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7/8 W01/March 2017 Award in General Insurance

Agreed value, or ‘valued’ policies are common in marine insurance. They may at times also be used
when insuring works of art and other objects, such as vintage motor cars, where the true value may
become a matter of dispute at the time of a claim. It is common to confine the agreed valuation to total
losses and to provide that partial losses are settled as if the policy was unvalued; that is, on an
indemnity basis. If the policy wording does not restrict the agreed value to total losses, then partial
losses will be dealt with on a proportionate basis.

D2 First loss policies

There are occasions when the policyholder believes that the full value of the insured property is not
really at risk, in other words a total loss or even a very substantial loss seems impossible. In this case,
the insured may request that their policy has a sum insured that is less than the full value. Where
insurers agree to this it is known as a ‘first loss’ policy.
Example 7.3
Substantial amounts of stock are stored in a warehouse and may potentially be destroyed by fire. However, it may be
physically impossible to remove all the stock from the warehouse in the course of a theft without using a fleet of
lorries. The policyholder’s assessment of the situation is that there is no need to insure the full value for theft.

However, the insurer’s view of the maximum amount realistically at risk is often similar to the
policyholder’s estimate. Consequently, the insurer will have calculated the premium for the full value
taking these factors into account. It follows, therefore, that insurers generally only give very modest
discounts on the ‘full value’ premium for risks insured on this basis. The reason for this is that there may
only be a slight reduction in their maximum exposure and they must still pay individual claims up to the
first loss figure.

D3 New for old cover

We have already seen in section C2E that this type of cover usually applies to household contents
policies. We could also place commercial property risks that are insured on a reinstatement basis in the Reference copy for CII Face to Face Training
same category. Each represents an attempt to replace at current costs.

E Limiting factors

7 There are a number of situations where insurers may provide less than a full indemnity. This may be
Chapter either because of the choice of policy cover (as in the case of a first loss policy), because of poor

insurance arrangements or because full cover was not requested. Policy terms may also restrict
entitlement to a full indemnity.
We will now consider how the sum insured, the application of average, excesses and deductibles limit
the operation of the principle of indemnity.

E1 Sum insured

As we have already seen, the maximum amount that can be recovered under a property insurance policy
Maximum that can be
recovered limited to is limited to the sum insured. In liability policies, the maximum amount that can be recovered is the
sum insured indemnity limit plus agreed costs.
If, following a loss, the amount needed to provide indemnity is greater than the sum insured, recovery is
limited to the sum insured. Some policies have no limit stated, for example there is no limit for third
party personal injury cover in a motor policy. In such cases, indemnity is restricted only by the amount of
the court award (or the amount agreed in an out of court settlement), plus any other costs specifically
covered by the policy.

E2 Inner limits or item limits

There are many policies that contain limits within the overall sum insured. The most common of these is
a household contents policy. There is usually a single item limit (for gold, silver or similar items) of 5% of
the sum insured. There may also be an overall limit for such items of, say, one-third of the total contents
value; a separate limit for cash in the home and so on. Each of these may act as a limiting factor if the
true value exceeds the limits stated.
In fact, in most classes of insurance there are monetary limitations for specified items or categories.