Page 80 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 5: Principles of Insurance

avoiding the cumbersome process of the Insurer first paying the Insured and he in turn paying Notes
to the third party.

Repair

This is a method of Indemnity used frequently by insurer to settle claims. Motor Insurance is the
best example of this where garages are authorized to carry out the repairs of damaged vehicles.
In some countries Insurance companies even own garages and Insurance companies spend a lot
on Research on motor repair to arrive at better methods of repair to bring down the costs.

Replacement

This method of Indemnity is normally not preferred by Insurance companies and is mostly used
in glass Insurance where the insurers get the glass replaced by firms with whom they have
arrangements and because of the volume of business they get considerable discounts. In some
cases of jewellery loss, this system is used especially when there is no agreement on the true
value of the lost item.

Reinstatement

This method of Indemnity applies to Property Insurance where an insurer undertakes to restore
the building or the machinery damaged substantially to the same condition as before the loss.
Sometimes the policy specifically gives the right to the insurer to pay money instead of restoration
of building or machinery.
Reinstatement as a method of Indemnity is rarely used because of its inherent difficulties e.g.,
if the property after restoration fails to meet the specifications of the original in any material
way or performance level then the Insurer will be liable to pay damages. Secondly, the
expenditure involved in restoration may be much more than the sum Insured as once they have
agreed to reinstate they have to do so irrespective of the cost.

Limitations on Insurers Liability

1. The maximum amount recoverable under any policy is the sum insured, which is mentioned
on the policy. The amount is not the agreed value of the property (except in Valued
policies) nor is it the amount, which will be paid automatically on occurrence of loss.
What will be paid is the actual loss or sum insured whichever is less.
2. Property Insurance is subjected to the Condition of Average. The underlying principle
behind this condition is that Insurers are the trustees of a pool of premiums from which
they meet the losses of the few who suffer damage, so it is reasonable to conclude that
every Insured should bring a proper contribution to the pool by way of premium. Therefore
if an insured deliberately or otherwise underinsures his property thus making a lower
contribution to the pool, he is not entitled to receive the full benefits.
The application of this principle makes the insured his own Insurer to the extent of under-
insurance i.e. the pro-rata difference between the Actual Value and the sum insured.

The amount of loss will be shared between the Insurer and the insured in the proportion of sum
insured and the amount underinsured. The formula applicable for arriving at the amount to be
paid by the Insurance Co. is:
Claim = Loss × (Sum Insured/Market Value)

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