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Chapter 7 Indemnity 7/7

Wholesalers’ and retailers’ stock in trade. Indemnity here is the cost of replacing the stock, at the time
of the loss, including the costs of transport to the policyholder’s premises and handling costs. It is not
possible to insure stock on any kind of reinstatement basis.
One of the difficulties in measuring stock losses (whether for manufacturers or wholesalers) is that the
stock may not have a definite constant re-sale value. In addition, some stock may be obsolete. Items
may be unfashionable or be superseded by a more sophisticated model and, therefore, be difficult to
sell. In these cases, settlement must be made to maintain the policyholder’s financial position, not to
improve it. This may mean paying only the market value where this is less than raw materials plus the
costs defined above.

C2E Household goods

Basic cover
In general, indemnity is based on the cost of replacing the items at the time of loss, subject to a wear
and tear deduction. However, a more popular form of cover is available and almost universally used
within the UK – ‘new for old’ cover.
New for old cover
New for old cover modifies the principle of indemnity by making no allowance for wear and tear. Most
New for old cover
insurers retain the deduction for wear and tear for items of household linen and clothing, but apply cover modifies principle of
for all other items on a ‘new for old’ basis. This is justified by setting the sum insured to represent the indemnity
full replacement cost of the household goods and the premium paid reflects this. However, it does
extend the principle of indemnity.
C2F Farming stock

In the case of livestock and produce, the local market price is the basis of indemnity. Farming stock is
different from other types of stock, as the policyholder is entitled to receive any potential profit on sale.
This is because the market price is both the buying price and selling price at any time and there is no
way of separating out the profit element.

C3 Liability insurance Reference copy for CII Face to Face Training

In liability insurance, indemnity is measured as the amount of any court award (or more commonly,
negotiated ‘out of court’ settlement) plus the costs and expenses arising in connection with the claim.
Where the insurer agrees that other expenses can be incurred these are included in the amount payable.
An example of such additional expenses would be paying for specialist medical treatment for an injury. Chapter

Question 7.2 7
In 2012, Claire bought a watch for US$1,600. She added this to her household contents policy as a specified item
and provided a valuation of the watch. In 2016 the watch was stolen and its replacement was US$2,400. The policy
was still in force, which stated that it would pay the ‘full value’ of property lost or damaged.

Write down the sum which you think the insurers were liable to pay the insured. Give reasons for your answer.

D Modifying indemnity

We have already seen some ways in which the principle of indemnity can be modified by agreement
between the parties. There are others that allow the policyholder to get either more or less than a strict
indemnity settlement.
The principle of indemnity is modified in agreed value policies and first loss policies.

D1 Agreed value policies

The value of the subject-matter of an agreed value policy is agreed at the start of the contract and the
Value of the subject-
sum insured is fixed accordingly. This value is reviewed at each renewal and, in the event of a claim, the matter is agreed at
value need not be proved at the time of the loss. start