Chapter 7 Flashcards
Define indemnity
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.
Name types of benefit policies
Personal accident, sickness, critical illness, payment protection indemnity, hospital cash plans, permanent health and travel insurance.
What is a benefit policy?
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.
Name the options of indemnity
Cash payment, repair, replacement, reinstatement
Why are there different options for indemnity?
It is so that insurer can find the most economical way o providing indemnity.
What happens if the insurer offers replacement but the insured wants cash?
The insurer will only be required to pay to the insurer the amount they would have paid to the retailer.
Benefits to repairing an item
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.
Benefits of replacement
quicker replacement means further losses are minimised
Benefits of using nominated retailers
- 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
What does reinstatement mean?
Reinstatement means that the insurer agrees to restore a building that has been damaged by an insured peril
Do insurers like reinstatement?
No
Why is reinstatement not popular with insurers?
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.
Name examples of contracts of indemnity
Property and liability policies
Measuring indemnity: Marine insurance
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).
When is the insurable value identified?
It is effective from the start period of insurance (policy inception) and in unaffected by subsequent market price variation.
Measuring indemnity: Property Insurance Basic Cover
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.
Measuring indemnity: Property Insurance Reinstatement Cover
Full reinstatement value at the time of reinstatement
Reinstatement Memorandum
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.
Day one reinstatement
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.
Measuring indemnity: Household goods, Basic Cover
Cost of replacing the item at the time of loss subject to wear and tear deduction
Measuring indemnity: Household goods, New for Old
Modified the principle for indemnity by making no allowance for wear and tear. This is reflected in the sum insured and the premium paid.
Measuring indemnity: Machinery and contents, Basic Cover
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
Measuring indemnity: Machinery and contents, Reinstatement conditions
The sum insured must be calculated on the same basis as the proposed settlement formula
Cash settlements, reinstatements
Wear and tear and depreciation will be taken into account
Manufacturers stock in trade
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
Wholesalers and retailers stock in trade
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.
Measuring indemnity: Farming Stock
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.
Measuring indemnity: Liability insurance
Indemnity is measure as the amount of any country award plus the costs and expenses arising in connection with the claim.
Agreed value policies
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.
First loss policies
When the insured believes that the full value of the insured property is not really at risk.
New for old cover
An attempt to replace at current costs.
Sum Insured
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.
