Chapter 7 - Indemnity

Question 1

Definition of Indemnity

Answer 1

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

Question 2

Benefit Policies

Answer 2

Some insurance policies are not policies of indemnity. These policies, Accident and Sickness, that provide a fixed benefit where there is no way that a price can be placed on the loss of a limb or of sight.

Question 3

Options Available to Insurers to Settle Claims

Answer 3

These options only apply if they are stated in the policy. If not then the insured has a legal right to financial compensation.
• Cash payment
• Repair
• Replacement
• Reinstatement

Question 4

Application of Indemnity Property Insurance

Answer 4

Where equipment is completely destroyed, indemnity is the replacement cost less an allowance for wear and tear.
For partial damage, indemnity is the repair cost less an allowance for wear and tear.
Most property policies incorporate some form of new for old cover.

Question 5

Application of Indemnity Liability Insurance

Answer 5

Provides indemnity in respect of their legal liability to pay damages and claimant’s costs.
Will always be a limit to how much the policy will pay in the event of a claim.

Question 6

Measuring Indemnity Marine Insurance

Answer 6

In a valued policy the insurable value is agreed between the insured and the insurer.
In an unvalued policy it must be calculated using the formula in the Marine Insurance Act 1906.

Question 7

Measuring Indemnity Property Insurance

Answer 7

Indemnity is valued at the date and place of loss.

Buildings:
Reinstatement conditions are the most common. Cover applies for the full reinstatement value at the time of reinstatement.

Household goods:
Indemnity is based on the cost of replacing the item at the time of loss, subject to a wear and tear deduction. New for old cover is more popular and almost universally used in the UK. There is still a deduction for wear and tear for items of linen and clothing.

Question 8

Measuring Indemnity Liability Insurance

Answer 8

Indemnity is measured as the amount of any court award, or settlement negotiated out of court, plus the costs and expenses arising in connection with the claim.

Question 9

First Loss Policies

Answer 9

When the insured believes that the full value of the insured property is not really at risk. In this case the insured may request the policy has a sum insured that is less than the full value. This is known as a first loss policy.