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Chapter 7 Indemnity 7/5

Question 7.1
Simon was preparing a meal in his kitchen when the front door bell rang, which he left the kitchen to answer. When
he finally returned the kitchen was full of smoke. A pair of kitchen gloves had caught fire from one of the oven’s gas
rings. The resulting fire had spread to the curtains. Simon managed to put out the fire by using a wet cloth.
Simon claimed US$6 for the gloves, US$140 for the curtains and US$4 for the cloth; the cost of the items two years
previously.
How do you think the insurers decided upon the amount of indemnity in this claim? What payment would you have
made to Simon as indemnity?

C1 Marine insurance

In a valued policy (which is the same as an agreed value policy), the insurable value is agreed between
the insured and the policyholder.
The insurable value in an unvalued policy must be calculated using the formula in the Marine Insurance
Act 1906. In both kinds of policy there is an identifiable insurable value, effective from the start of the
period of insurance, and which is unaffected by subsequent market price variation. This usually
corresponds with the sum insured.

C2 Property insurance

We have already said that the measure of indemnity for property is its value at the date and place of
loss. This is a very broad guideline and we must look at the different types of property insurance in order
to understand how the principle operates in specific cases.
C2A Buildings

Basic cover
This is referred to in the market as an ‘indemnity’ settlement, to distinguish it from reinstatement. Reference copy for CII Face to Face Training
Insurers calculate the indemnity for loss of, or damage to, buildings as the cost of repair or
reconstruction at the time of loss. They make an allowance for any improvements that may result from
the repair or reconstruction, for example, new plumbing or new decoration. This is termed betterment.It
is very unusual for buildings to be insured on this basis. What is much more common is insurance on
reinstatement conditions.
Reinstatement conditions Chapter
This is an extension of the principle of indemnity. Cover applies on the basis of the full reinstatement 7
value at the time of reinstatement, not of a discounted sum reflecting wear and tear. There are several
different types of insuring clause, the most common of which are the reinstatement memorandum and
Day One reinstatement.

Reinstatement memorandum. The most important aspect of insurances subject to the reinstatement
memorandum is that the sum insured must represent the full value at the time of reinstatement. This
means that the policyholder pays a premium based upon the higher amount. This particular clause
allows a margin for error in estimating the sum insured. It states that the insured value must be at least
85% of the actual value; otherwise claim payments will be reduced. This still leaves the policyholder
with a problem if the claim amount exceeds the 85% figure, since insurers will not pay more than the
sum insured in the event of a loss.

Reinstatement must be carried out without delay, although the policyholder is given flexibility about
where and how reinstatement takes place.
Day One reinstatement requires the policyholder to state the reinstatement amount on the first day of
the cover. Insurers provide an automatic uplift to allow for inflation (usually an extra 50% of the
‘declared value’) but only charge a modest increase for this inflation element (15% of the premium). The
advantage of this system is that the reinstatement figure at day one is a relatively easy figure to
establish. Because of this, the day one value must be accurate; there is no 15% margin for error as there
is with the reinstatement memorandum.