Chapter 7: Indemnity

Question 1

what is indemnity

Answer 1

financial compensation sufficient to place PH in same financial position after a loss as they previous enjoyed

Question 2

what are benefit policies

Answer 2

not policies of indemnity- accident and sickness
unable to price value of limb etc- if claim define amount paid

Question 3

examples of benefit policies

Answer 3

personal accident; sickness; critical illness; payment protection; hospital cash plans; permanent health; elements of travel insurance

Question 4

settlement options to insurers

Answer 4

cash payment
repair
replacement
reinstatement
all only apply if stated in policy

Question 5

cash payments

Answer 5

insurers use partnership with chains- discount up to 20%- if insured want cash payment- insurer needs only pay what they would have with the chain (discounted)

Question 6

reinstatement

Answer 6

insureer agrees to restore building/machinery damaged by an insured peril- same condition before the loss
often applies to buildings- can’t stop work halfway through even if exceeds SI
insurers are the insurers of risk during reinstatement

Question 7

application of indemnity

Answer 7

value can be placed on subject matter- EG
pecuniary, business interruption, property

Question 8

property insurance indemnity

Answer 8

measure of indemnity is replacement cost less allowance for wear and tear

Question 9

liability insurance

Answer 9

indemnity in respect of legal liability for damage and claims- financial value of indemnity not defined- court decides

Question 10

measuing indemnity

Answer 10

financial value of subject matter at time of loss

Question 11

marine insurance- in a valued policy

Answer 11

insurable value agreed between insured and insurer- value in unvalued policy calculated using formula of Marine Insurance Act 2016

Question 12

marine insurance act 2016 formula

Answer 12

must be an identifiable insurable interest in both policies- unaffected by subsequent market price variation- corresponds with SI

Question 13

reinstatement conditions

Answer 13

extension of principle of indemnity- cover applies on basis of full reinstatement value at time of initial reinstatement

Question 14

basic building cover

Answer 14

indemnity settlement- loss/damage to buildings as cost of repair at time of loss- allowance for betterement: improved plumbing

Question 15

reinstatement memorandum

Answer 15

SI must represent full value at time of reinstatement
insured pays higher premium- 15% margin for SI- insured value must be 85% of SI
Insurers will pay no more than SI at time of loss
Reinstatement carried out without delay

Question 16

Day one reinstatement

Answer 16

insurer required to statement reinstatement amount on first day
uplift for inflation up to 50% of declared value
reinstatement day one figure must be accurate- no margin %
more cost efficient than memorandum

Question 17

Machinery and Contents - basic cover

Answer 17

ready second hand market- indemnity cost of second hand items plus transport/installation
no second hand market- cost of repair/replace less wear and tear

Question 18

reinstatement for machinery and contents

Answer 18

covers for machinery and content often on basis which modifies principle of indemnity
reinstatement memorandum often used- day one also available

Question 19

cash statements under reinstatement conditions

Answer 19

in order to benefit insured must actually reinstate
if no reinstatement insured entitled to settlement upon limits of indemnity

Question 20

stock- manufacturers stock in trade- raw materials

Answer 20

indemnity cost of raw materials at time and place of loss plus labour etc

Question 21

wholesaler’s and retailers’ stock in trade

Answer 21

indemnity cost of replacing stock as well as cost for transport
in both cases insured not entitled to payment in respect of profit- catered for by business interuption
difficulty in measuring stock- no definite resale value- maintain financial position

Question 22

Household goods - basic cover

Answer 22

replacing items at time of loss subject to wear and tear: new for old cover
modifies principle of indemnity- justified by SI replacement cost of goods- extends principle of indemnity

Question 23

Farming stock

Answer 23

local market price basis of indemnity- insured able to achieve profit - market price both buying and selling price- no way of seperating profit element

Question 24

indemnity measured in liability insurance

Answer 24

amount of any court award plus costs and expenses arising in connection with claim

Question 25

modifying indemnity

Answer 25

modifications that allow insured to get either more or less than strict indemnity settlement- principle of indemnity modified in agreed value policies and first loss

Question 26

agreed value policies

Answer 26

value of subject matter agreed at start of contract- reflected in SI common in marine- works of art, classic PC- true value is disputable common to confine valuation to total losses- partial losses settled as if policy unvalued

Question 27

first loss policies

Answer 27

when insured believes full value of property is not at risk- total/substantial loss seems impossible- PH wld request lower SI than full value

Question 28

new for old cover

Answer 28

household contents- commercial proprerty risks insured on reinstatement basis

Question 29

speed of indemnity - enterprise act 2016

Answer 29

passed may 4th gives PH legal right to claim damages in event of late payment- applies to every reinsurance policy

Question 30

speed of indemnity details (copied)

Answer 30

* Retail and smaller commercial customers had access to address late settlement claims via Financial Ombudsman Service- EG complainants could be awarded interest in respect of delayed settlements- note neither eligible/ non eligible complainants have no right to legal right to compensation. * Act amended IA2015- reinsurers must pay any sums due to insured within ‘reasonable time’ – if not paid in reasonable time, insured entitled to enforce payment of claim and pursue claim for damages. * What constitutes reasonable time- type of insurance; size and complexity of claim; compliance with relevant statutory rules; supply chain reliability. * Act provides insurers will not be in breach of the provisions merely by failing to pay claim white dispute is outstanding- claims against reinsurers will be time barred unless they are made no later than one year from date on which insurer has paid all sums in respect of claim. * Safeguards: loss has to be foreseeable- EG insurer would be able to foresee that delay in paying for broken machine would lead to production losses. * Parties to non consumers permitted to contract out the provisions the reinsurers must meet ‘transparency requirements’ – reinsurer’s attention must be brought to disadvantageous term before contract entered into and term must be clear- if requirements not met, term will be void. * Term that seeking to contract out of late payment will be void if insurer deliberately fails to pay out in reasonable time- insurers unable to provisions out of contracts for consumer contracts Limiting factors: insureds choice of policy; poor insurance arrangements; full cover not requested-

Question 31

Limiting factors

Answer 31

insureds choice of policy; poor insurance arrangements; full cover not requested policy terms may restrict insured indemnity

Question 32

inner limits or item limits

Answer 32

limits within overall sum insured- EG contents single item limit of 5% of SI

Question 33

average

Answer 33

SI is total value declared by insured- determines premium everyone who contributes to the pool pays premium based on full value of subject matter average condition- insured their own insurer for risk they have chosen not to insure.

Question 34

average formula for average- subject to pro rata condition of average

Answer 34

sum insured/ value of goods at risk x loss

Question 35

variations in conditions of average

Answer 35

principle that losses will be paid in proportion to what insured has set as SI applies to property

Question 36

special condition of average

Answer 36

applied similiar to farming stock- likewise special condition to agricultural productd and livestock as value fluctuates

Question 37

underinsurance in terms of special condition of average

Answer 37

effect of clause states that SI at time of loss represents 75% of value- average will not be applied- insured given 25% margin for error before underinsurance reduces claim condition does not apply to items solely to growing crops, fences, gates, boundary walls, household goods

Question 38

two conditions of average (copied)

Answer 38

conditions designed to apply to contents or stocks, insurance of which is arranged on floating basis (more than one location) – wording states that ‘average’ applies- goes on to state more specific insurance for items insured at any of the locations= only the excess value used to check if average applies. EG ‘a store has fire policy covering stock in A/B/C warehouse total: £250,000 and another policy for warehouse B of £50,000 – loss occurs value of stock- £280,000 – reduction of £50,000 due to second policy, therefore £230,000 which is in limit of SI (250k) so average would not apply.

Question 39

excess and deductibles (copied)

Answer 39

: excess is amount deducted from each claim and paid by insured. Increase voluntary excess potentially sees reduction in premium. Historically deductible was a large excess and is often still the case- commercial organization agrees to meet costs of any claim falling within policy terms up to stated value of the deductible. Linked to risk management process means of retaining risks up to certain size within an organization- stated in policy wordings When deductible is a large sum for which insured accepts responsibility under material damage or business interruption policy – 72h time limit for defining of ‘any one event’ – important consideration for weather claims that may occur over a period of time- deductible only applies once in such circumstances