1. 1 Keys for Chapter 5 Keys for Chapter 5 1. Do you think the insurance company should pay the claim to the insured? Why? Yes, the insurance company should pay the claims. Because there is no necessary connection between the blackout and the thieves, even in the daytime, thieves still want to steal property from the owner of the house. Therefore insurance company cannot refuse the claim with the excluded terms. Yes, the insurance company should pay the claims. Because there is no necessary connection between the blackout and the thieves, even in the daytime, thieves still want to steal property from the owner of the house. Therefore insurance company cannot refuse the claim with the excluded terms.

2. 2 Chapter 6 The Principle of Indemnity

3. 3 Contents A. Indemnity B. Contribution C. Subrogation

4. 4 A. Indemnity 1. The meaning of Indemnity “Indemnity can be defined as exact financial compensation. It is sufficient to place the insured in the same financial position after a loss as he can enjoy the benefit before it occurs.” “Indemnity can be defined as exact financial compensation. It is sufficient to place the insured in the same financial position after a loss as he can enjoy the benefit before it occurs.” In other words, when claims occur in property insurance, the insurer will pay the claims to the insured if it is covered by the policy conditions. In other words, when claims occur in property insurance, the insurer will pay the claims to the insured if it is covered by the policy conditions.

5. 5 2. Indemnity links with insurable interest In the event of any claim, the payment made to an insured cannot therefore exceed the extent of his insurance interest. In the event of any claim, the payment made to an insured cannot therefore exceed the extent of his insurance interest. In property insurance, most property contracts are contracts of indemnity. In property insurance, most property contracts are contracts of indemnity. life and personal accident policies are not contracts of indemnity life and personal accident policies are not contracts of indemnity

6. 6 3. How does an insurer provide indemnity? Four ways ways Cash Repair Replacement Reinstatement

7. 7 4. Measurement of indemnity two kinds of policies The insurable value in an unvalued policy must be calculated according to a formula. valued policy unvalued policy In a valued policy, the insurable value is agreed by two parties in advance.

8. 8  Property insurance: The measurement of indemnity in respect of the loss of any property is determined not The measurement of indemnity in respect of the loss of any property is determined not by its cost, but by its value at the date of the loss and the place of loss

9. 9  Pecuniary insurance It is based on actual financial loss suffered by the insured as It is based on actual financial loss suffered by the insured as a result of the dishonest of a cashier. a result of the dishonest of a cashier.

10. 10  Liability insurance It is the amount of any award made by the court or it is an out-of-court settlement by the negotiation between the two parties. It is the amount of any award made by the court or it is an out-of-court settlement by the negotiation between the two parties.

11. 11  Salvage: If a property is destroyed partially, there arises a problem of salvage. If a property is destroyed partially, there arises a problem of salvage. If the property is not wholly destroyed, the choice of whether it is treated as a total loss or not rests on the insurers. If the property is not wholly destroyed, the choice of whether it is treated as a total loss or not rests on the insurers. The insured cannot ‘abandon’ the salvage. The insured cannot ‘abandon’ the salvage.

12. 12  Abandonment In the event of a constructive total loss, the insured is entitled to abandon all rights in the subject matter to the insurer and claim for total loss. In the event of a constructive total loss, the insured is entitled to abandon all rights in the subject matter to the insurer and claim for total loss. In other words, the insured can abandon the damaged property In other words, the insured can abandon the damaged property to the insurer. to the insurer.

13. 13 5. Factors limiting payment of indemnity Factors  Excess  Average  Deductibles  sum insured  Franchise

14. 14 B. Contribution Contribution is derived from indemnity. It is also one of the important principles in insurance practice. Contribution is derived from indemnity. It is also one of the important principles in insurance practice. This principle is often changed in practice by policy condition so that one insurer does not have to pay out for 100% loss. He is liable for a rateable proportion. This principle is often changed in practice by policy condition so that one insurer does not have to pay out for 100% loss. He is liable for a rateable proportion.

15. 15 1. Meaning of contribution Contribution is the right of an insurer who has paid a claim to the insured to recover part of the amount paid from other insurers if there are other policies covering the same loss. Contribution is the right of an insurer who has paid a claim to the insured to recover part of the amount paid from other insurers if there are other policies covering the same loss. An Insurer An Insured Another Insurer

16. 16 2. How does contribution arise? Contribution applies in the following conditions: Contribution applies in the following conditions:  Two or more policies of indemnity exist  Two or more policies of indemnity exist  The policy covers a common interest  The policy covers a common interest  The policy covers a common peril which gave rise to the loss  The policy covers a common peril which gave rise to the loss  The policy covers a common subject matter of insurance  The policy covers a common subject matter of insurance  Each policy must be liable for the loss  Each policy must be liable for the loss

17. 17 4. Basis of contribution In Great Britain, whether insurers are in contribution by common law or by contractual condition, the effect is that the loss will be shared by insurers in their ‘rateable proportions’. In Great Britain, whether insurers are in contribution by common law or by contractual condition, the effect is that the loss will be shared by insurers in their ‘rateable proportions’. For example, the sum insured of Company A is ￡ 1,000, the sum insured of Company B is ￡ 2,000 and the sum insured of Company C is ￡ 3,000, the loss is ￡ 1,500. How much should each company pay? For example, the sum insured of Company A is ￡ 1,000, the sum insured of Company B is ￡ 2,000 and the sum insured of Company C is ￡ 3,000, the loss is ￡ 1,500. How much should each company pay?

18. 18 1500 × = ￡ 250 1500 × = ￡ 500 1500 × = ￡ 750

19. 19 C. Subrogation The definition of subrogation The definition of subrogation Subrogation means that after the insurer has indemnified the insured in the event of loss and damage, he is entitled to receive back from the insured who might receive from any other party liable. Subrogation means that after the insurer has indemnified the insured in the event of loss and damage, he is entitled to receive back from the insured who might receive from any other party liable.

20. 20 1.2 Corollary of indemnity Generally, if the insurer has indemnified the insured, any recovery will come from the third party. Generally, if the insurer has indemnified the insured, any recovery will come from the third party. Life contracts are not contracts of indemnity. If death was caused by negligence of another person, then the deceased’s representatives can recover from that person in addition to the policy money. For example, if an airliner is crashed and causes the death of passengers, the beneficiaries can recover from the airliner company in addition to the policy money. Life contracts are not contracts of indemnity. If death was caused by negligence of another person, then the deceased’s representatives can recover from that person in addition to the policy money. For example, if an airliner is crashed and causes the death of passengers, the beneficiaries can recover from the airliner company in addition to the policy money.

21. 21 1.3 Extent of subrogation rights There was such a case in 1962 in UK that the insurer has paid the insured ￡ 72,000, but due to the lapse of time between the claim payment and the recovery from the third party and due to the fact that the pound sterling has been devalued in the interval, the insurer actually recovered ￡ 127,000. It was held that the insurer were only entitled to ￡ 72,000. There was such a case in 1962 in UK that the insurer has paid the insured ￡ 72,000, but due to the lapse of time between the claim payment and the recovery from the third party and due to the fact that the pound sterling has been devalued in the interval, the insurer actually recovered ￡ 127,000. It was held that the insurer were only entitled to ￡ 72,000. Insurers can only subrogate to the extent that they have provided indemnity. Insurers can only subrogate to the extent that they have provided indemnity.

22. 22 4. How does subrogation arise?  Rights arise out of tort  Rights arise out of tort A motorist driving negligently may strike and damage a building. A motorist driving negligently may strike and damage a building. Trade persons may negligently leave factory doors open and thieves may steal some stock. Trade persons may negligently leave factory doors open and thieves may steal some stock. A painter may drop ladders onto a machine so that it is damaged and production is lost. A painter may drop ladders onto a machine so that it is damaged and production is lost.

23. 23 4. How does subrogation arise? ► Rights arising out of contract ► Rights arising out of contract --The rights arising out of contract include tenancy agreements. --The rights arising out of contract include tenancy agreements. --Tenants agree to make good any damage to the property which they occupy. --Tenants agree to make good any damage to the property which they occupy. --Prudent property owners would also maintain a policy of insurance --Prudent property owners would also maintain a policy of insurance

24. 24  Rights arise out of statute  Rights arise out of statute In UK, Public Order Act In UK, Public Order Act 4. How does subrogation arise?

25. 25  Rights arise out of the subject matter of insurance  Rights arise out of the subject matter of insurance 4. How does subrogation arise?

26. 26 1.5 When does the right of subrogation arise? Generally speaking, right of subrogation does not arise until the insurers have admitted the insured’s claim and paid it. Generally speaking, right of subrogation does not arise until the insurers have admitted the insured’s claim and paid it.

27. 27 1.6 Modifications to the operation In cases of motorist hitting property, the property insurer would be exercising subrogation rights against the driver. The driver in return would pass the claim on to his own motor insurers. In cases of motorist hitting property, the property insurer would be exercising subrogation rights against the driver. The driver in return would pass the claim on to his own motor insurers. In employer’s liability, subrogation is waived if one employee causes the injury of another. In employer’s liability, subrogation is waived if one employee causes the injury of another.

28. 28