Chapter 9 - the principle of indemnity

Question 1

What is an indemnity policy?

Answer 1

Indemnity insurances are those where the insurers agree to pay only when the insured suffers a particular type of loss.

Question 2

What is a non indemnity policy?

Answer 2

Policies in which insurers agree to pay a specified amount when a particular defined event occurs. I.e life cover

Question 3

What is meant by indemnity?

Answer 3

Means to save from loss or harm, protection against damage or loss.

Question 4

What is meant by new for old?

Answer 4

Old is replaced by new from insurer.

Question 5

What is meant by ‘claim for unliquidated damages’?

Answer 5

Exact amount of compensation is not known in advance but is to be fixed afterwards on the basis of the loss suffered.

Question 6

What is the general indemnity rule for property insurance?

Answer 6

Determined by its value at the date of loss and at the place of loss (rather than its cost).

Question 7

What happens if the value has increased during the currency of the policy?

Answer 7

indemnity on the basis of the increased value subject, of course, to the adequacy of the sum insured.

Question 8

What happens if the value decreases during the policy period?

Answer 8

The insured will recover only
the reduced value at the time of the loss, not the original value.

Question 9

What is the payout if a building is damaged?

Answer 9

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 10

What is betterment?

Answer 10

Betterment is where the reinsured’s property is reinstated to a better position prior to the loss

Question 11

What is the principle of indemnity for machinery and equipment?

Answer 11

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 12

What are pecuniary insurances?

Answer 12

Pecuniary insurances cover various types of financial loss and can be contrasted with property insurances. Examples of this can include business interruption

Question 13

What is a ‘trends 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

What is the measure of liability?

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

What is the measure of indemnity for marine insurance?

Answer 15

The measure of indemnity under marine policies is complex and based on rules which differ from those which apply to insurance generally. Only a brief description is necessary here.
The Marine Insurance Act 1906 provides for both unvalued and valued policies.

Question 16

What is a franchise?

Answer 16

A franchise is similar to an excess in that there is no liability for any loss which is less than the franchise figure. However, once the franchise has been exceeded, the loss is payable in full.

Question 17

What is reinstatement cover?

Answer 17

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 18

What is new for old cover?

Answer 18

Cover on a reinstatement basis, described above, is really a type of ‘new for old’ cover on buildings and machinery. However, the term ‘new for old’ is more often associated with
insurances of household goods and personal possessions, including household contents and personal ‘all risks’ policies.

Question 19

What is agreed value cover?

Answer 19

In the case of a valued policy, the parties agree that 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 20

What happens if there is a partial loss under a valued policy?

Answer 20

Insurers could probably overrule the ‘Elcock principle’ by including a specific provision in the policy about the basis of settlement for a partial loss. However, the insurers will usually have the option of paying nothing at all to the insured and settling the claim simply by repairing the building or other property.

Question 21

What are the typical methods of indemnity?

Answer 21

• Payment of money
• Reinstatement
• Repair
• Replacement

Question 22

Can the insured spend their indemnity money as they wish?

Answer 22

Where insurers make a cash payment, there is no general obligation on the part of the insured to spend the insurance money on restoring the property in respect of which the claim
was paid. However, the insured may be required to do so by virtue of their relationship with a third party.

Question 23

What is reinstatement?

Answer 23

In simple terms, it is where the insurers choose to settle the claim by actually rebuilding the property that has been damaged instead of paying money to the insured.

Question 24

What is the statutory reinstatement - fire prevention act?

Answer 24

This Act requires insurance companies to lay out the insurance money, as far as it will go, towards rebuilding or reinstating buildings which have been destroyed or damaged by fire.

Question 25

What is salvage?

Answer 25

this term commonly refers to the scrap value of damaged property. the insurer is entitled to claim, for their own benefit, anything that remains of the insured subject matter.

Question 26

What is abandoment?

Answer 26

The action of giving up the subject matter to the insurer is referred to as abandonment, and the right of the insurer to take over the subject matter is known as salvage.

Question 27

What is a CTL?

Answer 27

Constructive Total Loss
Constructive Total Loss applies when the subject matter is damaged or the insured is deprived of the possession of their ship or goods but the subject matter is not destroyed. A constructive total loss in marine cargo insurance means that the cost of repair of a damaged item is more than the current value of the item.

Question 28

What are the effects of claim payments on policy cover?

Answer 28

First, where a policy grants a fixed amount of cover (such as a theft policy on goods with a sum insured of £500,000), the cover reduces by the amount of any claim payment. So,
unless the sum insured is restored by the insured paying an extra premium (known as a reinstatement premium), the policy will lapse once all the cover is used up. However, in practice, it is not collected in cases where the loss is trivial in relation to the total sum insured and the extra premium involved is insignificant.