Chapter 7 - Indemnity

Question 1

Define indemnity

Answer 1

Financial compensation sufficient to place the insured in the same financial position after a loss as they had immediately before the loss occurred.

Question 2

Explain a benefit policy

Answer 2

= Policies which provide fixed benefits (mainly cover accident and sickness) often where a price cannot be placed.
e.g. personal accident, sickness, PPI, critical illness

Question 3

What are the 4 settlement options available to insureds for contracts of indemnity? Explain each of them

Answer 3

1. Cash payment - most common, some types of insurance is always this, BI, loss of rent & liabilities (liabilities the payment is made to the wronged party)
2. Repair - if cheaper and insurer has network to reduce cost
3. Replacement - most common with glass (discounts, minimise fraud, improved customer experience)
4. Reinstatement - only buildings, when an insurer restores it. not common as when restoring the insurer is then liable for any damages to the building and can be more expensive than anticipated.

Question 4

How is indemnity measured for property insurance?

Answer 4

Measure of indemnity is the cost of replacement or repair at the time of loss, minus an allowance for wear and tear

Question 5

Why are life and personal accident policies not contracts of indemnity?

Answer 5

Because insured cannot be restored to the same financial position after the loss.

Question 6

What does liability insurance do?

Answer 6

Provides indemnity to the insured in respect of their legal liability to pay damages and the claimant’s costs decided by the courts. Always a limit of indemnity

Question 7

How is indemnity measured for marine insurance?

Answer 7

They are valued policies (same as agreed value). In an unvalued policy is still calculated and agreed by the Insurer and insured. So, is unaffected by market fluctuations.

Question 8

Explain what is meant by betterment

Answer 8

When improvements are made to a building which result from repair or reconstruction e.g. new plumbing or decoration.

Question 9

Explain basic cover when referencing building indemnity

Answer 9

Basic cover is when the indemnity is calculated for loss or damage to buildings as the cost of repair or reconstruction at the time of the loss. And make allowance for betterment. Very unusual

Question 10

Explain a reinstatement condition when referencing buildings indemnity. Explain the differences between the two types

Answer 10

Where cover is applied on the basis of the full reinstatement value at the time of reinstatement.

1. Reinstatement memorandum - Sum insured must represent full value. Insured value must be at least 85% of actual value otherwise claim payment may be reduced, reinstatement must occur without delay.
2. Day one reinstatement - insured states reinstatement amount on the first day of cover. Insurer provides automatic uplift (often 50% of declared value) for inflation. If not the correct value, then underinsured.

Question 11

How is indemnity measured for the following insurance categories:
- Household goods
- Machinery and contents
- Cash settlements
- Stock
- Farming Stock
- Liability insurance

Answer 11

• Household goods: Basic cover (cost of replacement at time of loss) or new for old
• Machinery: Basic cover = if a second hand market, then cost of replacement or if no second hand, cost of repair or replacement less wear and tear -> can also be on a reinstatement basis
• Cash settlement - as is says
• Stock - if manufacturers stock in trade then indemnity value is cost of materials plus labour and other cost incurred or if wholesalers then cost of replacing stock and cost of transport
• Farming stock - indemnity value is the local market price.
• Liability - indemnity value is the amount the court awards plus cost and expenses arising in connection to the claim.

Question 12

How can indemnity be modified to allow insured a more strict indemnity settlement?

Answer 12

= Agreed value and first loss policies (and new for old cover)

Question 13

Explain what is meant by an agreed value policy

Answer 13

Where the value of the subject matter of insurance is agreed at the start. Can be reviewed at each renewal. So not necessary to prove value at the time of loss

Common in marine, art, vintage cars,

Question 14

Explain what is meant by a first loss policy

Answer 14

Insured requests a sum insured which is less than full value if believes a total loss is impossible.

Question 15

Explain what is meant by new for old cover?

Answer 15

Where risks are insured on a reinstatement basis. Normally for household contents

Question 16

What are the implications of the Enterprise Act 2016

Answer 16

= protects PH if the insurer does not settle valid claims within a reasonable time.

Reasonable depends on type of insurance, size and complexity of the claim and compliance with regulatory rules etc.

Question 17

What are the limiting factors of indemnity?

Answer 17

Sum insured, average, excesses and deductibles

Question 18

Explain an inner limit/item limit

Answer 18

= When a policy has a limit within the overall sum insured e.g. for household contents

Question 19

What is underinsurance and how does it lead to average?

Answer 19

If insured understates the value of the subject matter of insurance (as total value declared = SI) = underinsurance and if a claim does arise, the pro rata condition of average is used. Average does not apply to liability but can do commercial and household policies.

Question 20

How can the condition of average be varied?

Answer 20

1. Special condition of average - for agricultural produce or livestock. If value at time of loss is at least 75% of actual value then average is not applied. Can also insure the forward price of produce.
2. Two conditions of average - where stock or contents is arranged on floating basis

Question 21

For a deductible, when claiming for ‘any one event’ what is the time limit

Answer 21

72 hours for any one event.

Question 22

What is the difference between an excess and a deductible?

Answer 22

Simply, a deductible is a large excess where a commercial organisation agrees to meet the cost of any claim falling within a policy terms.

Policies which have an excess will pay up to the policy limit over and above the excess but with deductibles the amount is taken from the limit.

If an average is applied, the deductible is deducted last so applies in full.