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8/8 W01/March 2017 Award in General Insurance

Example 8.3
Tony takes up a tenancy in rented accommodation. Part of the contract between Tony and the landlord makes Tony
responsible for damage to the property. The property is damaged and a claim is made on the landlord’s insurer who
then exercises its subrogation rights and recovers its losses in respect of the damage from Tony, regardless of fault
or the existence of alternative insurance to cover the loss.

Many building projects are entered into under particular forms of contract that specify the legal and
insurance responsibilities of the parties, i.e. the principal, contractor and sub-contractors.

D3 Statute

Most insurers require that claims for riot, civil commotion and malicious damage must be notified within
seven days of the event. This is because under the terms of the Riot (Damages) (Amendment)
Regulations 2011 insurers may have rights of recovery against the police for riot damage but have only
42 days from the date of the riot to do so. The previous timescale of 14 days under the Riot (Damages)
Act 1886 was increased following the practical issues arising from the 2011 riots in several cities across
the UK.

E Insurer’s rights concerning subject-matter

If the insurer regards the property that is the subject-matter of insurance as being beyond economic
repair, they may offer a total loss settlement. This often happens in motor insurance where, under many
motor policies, the insurer states in advance what will constitute ‘economic repair’. Market practice
tends to view repairs exceeding 60% of market value as uneconomic. Of course, when this happens,
there may be some residual value in the thing insured. This is termed salvage. If the insurer meets the
loss in full, it is the insurer that is entitled to the benefit of the salvage value.

Because it is a financial benefit, a question arises as to who has rights to the salvage itself. It is usually
the policyholder who is given the opportunity to retain the salvage, provided a suitable deduction is
made from the claim payment to take its value into account. The amount needs to be agreed between Reference copy for CII Face to Face Training
the insurer and the policyholder.
This principle would govern the recovery of property. For example, if an insurer pays out a sum as a total
loss for an item of jewellery that has been stolen and it is subsequently recovered, the policyholder must
be offered the jewellery provided that the full claim payment is repaid to the insurer.
In an important respect rights arising from the salvage differ from subrogation rights. When the insurer
retains the salvage, the insurer becomes the owner of it. If, when it is sold, a greater sum is achieved
than the insurer originally assumed, this is in order.

Example 8.4
A painting by a little known artist is damaged. It is regarded as a total loss and the insurer pays the claim accordingly
8 and retains the damaged painting. The insurer gets an expert to repair the painting and offers it for sale. The artist in
Chapter the meantime has become very popular and the sale value is well beyond the original claim payment. The profit
made benefits the insurer.

Sample examination question 2
An insurer pays US$20,000 and allows the policyholder to retain the salvage, valued at US$2,000, in settlement of a
claim for damage caused by a negligent third party. How much can the insurer claim from that third party when
exercising its subrogation rights?
a. US$2,000. F
b. US$18,000. F
c. US$20,000. F
d. US$22,000. F