Chapter 7: Indemnity Flashcards
what is indemnity
financial compensation sufficient to place PH in same financial position after a loss as they previous enjoyed
what are benefit policies
not policies of indemnity- accident and sickness
unable to price value of limb etc- if claim define amount paid
examples of benefit policies
personal accident; sickness; critical illness; payment protection; hospital cash plans; permanent health; elements of travel insurance
settlement options to insurers
cash payment
repair
replacement
reinstatement
all only apply if stated in policy
cash payments
insurers use partnership with chains- discount up to 20%- if insured want cash payment- insurer needs only pay what they would have with the chain (discounted)
reinstatement
insureer agrees to restore building/machinery damaged by an insured peril- same condition before the loss
often applies to buildings- can’t stop work halfway through even if exceeds SI
insurers are the insurers of risk during reinstatement
application of indemnity
value can be placed on subject matter- EG
pecuniary, business interruption, property
property insurance indemnity
measure of indemnity is replacement cost less allowance for wear and tear
liability insurance
indemnity in respect of legal liability for damage and claims- financial value of indemnity not defined- court decides
measuing indemnity
financial value of subject matter at time of loss
marine insurance- in a valued policy
insurable value agreed between insured and insurer- value in unvalued policy calculated using formula of Marine Insurance Act 2016
marine insurance act 2016 formula
must be an identifiable insurable interest in both policies- unaffected by subsequent market price variation- corresponds with SI
reinstatement conditions
extension of principle of indemnity- cover applies on basis of full reinstatement value at time of initial reinstatement
basic building cover
indemnity settlement- loss/damage to buildings as cost of repair at time of loss- allowance for betterement: improved plumbing
reinstatement memorandum
SI must represent full value at time of reinstatement
insured pays higher premium- 15% margin for SI- insured value must be 85% of SI
Insurers will pay no more than SI at time of loss
Reinstatement carried out without delay
Day one reinstatement
insurer required to statement reinstatement amount on first day
uplift for inflation up to 50% of declared value
reinstatement day one figure must be accurate- no margin %
more cost efficient than memorandum
Machinery and Contents - basic cover
ready second hand market- indemnity cost of second hand items plus transport/installation
no second hand market- cost of repair/replace less wear and tear
reinstatement for machinery and contents
covers for machinery and content often on basis which modifies principle of indemnity
reinstatement memorandum often used- day one also available
cash statements under reinstatement conditions
in order to benefit insured must actually reinstate
if no reinstatement insured entitled to settlement upon limits of indemnity
stock- manufacturers stock in trade- raw materials
indemnity cost of raw materials at time and place of loss plus labour etc
wholesaler’s and retailers’ stock in trade
indemnity cost of replacing stock as well as cost for transport
in both cases insured not entitled to payment in respect of profit- catered for by business interuption
difficulty in measuring stock- no definite resale value- maintain financial position
Household goods - basic cover
replacing items at time of loss subject to wear and tear: new for old cover
modifies principle of indemnity- justified by SI replacement cost of goods- extends principle of indemnity
Farming stock
local market price basis of indemnity- insured able to achieve profit - market price both buying and selling price- no way of seperating profit element
indemnity measured in liability insurance
amount of any court award plus costs and expenses arising in connection with claim
modifying indemnity
modifications that allow insured to get either more or less than strict indemnity settlement- principle of indemnity modified in agreed value policies and first loss
agreed value policies
value of subject matter agreed at start of contract- reflected in SI
common in marine- works of art, classic PC- true value is disputable
common to confine valuation to total losses- partial losses settled as if policy unvalued
first loss policies
when insured believes full value of property is not at risk- total/substantial loss seems impossible- PH wld request lower SI than full value
new for old cover
household contents- commercial proprerty risks insured on reinstatement basis
speed of indemnity - enterprise act 2016
passed may 4th gives PH legal right to claim damages in event of late payment- applies to every reinsurance policy
speed of indemnity details (copied)
- Retail and smaller commercial customers had access to address late settlement claims via Financial Ombudsman Service- EG complainants could be awarded interest in respect of delayed settlements- note neither eligible/ non eligible complainants have no right to legal right to compensation.
- Act amended IA2015- reinsurers must pay any sums due to insured within ‘reasonable time’ – if not paid in reasonable time, insured entitled to enforce payment of claim and pursue claim for damages.
- What constitutes reasonable time- type of insurance; size and complexity of claim; compliance with relevant statutory rules; supply chain reliability.
- Act provides insurers will not be in breach of the provisions merely by failing to pay claim white dispute is outstanding- claims against reinsurers will be time barred unless they are made no later than one year from date on which insurer has paid all sums in respect of claim.
- Safeguards: loss has to be foreseeable- EG insurer would be able to foresee that delay in paying for broken machine would lead to production losses.
- Parties to non consumers permitted to contract out the provisions the reinsurers must meet ‘transparency requirements’ – reinsurer’s attention must be brought to disadvantageous term before contract entered into and term must be clear- if requirements not met, term will be void.
- Term that seeking to contract out of late payment will be void if insurer deliberately fails to pay out in reasonable time- insurers unable to provisions out of contracts for consumer contracts
Limiting factors: insureds choice of policy; poor insurance arrangements; full cover not requested-
Limiting factors
insureds choice of policy; poor insurance arrangements; full cover not requested policy terms may restrict insured indemnity
inner limits or item limits
limits within overall sum insured- EG contents single item limit of 5% of SI
average
SI is total value declared by insured- determines premium
everyone who contributes to the pool pays premium based on full value of subject matter
average condition- insured their own insurer for risk they have chosen not to insure.
average formula for average- subject to pro rata condition of average
sum insured/ value of goods at risk x loss
variations in conditions of average
principle that losses will be paid in proportion to what insured has set as SI applies to property
special condition of average
applied similiar to farming stock- likewise special condition to agricultural productd and livestock as value fluctuates
underinsurance in terms of special condition of average
effect of clause states that SI at time of loss represents 75% of value- average will not be applied- insured given 25% margin for error before underinsurance reduces claim
condition does not apply to items solely to growing crops, fences, gates, boundary walls, household goods
two conditions of average (copied)
conditions designed to apply to contents or stocks, insurance of which is arranged on floating basis (more than one location) – wording states that ‘average’ applies- goes on to state more specific insurance for items insured at any of the locations= only the excess value used to check if average applies.
EG ‘a store has fire policy covering stock in A/B/C warehouse total: £250,000 and another policy for warehouse B of £50,000 – loss occurs value of stock- £280,000 – reduction of £50,000 due to second policy, therefore £230,000 which is in limit of SI (250k) so average would not apply.
excess and deductibles (copied)
: excess is amount deducted from each claim and paid by insured. Increase voluntary excess potentially sees reduction in premium.
Historically deductible was a large excess and is often still the case- commercial organization agrees to meet costs of any claim falling within policy terms up to stated value of the deductible.
Linked to risk management process means of retaining risks up to certain size within an organization- stated in policy wordings
When deductible is a large sum for which insured accepts responsibility under material damage or business interruption policy – 72h time limit for defining of ‘any one event’ – important consideration for weather claims that may occur over a period of time- deductible only applies once in such circumstances
