Chapter 7 - Indemnity Flashcards
A - Definition of Indemnity
- What is the definition of indemnity?
Financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occurred.
A - Definition of Indemnity
A1 Benefit Policies
- Are policies that provide fixed benefits policies of indemnity?
No.
A - Definition of Indemnity
A1 Benefit Policies
- What do benefit policies mainly cover?
Accident & Sickness.
A - Definition of Indemnity
A1 Benefit Policies
- With a benefit policy, what will be paid in the event of a claim?
A defined amount or benefit.
A - Definition of Indemnity
A1 Benefit Policies
- Give examples of benefit policies.
Personal accident
Sickness
Payment protection indemnity
A - Definition of Indemnity
A2 Options available to Insurers
- What are the indemnity options available for property insurance?
Cash payment
Repair
Replacement
Reinstatement
A - Definition of Indemnity
A2 Options available to Insurers
- The indemnity options available for property insurance are only available…if?
Stated in the policy.
If they are not, the insured has a legal right to financial compensation.
A - Definition of Indemnity
A2A Cash Payment
- What is the most common form of indemnity, particularly with commercial insurances?
Cash Payment.
A - Definition of Indemnity
A2A Cash Payment
- Since the 1990s, how has indemnity for personal insurance policies changed?
Seen a growing trend of replacement through nominates retail chain stores or via the insurers own supply chains.
A - Definition of Indemnity
A2A Cash Payment
- What is required of insurers if the insured does not agree to accept replacement as the form of indemnity?
Cash settlement, however the insurer will only be required to pay to the insured the amount they would have paid the retailer.
A - Definition of Indemnity
A2A Cash Payment
- If replacement is the form of indemnity, is the insured allowed to choose where the replacement is purchased? What happens if an acceptable replacement cannot be found?
According to the Financial Ombudsman service, yes.
The insured is entitled to a full cash settlement.
A - Definition of Indemnity
A2B Repair
- Why might an insurer opt to repair damage to an insured item, rather than replace?
Chance of lower cost
A - Definition of Indemnity
A2B Repair
- What is the most common type of insurance that uses repair as the form of indemnity?
Motor insurance.
A - Definition of Indemnity
A2C Replacement
- What is the common example of replacement as a means of providing indemnity?
Glass insurance.
A - Definition of Indemnity
A2C Replacement
- Why might replacement be chosen as the means of providing indemnity? Provide an example.
Quick replacement means further losses are minimized. e.g. when shop front windows are smashed.
A - Definition of Indemnity
A2C Replacement
- Name some other situations where insurers might use replacement?
Vehicle write-offs where the vehicle is less than a year old.
Items relating to jewelry if the insurer can obtain a significant discount from a jeweler.
A - Definition of Indemnity
A2C Replacement
- What are the benefits of using replacement?
Discounts reduce cost to the insurer
Replacement reduces fraudulent claims, as fraudsters typically want cash
Customer experience is improved by using quality retailers
A - Definition of Indemnity
A2D Reinstatement
- What does reinstatement do?
The insurer agrees to restore a building (or piece of machinery) that has been damaged by an insured peril.
A - Definition of Indemnity
A2D Reinstatement
- What is the difference between replacement and reinstatement?
Reinstatement only applies to building and is concerned with bringing the property back to its pre-loss condition.
To do this insurers effectively occupy the premises to reinstate. Replacement does not carry with it the “occupation” aspect.
A - Definition of Indemnity
A2D Reinstatement
- Why don’t insurers like reinstatement?
Because of the uncertainty of cost.
B - Application of Indemnity
- Why are property policies and liability policies contracts of indemnity?
Because a value can be placed on the subject-matter insured.
B - Application of Indemnity
- Does the principle of indemnity apply to pecuniary insurances, such as business interruption?
Yes.
B - Application of Indemnity
- Why are life and personal accident policies not contracts of indemnity?
The insured cannot be restored to the same financial position after a loss.
B - Application of Indemnity
B1 Property Insurance
- What is the measure of indemnity where equipment is completely destroyed?
The replacement cost less an allowance for wear and tear.
B - Application of Indemnity
B1 Property Insurance
- What is the measure of indemnity in the case of partial damage to property?
The repair cost less an allowance for wear and tear.
B - Application of Indemnity
B2 Liability Insurance
- What does a liability policy provide in respect of indemnity to the insured?
Their legal liability to pay damages and claimant’s costs.
B - Application of Indemnity
B2 Liability Insurance
- Does a liability insurance policy define the financial value of the indemnity?
No, it is often left to the courts to decide.
B - Application of Indemnity
B2 Liability Insurance
- Do liability insurance policies have a limit to how much they will pay?
Yes, always. This will be stated in the policy.
C - Measuring Indemnity
- In property insurance, what is the value of the subject matter?
Its value at the time and place of loss.
C - Measuring Indemnity
C1 Marine Insurance
- What are the two types of marine insurance policy?
Valued policy
Unvalued policy
C - Measuring Indemnity
C1 Marine Insurance
- What is a Marine valued policy?
Same as an agreed value policy, the insurable value is agreed between the insured and the insurer.
C - Measuring Indemnity
C1 Marine Insurance
- What is the value in a Marine unvalued policy?
The insured value must be calculated using the formula in the marine insurance act.
C - Measuring Indemnity
C1 Marine Insurance
- What do Marine valued and unvalued policies have in common?
An identifiable insurable value,
effective from the start,
which is unaffected by subsequent market price variation.
C - Measuring Indemnity
C2 Property Insurance
- What is the measure of indemnity for property insurance?
It’s value at the date and place of loss.
C - Measuring Indemnity
C2A Buildings
- What is the indemnity with basic buildings cover?
Cost of repairs or reconstruction at the time of loss, with a deduction for wear and tear.
C - Measuring Indemnity
C2A Buildings
- With buildings insurance, what is betterment? Provide examples.
An allowance for improvements that result from repair or reconstruction. New plumbing or new decoration.
C - Measuring Indemnity
C2A Buildings
- Is basic cover common in buildings insurance?
No, it is rare. Insurance by reinstatement is much more common.
C - Measuring Indemnity
C2A Buildings
- With buildings insurance, what do reinstatement conditions cover?
Full reinstatement value at the time of reinstatement, not discounted for wear and tear.
C - Measuring Indemnity
C2A Buildings
- With buildings insurance, what are the most common types of insuring clauses with reinstatement conditions?
Reinstatement Memorandum
Day One Reinstatement
C - Measuring Indemnity
C2A Buildings
- With a reinstatement memorandum what must the sum insured represent?
The full value at time of reinstatement.
C - Measuring Indemnity
C2A Buildings
- With a reinstatement memorandum is there an allowed margin for error in estimating the sum insured? What is it?
Yes.
The insured value must be at least 85% of the actual value, otherwise claim payments will be reduced.
C - Measuring Indemnity
C2A Buildings
- With a reinstatement memorandum, when must reinstatement take place?
Without delay, although the insured is given flexibility about where and how it takes place.
C - Measuring Indemnity
C2A Buildings
- With a Day One Reinstatement, how is the sum insured established?
The insured is required to state the reinstatement amount on the first day of the cover.
C - Measuring Indemnity
C2A Buildings
- With Day One Reinstatement, how is reinstatement value adjusted over time? How do insurers charge for it?
Insurers provide an automatic uplift to allow for inflation.
They only charge a modest increase for this inflation element.
C - Measuring Indemnity
C2A Buildings
- With Day One Reinstatement, is the reinstatement figure relatively easy to establish?
Yes.
C - Measuring Indemnity
C2A Buildings
- With Day One Reinstatement, is there a margin for error?
No.
C - Measuring Indemnity
C2A Buildings
- How is Day One Reinstatement charged?
The inflation uplift is usually 50% of the declared value, whereas the premium inflation is usually only 15%.
C - Measuring Indemnity
C2A Buildings
- With building insurance, if the insured wants to insure without any deduction for wear and tear, what type of policy can be ruled out?
Indemnity policies.
C - Measuring Indemnity
C2A Buildings
- Say a company wanted to insure a factory with a reinstatement memorandum where the rebuilding cost today is £1m, the rebuild time would be 18 months and inflation would be 20%. How would this work? What would the actual reinstatement value be in the event of a loss?
The rebuilding sum insured would be set at £1.2m and they would pay a premium based on this figure.
The actual reinstatement value would be no more than £1.412m. Average would not be applied up to this value because its sum insured represent 85% of this amount.
C - Measuring Indemnity
C2B Household Goods
- With Household Goods insurance, what is indemnity based on with basic cover?
The cost of replacing the items damaged or destroyed at the time of the loss, subject to wear and tear.
C - Measuring Indemnity
C2B Household Goods
- With Household Goods insurance, what is the indemnity with new for old cover?
Cost of replacing at time of loss
No allowance for wear and tear. (Most insurers make an exception for household linen and clothing)
C - Measuring Indemnity
C2C Machinery and Contents
- With Machinery and Contents insurance, what is the measurement of indemnity with basic cover? Is basic cover commonly used?
Depends if there is a ready second hand market for the item.
If there is, indemnity is cost plus carriage or installation.
If there isn’t, indemnity is cost of repair or replacement less wear and tear.
No, it is rarely used.
C - Measuring Indemnity
C2C Machinery and Contents
- With Machinery and Contents insurance, what type of Reinstatement Conditions can apply?
Either a reinstatement memorandum or day one reinstatement.
C - Measuring Indemnity
C2D Cash Settlements under Reinstatement Conditions
- With reinstatement conditions, what happens if no reinstatement takes place?
The insured is entitled only to a cash settlement based upon strict indemnity. Wear and tear and depreciation will be taken into account.
C - Measuring Indemnity
C2E Stock
With Stock insurance, what is the measure of indemnity for a Manufacturers’ Stock in Trade?
Indemnity consists of raw materials, WIP & finished stock.
C - Measuring Indemnity
C2E Stock
With Stock insurance, what is the measure of indemnity with Wholesalers’ and Retailers’ Stock in Trade?
Indemnity is cost of replacing the stock, at the time of loss, including costs of transport and handling costs.
C - Measuring Indemnity
C2E Stock
With Stock insurance, is it possible to insure stock on a reinstatement basis?
No.
C - Measuring Indemnity
C2E Stock
- With stock insurance, is the insured entitled to payment in respect of any potential profit that would have been made? How would it be catered for?
No. That would be catered for by a business interruption policy.
C - Measuring Indemnity
C2E Stock
- With stock insurance, what happens if the market value is less than the raw materials plus cost?
The insured may receive less.
C - Measuring Indemnity
C2F Farming Stock
- What is the measure of indemnity with livestock and produce?
The local market price
C - Measuring Indemnity
C2F Farming Stock
- How is farming stock different to other stock? Why?
The insured is entitled to receive any potential profit on sale.
This is because the market price is the buying price and the selling price and there is no way of separating the profit element.
C - Measuring Indemnity
C3 Liability Insurance
- What is the measure of indemnity with liability insurance?
The amount of any court award plus cost and expenses arising in connection with the claim.
D - Modifying Indemnity
- In what type of policies is the principle of indemnity modified?
Agreed Value Policies
First Loss Policies
D - Modifying Indemnity
D1 Agreed Value Policies
- When is the value of the subject matter agreed with an agreed value policy?
At the start of the contract.
D - Modifying Indemnity
D1 Agreed Value Policies
- With an Agreed Value Policy, when will the value of the subject matter be reviewed?
At renewal.
D - Modifying Indemnity
D1 Agreed Value Policies
- With an Agreed Value Policy, what does not need to be proved in the event of a claim?
The value of the subject matter.
D - Modifying Indemnity
D1 Agreed Value Policies
- What type of insurance commonly uses Agreed Value Policies?
Marine Insurance.
D - Modifying Indemnity
D1 Agreed Value Policies
- Give examples of when Agreed Value Policies may be used outside of Marine Insurance.
Works of Art
Vintage Cars
Other items whose true value may become a matter of dispute at the time of a claim.
D - Modifying Indemnity
D1 Agreed Value Policies
- Is it true that with Agreed Value Policies it is common to apply (confine) the agreed valuation to total losses and to apply (provide) an indemnity basis to partial losses?
Yes.
D - Modifying Indemnity
D1 Agreed Value Policies
- With an Agreed Value Policy, if the policy wording does not restrict the agreed value to total losses, how will partial losses be dealt with?
On a proportionate basis.
D - Modifying Indemnity
D2 First Loss Policies
- When are First Loss Policies used?
Where the insurer believes that the full value of the insured property is not really at risk.
D - Modifying Indemnity
D2 First Loss Policies
- Give an example of where first loss policies are used.
Stock in a warehouse would need many lorries to remove so no need to insure the full value for theft cover.
D - Modifying Indemnity
D2 First Loss Policies
- How is the premium calculated with first loss policies?
Calculated for the full value of the subject matter, with a modest discount given.
D - Modifying Indemnity
D2 First Loss Policies
- Why do First Loss Policies only receive a modest discount?
Because the insurer must still pay all individual claims up to the first loss figure so there may only be a slight reduction in exposure.
D - Modifying Indemnity
D3 New for Old Cover
- What type of insurance does new for old cover usually apply to?
Household Contents insurance.
D - Modifying Indemnity
D3 New for Old Cover
- What type of insurance risk could be considered as a type of new for old policy?
Commercial property risks insured on a reinstatement basis.
E - Speed of Indemnity
- What is the name of the legislation that gives policyholders a legal right to claim damages in the event of a late payment?
Enterprise Act 2016.
E - Speed of Indemnity
- According to the Enterprise Act 2016, how soon must insurers pay any sums due to the insured?
Within a “reasonable time”.
E - Speed of Indemnity
- What can the insured do if not paid within a reasonable time?
Enforce payment of the claim.
Pursue a claim for damages.
E - Speed of Indemnity
- What constitutes a “reasonable time” depends on…?
The type of insurance
The size and complexity of the claim
Compliance with regulations
Factors outside the insurers’ control e.g. supply chain issues
E - Speed of Indemnity
- What is a key safeguard surrounding claims against insurers? Provide examples.
Claims made against the insurer have to be for losses that were foreseeable
e.g. insurers would be able to foresee that a delay in paying for a broken machine in a busy factory would lead to production losses, whereas a broken boiler in an empty property unused for many years would not be foreseeable.
F - Limiting Factors
- There are a number of situations where insurers will provide less than full indemnity. Why might that be?
Poor choice of policy cover
Full cover was not needed
F - Limiting Factors
F1 Sum Insured
- The maximum amount that can be recovered under a property insurance policy is limited to what?
The sum insured.
F - Limiting Factors
F1 Sum Insured
- What is the maximum amount that can be recovered with a liability policy?
The indemnity limit plus costs.
F - Limiting Factors
F1 Sum Insured
- Some policies have no limit to the sum insured. Give an example.
Third party personal cover in a motor policy.
F - Limiting Factors
F1 Sum Insured
- Where there is no stated limit to indemnity in a liability policy, what is indemnity restricted to?
The amount the court awards.
F - Limiting Factors
F2 Inner Limits or Item Limits
- Many policies contain inner limits within the overall sum insured. What is the most common example?
With household contents insurance there is usually a single item limit of 5% of the sum insured.
F - Limiting Factors
F3 Average
- What is underinsurance?
The insured understates the value of the subject matter.
F - Limiting Factors
F3 Average
- Insurers apply a policy term known as the Average Condition. What does it mean?
The insured is considered the insurer for the amount they have underinsured. Losses will therefore be shared proportionate to the amount underinsured.
F - Limiting Factors
F3 Average
- Are partial losses subject to average?
Yes.
F - Limiting Factors
F3 Average
- What types of insurance does the policy of average apply to? What type of insurance can it not be applied to?
Property insurance.
Liability insurance.
F - Limiting Factors
F3A Variations in Conditions of Average
- What type of insurance is the special condition of average applied to?
Agricultural produce and livestock.
F - Limiting Factors
F3A Variations in Conditions of Average
- Why is the special condition of average applied to agricultural produce and livestock?
Because the value may fluctuate significantly.
F - Limiting Factors
F3A Variations in Conditions of Average
- What does the special condition of average state?
If the value insured represents 75% or more of the actual value at the time of loss, average will not be applied.
F - Limiting Factors
F3A Variations in Conditions of Average
- What type of insurance does the two condition of average apply to?
Contents and stock.
F - Limiting Factors
F3A Variations in Conditions of Average
- On what basis is the two conditions of average arranged?
On a floating basis (more than one location), where specific insurance also applies.
F - Limiting Factors
F3A Variations in Conditions of Average
- How does two conditions of average work?
If there is a more specific insurance at any one of the locations, only the excess value will be used to check whether average applies.
F - Limiting Factors
F4 Excess and Deductible
- Name a type of insurance where an excess is compulsory.
Motor insurance.
F - Limiting Factors
F4 Excess and Deductible
- How are excesses and deductibles handled if there is underinsurance?
The excess or deductible is deducted last of all.
