Chapter 9 - indemnity

Question 1

What is an indemnity insurance?

Answer 1

Indemnity insurances are those where the insurers agree to pay only when the insured suffers a loss of a particular type, and only for the amount of the loss

Question 2

What are non-indemnity insurance (contingency)

Answer 2

These are policies in which insurers agree to pay a specified sum when a particular defined event occurs. The insured does not have to prove that they have suffered a loss, only that the event in question has happened.

Question 3

What does the term contingency mean?

Answer 3

The term ‘contingency insurance’ is an accepted legal term for a non-indemnity insurance.

Question 4

Under property insurance, what is the measure of indemnity?

Answer 4

The general rule is that the measure of indemnity for the loss of any property is determined by its value at the date of loss and at the place of loss (rather than its cost).

Question 5

Under buildings insurance, what is the measure of indemnity?

Answer 5

Where a building is damaged, the normal basis of indemnity will be the cost of repair or reconstruction at the time of the loss with, in many cases, a deduction for ‘betterment’.

Question 6

What are the two forms of betterment?

Answer 6

1. First, when a building is repaired, certain parts of the structure will often have to be renewed so that when the work is complete the building is likely to be in a better condition than it was before the loss. (i.e like wear and tear)
2. The other way in which betterment can arise is where the quality of the building is improved in the course of carrying out repairs. For example, an extra storey may be added to a building or a sprinkler system installed during the reconstruction.

Question 7

Under machinery and equipment insurance, what is the measure of indemnity?

Answer 7

Indemnity is generally valued as:
* the cost of repair less wear and tear, if applicable; or
* if repair is not possible, the cost of replacement, less wear and tear.

Question 8

Under manufactures stock insurance, what is the measure of indemnity?

Answer 8

The measure of indemnity will not necessarily be the cost to the manufacturer of producing the stock. It will be what it will cost them, at the time and place of the loss, to replace the goods or return them to the condition they were in before they were destroyed.

Question 9

Under whole sale and retail stock insurance, what is the measure of indemnity?

Answer 9

Indemnity will be based on the cost at the time of loss of replacing the stock (i.e. manufacturer’s or wholesale price) including transport and handling costs to the insured’s premises.

Question 10

Under farming stock insurance, what is the measure of indemnity?

Answer 10

In the case of both livestock and produce, the local market price is the normal basis of an indemnity.

Question 11

Under business interuption insurance, what is the measure of indemnity?

Answer 11

Business interruption policies operate on the basis that the assured can recover financial losses caused by the relevant insured peril for an indemnity period as laid down by the policy. To ascertain the amount of that loss it is necessary to work out what the assured’s
revenue would have been had the insured event (for example, a fire) not occurred.

Question 12

Under credit insurance, what is the measure of indemnity?

Answer 12

In the case of credit insurance, indemnity will be easy to assess, being the amount of the bad debt, less any recoveries. However, in practice insurers will rarely grant 100% cover for this line of business.

Question 13

What is a trend clause?

Answer 13

The trends clause’s purpose is to allow, in assessing the amount to be awarded, to take account of exceptional events that
may have depressed or increased revenue in the earlier comparator, and also to take account of anticipated exceptional events in the indemnity period.

Question 14

Under liability insurance, what is the measure of indemnity?

Answer 14

The measure of indemnity will be the amount of any court award or negotiated ‘out of court’ settlement plus costs and expenses arising in connection with the claim (such as lawyers’ fees, court fees, and payment for medical reports or the services of expert witnesses), plus
any other expenses which have been incurred with the agreement of the insurers.

Question 15

If a house suffered a total loss, resulting in the house to be re built, what would be the position with the property insurance?

Answer 15

A new insurance contract must be arranged along with a new premium.

Question 16

If there is no clause in the policy (such as the one above) giving the insurers the right to settle in some other way, the insured has a legal right to insist what?

Answer 16

a money payment

Question 17

If a payment of money is made can the insured spend it on whatever they want?

Answer 17

no, can use the money to reinstate the property or it will otherwise be settled on an ordinary indemnity basis.

Question 18

In marine insurance what is abandonment?

Answer 18

The action of giving up the subject matter to the insurer

Question 19

In marine insurance what is salvage?

Answer 19

the right of the insurer to take over the subject matter

Question 20

What is reinstatement cover?

Answer 20

Reinstatement cover solves this problem by providing that, in the event of a loss, the insurers will pay a sum equivalent to the cost of rebuilding or replacing the property to a condition ‘equivalent to or substantially the same as but not better or more extensive than its
condition when new’

Question 21

What is new for old?

Answer 21

the insurers agree to pay the full replacement cost ‘as new’ of any insured item which is lost or destroyed, with no deduction for wear, tear or depreciation.

Question 22

What is agreed value cover?

Answer 22

in the event of a loss a particular sum, fixed at the outset of the insurance, will be paid, regardless of the actual value of the
property at the time.

Question 23

What are the methods of providing indemnity?

Answer 23

Payment of money
reinstatement
repair
replacement

Question 24

On a new for old or reinstatement basis insurers generally pay the full cost of the property concerned if the insured uses the cash to replace the property. What happens if the insured doesnt do this?

Answer 24

Settlement is made on an ordinary indemnity basis, meaning reductions for wear and tears, (lower amount of settlement will be made)