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7/12 W01/March 2017 Award in General Insurance

Key points

The main ideas covered by this chapter can be summarised as follows:
Definition of indemnity
• Indemnity is financial compensation sufficient to place the policyholder in the same financial position after a loss as
they enjoyed immediately before the loss occurred.
• Not all insurance policies are policies of indemnity; for example, personal accident policies are benefit policies, as it
is impossible to put a financial value on something like the loss of a limb.
• Indemnity can be provided through a cash payment, repair of the damaged item, replacement or reinstatement.
Application and measurement of indemnity
• For property insurance the measure of indemnity is the cost of repair or replacement at the time of the loss, less an
allowance for wear and tear.
• For liability insurance the measure of indemnity is the damages and claimants costs awarded by a court (or arising
from an out of court settlement).
• For marine insurance a valued or agreed value policy means that the insurable value is agreed between the insurer
and policyholder and does not fluctuate with the market.

Modifying indemnity
• It is possible to extend the principle of indemnity for property insurance through the use of reinstatement conditions
and new for old cover.
• Agreed value policies modify indemnity by fixing the value of the subject-matter of the insurance at inception. It is
then not necessary to prove the value on loss.
• A first loss policy limits the sum insured to an amount that the policyholder feels is the maximum potential loss
where this is not the full value of the subject-matter of the insurance.

Limiting factors
• The maximum that can be recovered under any policy is the amount agreed to be the sum insured or the
indemnity limit.
• There may be inner limits or item limits to the sum insured within the policy. Reference copy for CII Face to Face Training
• In cases of underinsurance, the average condition is applied where only that part of the loss that is proportionate to
the sum insured is paid.

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