IF1 Module 5 and 6 Flashcards
The proximate cause of a loss will always be the:
dominant cause
What is an insured peril?
A peril listed in the policy as being covered
What is an excepted or excluded peril?
A peril listed in the policy as not being covered.
What is an uninsured or unnamed peril?
A peril not mentioned in the policy document
Insurance companies provide an indemnity on any valid claims. Indemnity is defined as:
Indemnity is a financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occurred.
What are benefit policies?
They are policies that protect against financial consequences of incapacity and death and are know as benefit policies because they pay out a fixed sum in the event of a claim.
What are the four ways through which an insurer can provide indemnity?
- Cash payment
- Repair
- Replacement
- Reinstatement
Why do insurers often repair to provide indemnity?
The aim of the insurance company would be to provide indemnity at a lower cost than the policyholder could achieve because of their negotiating power.
The most common example of this is in the case of motor accident damage repairs. Insurers often negotiate special discount rates for repair work in return for a steady flow of business, and policyholders are instructed to take their vehicles to a repairer that have approved.
What is reinstatement as a form of indemnity?
Reinstatement involves the insurer restoring or rebuilding property or machinery which has been damaged by an insured peril.
In the case of a damaged property, the insurer effectively ‘takes occupation’ of the property, which distinguishes this option from repair.
Reinstatement is not always beneficial for the insurer, as they must reinstate to the same condition as before the loss, no matter the cost.
Once an insurer opts to reinstate, they lose the protection of the maximum sum insured.
How do insurance companies assess the financial value of the subject matter of the insurance when it comes to a marine policy.
In marine insurance with an ‘agreed value’ policy the value at risk will be agreed directly between the insured and the insurer.
In an ‘unvalued’ policy the value is calculated using the formula set out in the Marine Insurance Act 1906.
With both types of policy, the insured value is identifiable from the outset and is not affected by subsequent market price fluctuations.
How does indemnity work with regards to property insurance?
The general measure of indemnity for all property is its value at the date and place of loss.
For buildings insurance, two types of indemnity exist:
Basic Cover
Under basic cover, insurers will settle any claims on a traditional indemnity basis. Indemnity is calculated as the cost of repair or reconstruction at the time of loss.
They make an allowance (known as betterment) for any improvements that may result from their work.
Reinstatement
This is an extension of the principle of indemnity. Cover applies on the basis, not of a discounted sum reflecting wear and tear, but the full reinstatement value at the time of reinstatement. There are several different types of insuring clause, the most common of which are the reinstatement memorandum and day one reinstatement:
Reinstatement memorandum - cover is provided on the basis of a sum insured representing the full value of the property at the time of reinstatement (which might be more than a year in the future if the property is destroyed by fire on the last day of the insurance). The insured pays a premium based on this higher projected amount. To allow for a margin of error in estimating the sum insured, the memorandum states that the insured value must be at least 85% of the actual value; otherwise claim payments will be reduced.
Day one reinstatement - this aims to overcome difficulties in predicting a reinstatement value a year or more in the future. The insured states the reinstatement value on the first day of cover and the insurer provides an automatic uplift to allow for inflation (usually an extra 50% of the declared value, but only charging an extra 15% premium).
With any reinstatement, the insured must actually reinstate. If no reinstatement takes place, the insured is entitled only to a settlement based on strict indemnity.
What are the two types of indemnity with regards to stock in trade?
Manufacturers’ stock
Manufacturers’ stock in trade consists of raw materials, work in progress and finished stock.
For each category, indemnity is the cost of the raw materials plus any labour and other costs incurred in producing the finished or part finished goods.
Wholesalers’ and retailers’ stock
For wholesalers’ and retailers’ stock in trade, indemnity is the cost of replacing the stock at the time of loss, plus transport and handling costs.
Which of the following claims would usually be subject to a deduction for wear and tear?
- Household linen and clothing
- Furniture
- Electricals
Household linen and clothing
Most insurers retain a deduction for wear and tear for items of household linen and clothing, but apply cover for all other items on a ‘new for old’ basis.
What is a first loss policy?
Under a first loss policy, the insured can request their policy has a sum insured less than the full value of the property insured, as they believe that a total or even substantial loss is unlikely.
Where the insured accepts a very large deductible under a material damage or business interruption policy, what time limit is typically used to define any one event?
24 hours
48 hours
72 hours
72 hours
There is often a 72 hour limit for the defining of any one event.
This is important in considering how many times the deductible will be imposed when dealing with severe weather-related claims that may occur over a period of time.
