Page 108 - W01TB8_2017-18_[low-res]_F2F_Neat

7/6 W01/March 2017 Award in General Insurance

Example 7.2
Company ABC owns a factory. They wish to insure the building on a basis that provides that in the event of loss or
damage, the building will be put back to the same condition without any deduction being made for ‘wear and tear’.
This rules out a policy based solely on an indemnity settlement, but still leaves a choice to be made about the exact
basis of cover.
ABC could decide that they wish to insure on the basis of the reinstatement memorandum. Let us assume that the
rebuilding cost today is US$2 million. ABC will need to decide how long reinstatement is likely to take. They will then
need to estimate the full impact of this time period on the inflation of building costs. This is because they will need to
set a sum insured that will be adequate at the time of reinstatement. ABC is confident that rebuilding, even following
a substantial loss, could be completed within 18 months. Consequently, they may consider that an inflationary
element of 20% is the maximum that needs to be catered for. They would, therefore, set the rebuilding sum insured
at US$2.4 million and pay a premium based upon this figure.
In the event of a loss, provided that the actual reinstatement value is no more than US$2.8 million, average will not
be applied because their sum insured represents 85% of this amount.
Given these assumptions, ABC is far better advised to opt for the Day One reinstatement arrangement. The figure that
they need to declare is US$2 million, to which an automatic uplift of 50% will be applied – far more than their
estimate of what they require. The premium is increased by 15%, so produces a lower premium than the equivalent
reinstatement memorandum arrangement. Average will only apply if the ‘day one’ figure is inadequate (but no margin
for error is permitted).
You can see from this that different rebuilding periods or estimates of future inflation will affect the policyholder’s
decision regarding the most appropriate arrangement, but for most, the day one option provides the better solution.

C2B Machinery and contents

Basic cover
The starting point for the measurement of indemnity depends on whether there is a ready second-hand
market for the item.
• Where there is a ready second-hand market, indemnity is the cost of the second-hand item plus Reference copy for CII Face to Face Training
transport or installation costs.
• Where there is no second-hand market, indemnity is the cost of repair or replacement less an
allowance for wear and tear, if applicable.
Again it is important to emphasise that this is the starting point for considering property covers. In
7 practice this very limited form of cover is rare.
Chapter Reinstatement conditions

Like buildings insurances, covers for machinery and contents (other than stock) also tend to be on a
reinstatement basis. This modifies the principle of indemnity. The reinstatement memorandum is a
common method of insuring such items and Day One reinstatement is also possible. Again, it is
important for you to note that the sum insured must be calculated on the same basis as the proposed
settlement formula.

C2C Cash settlements under reinstatement conditions
One of the key elements of reinstatement conditions is that in order to benefit from the cover the
policyholder must actually reinstate. If no reinstatement takes place, they are entitled only to a
settlement based upon strict indemnity. This means that wear and tear and depreciation will be taken
into account.
C2D Stock

This may be considered under two headings:
• Manufacturers’ stock in trade.
• Wholesalers’ and retailers’ stock in trade.
In both cases, the policyholder is not entitled to payment in respect of any potential profit element on
sale of the stock. This is one of the aspects catered for by a business interruption policy.
Manufacturers’ stock in trade. This stock generally consists of raw materials, work in progress and
finished stock. Indemnity value is the cost of raw materials, at the time and place of loss, plus labour
and other costs incurred in respect of work in progress and finished stock.