Ways to indemnify and measuring indemnity Flashcards
Name 4 settlement options avaliable to insurers?
Cash, repair, replacement and reinstatement
What is reinstatement?
When the insurer agrees to restore a building or piece of machinery that has been damaged
How does indemnity apply in liability insurance?
Liability policies provide indemnity to the customer in respect of their legal liability to pay damages - often a court will decide the amount to money to be paid
In property insurance, the value of the subject matter is its value at the time/place of loss - true or false?
True
Which type of policies in marine insurance require the insured and the insurer to agree the insurable value?
Valued policies/value agreed policies (marine Insurance)
With value/value agreed policies the amount agreed between the insurer and insured is unaffected by any market changes - true or false?
True - with value/value agreed policies there is an identifiable insurable value from the start of the period of insurance which is unaffected by any market changes
Property insurance - buildings - basic cover - referred to in the market as “indemnity settlement”
With basic cover, insurers calculate indemnity as the cost of repairs or reconstruction at the time of loss and make an allowance for any improvements that may result from the repair or reconstruction (this is termed as betterment).
Property insurance - buildings - reinstatement conditions (more common than basic cover)
Cover here is based on the full reinstatement value and there are 2 different types - reinstatement memorandum and day one reinstatement
Reinstatement memorandum
The sum insured must represent the full value at the time of reinstatement
Day one reinstatement
The insured is required to state the reinstatement amount on the first day of cover
Property - Machinery and contents insurance - basic cover
Starting point for measuring indemnity depends on whether there is already a 2nd hand item avaliable;
- 2nd hand item avaliable, indemnity will be the cost of the 2nd hand item plus carriage/installation costs
- 2nd hand item isn’t avaliable, indemnity is the cost of replacement/repair less an allowance for wear and tear if applicable
Property - Machinery and contents insurance - reinstatement conditions
Similar to property insurance
Property - Stock insurance - manufacturers stock in trade and wholesalers/retailers stock in trade
Manufacturers -stock generally involves raw materials, work in progress and finished stock, indemnity value is the cost of the materials at the time/place of lost plus labour and other costs
Wholesalers/retailers - indemnity is the cost of replacing the stock at the time of loss including cost of transport (you can’t insure stock on any kind of reinstatement basis)
With both cases the insured is not entitled to payment of any potential profit on sale of stock - this is catered for by business interuption policies
Property - household goods - basic cover
Indemnity generally based on the cost of replacing items at the time of loss with wear and tear deducted
Property - household goods - new for old
Modifies principle of indemnity by making no allowance for wear and tear
Property - farming stock
Indemnity is based on the local market price. Insured is entitled to recieve any potential profit on sale (UNLIKE OTHER STOCK) as the market price is both the buying price and selling price there is no way of seperating the profit element.
Property - liability
Indemnity based on the amount of any court award plus the costs and expenses arising in connection with the claim
What is an agreed value policy? (amends indemnity)
Policies where the value of the subject matter is agreed at the start of a contract and the sum insured is fixed accordingly.
In the event of a claim the value doesn’t need to be proved at the time of loss.
Common in marine insurance and when insuring items such as vintage cars and paintings where the value of the subject matter may be challenged at the time of loss.
Most policies base the valuation on a total loss, therefore if the wording doesn’t restrict the agreed value to total losses then partial losses will be dealt with on a proportionate basis.
What is a first loss policy? (amends indemnity)
If the insurer believes the full value of the property is not really at risk (i.e. a total loss is unlikely) the customer can request for the sum insured to be less than the full value.
What is new for old cover? (amends indemnity)
Cover applies to household contents policies and commerical property risks - means attempting to replace at current costs.
Why might an insurer provide less than full indemnity? (limiting factors)
Sum insured - the maximum amount that can be recovered under a property insurance policy
Single item limit - limits on particular items under the policy (i.e. jewellery)
Average - insurers will apply a policy term known as the average condition to limit their liability which means the customer is considered to be their own insurer for the amount they have chosen not to insure (if there is underinsurance at the time of loss partial losses will be shared in proportion to the amount of underinsurance)
XS/deductible - xs is the amount deducted from each claim and is paid by the insured. Deductible generally means a large XS
What is the equation to work out under insurance?
Sum insured ÷ value of goods at risk x loss
