemnity: Liability insurance

Answer 28

Indemnity is measure as the amount of any country award plus the costs and expenses arising in connection with the claim.

Question 29

Agreed value policies

Answer 29

The value of the subject matter is agreed at the start. These are common in marine insurances. Also when insuring works of art/vintage motor cars whose true value might become a matter of dispute at the time of a claim.

Question 30

First loss policies

Answer 30

When the insured believes that the full value of the insured property is not really at risk.

Question 31

New for old cover

Answer 31

An attempt to replace at current costs.

Question 32

Sum Insured

Answer 32

If following a loss, the amount needed to provide indemnity is greater than the sum insured , the insureds recovery is limited to the sum insured.