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Chapter 7 Contract wordings 7/35

D10 Liability clauses
This section looks at the following liability clauses:

index clause
aggregate
loss corridor extension
clause

change of law claims series
clause clause
Liability clauses

occupational commutation
disease clauses clause

extended claims sunset clause
reporting clause

D10A Index clause Reference copy for CII Face to Face Training

The index clause adjusts the limit and deductible by reference to an index to take into account inflation
over a period of time.

Consider this…
Why would such clauses be required in casualty classes of business impacted by bodily injury claims? Chapter

The key elements of the clause are as follows: 7
• The index is identified and is usually an earnings or wages or retail prices index.
• The base date of the index, that is, the start date for the purposes of the claim(s) under the policy. This
date may predate the inception of the treaty.
• The agreed variation of the clause. A franchise may apply in which case no adjustment is made until
the index has increased by, for example, 15% over the relevant period. Alternatively, an excess may
apply and this type of clause is usually known as a severe inflation clause (SIC).
By way of illustration, if, in relation to a liability excess of loss reinsurance contract with a limit and
deductible of £5m, payments of £6m are made in settlement of a serious bodily injury claim, the
reinsured would ordinarily recover £1m. However, if the limit and deductible are indexed to take account
of, for instance, retail price inflation, the recovery must be adjusted for the rise in the index over the
relevant period.

Assuming the index rose from 125 to 150 from the base date to the payment date and applying the
standard clause, the calculation of the adjusted payment value is as follows:
£6m × 125/150 = £5m
To adjust the deductible you must multiply it by the actual payment divided by the adjusted payment
value, as follows:
£6m × £5m
= £6m
£5m
Finally, the amount recoverable is the actual payment less the adjusted deductible:
£6m – £6m = Nil