Measuring the loss: the principle of indemnity Flashcards
What is the key case in the definition of indemnity?
Castellain vs Preston 1883
What is the principle of indemnity?
Put someone back into the position they enjoyed prior to the insured loss they suffered, you cant be over compensation and cant profit from a loss.
What are the two kinds of policies?
Indemnity and non indemnity
What is non-indemnity sometimes called?
Benefit policies
Contingency policies
What do non indemnity policies cover?
Pay out a pre-determined/specified amount when a loss occurs such as life policies.
What is paid on on a property policy?
Value of the property at the date and place of a loss
What is paid out for a building policy?
Cost of repair less betterment
What is paid out on a machinery and equipment policy?
Cost of repair or replacement less wear and tear
What are the two kinds of stock policies?
Manufactures stock and wholesale/retail stock
What is included in a manufacturers stock policy?
Raw materials
Work in progress
Finished stock
What is paid out on a manufacturers stock policy?
Replacement of materials and time and place of loss for raw materials inc delivery to site.
In the case of other stock, it will be the same raw material costs plus labour and other costs which will be incurred in reproducing the half-made or fully completed goods which were lost.
What is covered under a wholesale/retail stock policy?
General stock
Handling costs
Transport stock
What is paid out on a wholesale stock policy?
Cost of replacing stock at wholesale price at the time of the loss.
What is paid out on a farming stock policy?
Local market price, replacement cost is the same as selling price
What is a pecuniary insurance policy?
Non-tangible insurance
What is paid out on a business interruption policy?
The policy wording will provide the formula used for this.
What is paid out on a credit insurance policy?
It covers bad debt or default of the insured trading partners.
What is paid on out an liability policy?
Indemnity will be based on the court awards or out of court settlements plus applicable costs.
What is a trend clause?
Used in BI, it will look at the trend prior to loss to ensure a profit is not gained from a claim.
What is indemnity on a marine policy?
Valued basis
Marine insurance act covers two basis, what are they?
Valued and unvalued basis
What is an unvalued basis?
Related to the insurable value which is the value of the subject matter at the start of the risk which is the amount recoverable in a total loss.
What principle is indemnity?
Contractual principle
What indemnity is used for property?
Sum Insured
What indemnity is used for Liability?
Limit of Liability
Limit of Indemnity
What indemnity is used for contents within a policy?
Inner Limits
Item Limits
Is loss exceeds limit of indemnity what happens?
Insured pays surplus.
What is a policy subject to if underinsured?
The average clause
What is the pro-rate average clause formula?
Sum insured at time of loss/Value of property at time of loss * value of loss
What is an excess, deductible and franchise?
Excess - What the insured will pay in event of a loss
Deducible - Large excess - mostly in commercial insurance
Franchise - set limit that insured will pay, if claim exceeds limit, Insurer will pay the whole claim
What is the purpose of an excess and deductible?
Avoids fraud and small claims for insurers
What is the pitfall of a Franchise?
Encourages fraud
What is reinstatment ?
An extension to indemnity, will restore property to its condition as new but not better than at new. Essentially no deduction for wear and tear.
What is the reinstatement clause?
Reinstatement memorandum
What can reinstatement be applied to?
buildings
plant
machinery
contents
What is new for old cover?
extension to indemnity
usually applied to household goods
replaces claim on property as new not taking wear and tear/depreciation into account.
What is a valued policy also known as?
Agreed value policy
What is liquidated damages?
Amount known in advance ie agreed value
Where is a valued policy common?
Agreed value:
Marine insurance
Fine Art
Antiques
Classic Cars
What is theElcock v Thomson 1949 case the main case on?
Partial losses under valued policies
What happened in The Elcock v Thomson case?
Agreed value of house = 106850
fire occured
house was valued pre-fire at only 18k
after fire = 12600
fire caused 30% reduction in value
court awared 32055 = 30% of agreed value despite current value.
What are the four methods for providing indemnity?
Cash
Reinstatement
Repair
Replacement
What is an act used as statutory reinstatment?
Fires Prevention (Metropolises) Act 1977
What is salvage?
Where the insured retains the property following a total loss rather than a cash payment for it,
What is abandonment?
An Act by the insured to give up property to the insurer following a total loss
What are the two types of Total Loss in Marine Insurance?
Actual Total Loss
Constructive Total Loss
What is Constructive total loss?
Where the subject is not destroyed but badly damaged and the insured is perhaps deprived of its possession or use.
What must the insured do if there is a constructive total loss?
Serve a note of abandonment on the insurers if they wish to be paid for the total loss, this is a formal notice indicating the insured’s willingness to give up the subject matter to theinsurers.
What must the insured do if there is a constructive total loss?
Serve a note of abandonment on the insurers if they wish to be paid for the total loss, this is a formal notice indicating the insured’s willingness to give up the subject matter to the insurers.
Generally what happens following a successive partial loss?
The sum insured reduces until it has been exhausted.
In marine insurance what happens following a successive partial loss?
Insurers must pay for successive partial losses even when these losses exceed the total sum insured.
What generally happens following a total loss?
The policy is terminated as the insurer has fulfilled there side of the contract.
Other than total loss how can a policy be terminated?
by the destruction of the subject as nothing left to insure.
What happens when property is replaced generally?
A new policy is needed with fresh consideration ie premium.
