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7/4 W01/March 2017 Award in General Insurance

However, this is not a popular option with insurers as, unless the policy specifies otherwise, they are
bound to reinstate the property so that it is largely in the same condition it was before the loss. In any
event they are their own insurers of the risk during the period of reinstatement. Also, once they choose
to reinstate, they lose the certainty that the sum insured will be the maximum they have to pay out since
they can hardly insist on reinstatement and then, once the sum insured is exhausted, stop work
regardless of whether the building is completely restored by then or not.
The distinction between repair and reinstatement may not be immediately obvious. Reinstatement would
apply only to buildings (and occasionally machinery) and is concerned with bringing the property back to
its pre-loss condition. To achieve this purpose the insurer effectively takes occupation of the premises
(or what is left of them) to reinstate. The option to repair does not carry with it the ‘occupation’ aspect.

B Application of indemnity

Property policies and liability policies are contracts of indemnity because a value can be placed on the
Property and liability
policies are contracts subject-matter insured. This principle also applies to pecuniary insurances, such as business
of indemnity interruption. You should note that life and personal accident policies are not contracts of indemnity as
the policyholder cannot be restored to the same financial position after a loss.

B1 Property insurance

See section D As a practical example of indemnity cover in respect of property insurance, imagine a fire which destroys
part of a school. Calculating the value of the loss may be a problem since equipment and facilities are
likely to be worth less than the original purchase price. Where equipment is completely destroyed, the
measure of indemnity is the replacement cost less an amount for wear and tear. In the case of partial
damage, indemnity is the repair cost less an allowance for wear and tear. This is very much a theoretical
starting point. Most property policies incorporate some form of ‘new for old’ cover.

B2 Liability insurance Reference copy for CII Face to Face Training

A liability policy provides indemnity to the policyholder in respect of their legal liability to pay damages
and claimant’s costs. The policy does not define the financial value of the indemnity, as this is often left
to the courts to decide, but it does lay down the elements to be included in an indemnity settlement.
There will always be a limit to how much the policy will pay in the event of a claim, and this will be
7 stated in the policy.
Chapter Sample examination question 1

Roy takes out two personal accident policies. The first policy provides US$50,000 cover for the loss of a limb. The
second policy provides US$60,000 cover for loss of limb. What is the total amount that Roy will receive in the event
of a valid loss of limb claim?
a. US$50,000. F
b. US$54,000. F
c. US$60,000. F
d. US$110,000. F

C Measuring indemnity

In this section, we look at how insurers measure indemnity for different classes of insurance.
Our starting point must be the financial value of the subject-matter of the insurance, but how is this
In property insurance
the value of the financial value calculated? In the absence of policy conditions modifying the position, in property
subject-matter is its insurance the value of the subject-matter of the insurance is its value at the time and place of loss.
value at the time
of loss However, as we shall see, it is usual for policy conditions to apply which alter this position. We start by
looking at different categories and types of insurance and considering the standard cover provided by
them, before examining possible extensions.