Department of Insurance & Risk Management

Midlands State University

Faculty of Commerce

Department of Insurance & Risk Management

Module: Property Insurance (IRM 205)

Lecturer: S. Masiyiwa

“Good advice is precious”

CHAPTER 1

INTRODUCTION TO PROPERTY AND PECUNIARY

1.0Introduction

Property insurance is the business of effecting and carrying out contracts of insurance against risks of, or damage to, material property, not being risks of a kind such that the business of effecting and carrying out contracts of insurance against them constitutes marine, aviation and transport insurance business or motor insurance business ( The UK Insurance Companies Act 1974/181)

The word property embraces every material thing or physical object to which fortuitous loss or damage may be occasioned. The distinction between immovable property and movable property has no relevance.

The perils normally insured include but are not limited to the following:-

• Fire
• Lightning
• Explosion
• Storm, wind, water, hail or snow
• Aircraft damage
• Impact by animals or vehicles
• Accidental leakage of sprinkler installations
• Burst pipes and overflowing of water tanks
• Riot strike and malicious damage
• Theft of goods
• Theft or loss of money
• Breakage of glass
• Accidental damage to or breakdown of machinery
• All risks

Many of the above perils may be insured by individual policies. However, insurers are increasingly using single policies ( i.e. package policies) covering losses from the above perils or some of them as may be applicable as regards both property and pecuniary insurance.

1.1General principles and factors limiting insurability of risks

From your introductory module (The Practice of Insurance IRM 101) it was mentioned that certain risks are uninsurable because to do so would be contrary to public policy. Below are some factors which can limit the scope of insurance protection available.

(a)Pecuniary value

Loss or damage covered by insurance must be capable of being expressed in pecuniary terms. This is due to the fact that in a majority of instances in contracts of indemnity the insurers settle claims by paying cash. However, the insurers may at their option settle the claim by reinstatement, replacement or repair, in which event they do not strictly settle by paying cash to the insured.

As a result of this factor some articles with very little commercial value, although highly prized by their owner may be uninsurable as the personal value attached to it by the owner is no capable of being expressed in financial terms and compensation by the payment of money is not feasible.

(b)Legality and public policy

The scope of all insurance policies is limited by law. An insured may not insure against the consequences to him of his own deliberate of fraudulent act i.e. the insured cannot benefit from his wilful misconduct.

A medical doctor or lawyer cannot insure against the effects of being disqualified from practising his profession on account of his own professional negligence. However, professionals may insure against liability to pay damages through some unintentional mistake or oversight in carrying out his professional duties. This is different from deliberate or intentional misconduct.

(c)Insurable interest

The insured must have a pecuniary interest recognised by law in the subject matter of the insurance contract. Where there is no insurable interest the insurance contract will be illegal and unenforceable in a court of law. To this end an insured cannot insure his neighbour’s property because he does not suffer any financial loss in the event that property is destroyed by, say fire or lightning.

(d)Lack of knowledge

There are certain risks of loss for which insurers will not provide any insurance cover. For example loss of profits through market fluctuations in prices of shares on the Zimbabwe Stock Exchange (ZSE) i.e. a speculative risk. The loss of profits is capable of being expressed in pecuniary terms and if it were possible to cover the risk the insurance contracts will be legally. However, there is not enough knowledge to assist underwriters in making sufficiently accurate forecasts of the future and as a result they are not able to calculate premium rate for the risk.

(e)Market agreement

Some risks are excluded from insurance protection by an agreement throughout the insurance market. Certain exclusions are common to nearly all policies covering property and the standard clauses relating to these are in general use. The risks are excluded from insurance policies because the extent of loss is incalculable and as a result insurers are not able to calculate scientific rate of premium.

(a)War risks exclusion clause

This clause appears in every policy issued in respect of property and pecuniary insurance(other than where it would be inapplicable , say, burglary insurance, fidelity and contract guarantees) and excludes loss or damage to property related to or caused by

-Civil commotion, labour disturbances, riot, strike of lock out

-War (declared or not) , invasion, act of foreign enemy, hostilities or warlike operations or civil war

-Mutiny, military uprising, military or usurped power, martial law or state of siege or any event or cause which determines the proclamation or maintenance of martial law or state of siege

-Insurrection, rebellion or revolution

-Any act (whether on behalf of any organisation, body or person, or group of persons) calculated or directed to overthrow or influence any State or government or any provincial, local or tribal authority with force or by means of fear, terrorism or violence

-Any act which is calculated or directed to bring about loss or damage in order to further any political aim, objective or cause, or to bring about social or economic change, or in protest against any State or government, or any provincial, local or tribal authority or for the purpose of instilling fear in the public or section thereof

-The act of any lawfully established authority in controlling. Preventing, suppressing, or in any other way dealing with any occurrence referred to above

(b)Radioactive contamination clause

The catastrophic potential of the developing nuclear industry created problems difficult problems for insurers and at an early state it became clear that no single insurer would have the capacity to cover the major risks involved even with help of reinsurance. The clause excludes:-

-Destruction or damage, directly or indirectly, caused by or arising from or in consequence of or contributed to any nuclear weapons material or by ionising radiations or contamination by radio activity from any nuclear fuel or from any nuclear waste from the combustion of nuclear fuel.

-Any legal liability of whatsoever nature directly or indirectly caused by or contributed to by or arising from ionising radiations or contamination by radio activity from any nuclear fuel

-Legal liability directly or indirectly caused by or contributed to by or arising from nuclear weapons material

(c)Sonic shock waves exclusion

The clause excludes loss or damage from aircraft or other aerial devices or articles dropped therefrom, or sonic waves.

1.2Pecuniary loss insurance

Pecuniary loss insurance business embraces the business of effecting and carrying out contracts of insurances against any of the following risks:-

(a)Risks of loss to the person insured arising from the insolvency of their debtors or from failure (other than through insolvency) of the debtors to pay the debts when due.

(b)Risks of loss to the persons insured attributable to interruptions of the carrying on of business carried on by them or to reductions of the scope of businesses so carried onn (consequential loss insurance)

(c)Risks of loss to the persons insured attributable to their incurring unforeseen expense, and

(d)Risk neither falling within any of the foregoing paragraphs, nor being of kind such that the carrying on of the business of effecting and carrying out contracts of insurance against them constitutes the carrying on of insurance business of some other class.

Examples of pecuniary insurances include loss of rent, loss of profits, book debts, accounts receivable, fidelity guarantee. Government bonds, court bonds, contract guarantee bond, etc.

Pecuniary loss insurance is primarily concerned with intangibles such as income, revenues or values in the form of money. The subject matter of pecuniary insurance is money whereas the subject matter of property insurance is tangible material capital but the same basic legal principles apply to both forms of insurance.

CHAPTER 2

PROPERTY INSURANCE 1

2.0PROPERTY INSURANCE 1

2.1 The sum insured as the limit of indemnity

The underlying principle of property insurance is that in exchange for a premium payment the insurer undertakes to indemnify the insured against any financial loss he may directly suffer as a result of the happening of an insured event to the subject matter of insurance.

The premium is the price charged by the insurer for the risk he undertakes and is calculated by applied a rate per $100 to the sum insured. It is therefore essential that the insurer must receive a premium which is commensurate with the risk. To this end the sum for which the subject matter of insurance is insured must represent its full value at the time of effecting the insurance and should be maintained at the full value throughout the period of insurance cover.

If the sum insured is less than the full value of the property, there is said to be underinsurance and the insured will be paying an inadequate premium into the insurer’s pool of funds from which all losses and expenses are paid. This results in equitable situation and may not receive full indemnity in the event of loss. Underinsurance on a large scale will inevitably lead to increases in rates since this is the way the insurer can receive the premium income required to build up the pool of funds adequate to compensate legitimate claimants and maintain the insurer’s profit margin. Underinsurance penalises those policyholders whose sums insured are adequate as they are also affected by the general rate increase.

Although most property insurance policies are annual contracts, it is not sufficient to merely reassess the adequacy of the sums insured at the annual renewal date. The insured should keep a watchful eye on the adequacy of the sums insured during the period of insurance. The effect of the government budget changes, replacement of older equipment of all kinds by newer and more expensive equipment, the impact of inflation and market price increases are all matters to be considered and dealt with at the time at which they arise.

When a loss occurs under property insurance policies, the sums insured are reduced by the amount paid in settlement, from time of the loss until the next renewal date. The insured must request the insurers to restore the sums insure to the normal figure and pay an additional premium and have the policy endorsed accordingly. The additional premium is charged on a pro rata basis from the date of reinstatement of the sums insured to the next renewal date. An exception to this practice if the declaration policy which contains a clause providing for the automatic restoration of the sums insured and the insured undertaking to pay an additional premium later. Please note that the additional premium is payable from the date of reinstatement and not date of loss.

2.2Determination of sums insured values

The value of the subject matter of insurance is its value:-

(d)At the TIME and the PLACE of loss. Value means its real or intrinsic value, no addition being made for any sentimental value. No allowance should be made for loss of prospective profit or other consequential loss.

The insured is entitled to receive indemnity within the limits of the sum insured. The practical application of the principle is discussed below in respect of the various types of property.

(a)Buildings

The basis of indemnity for buildings is the cost of repair or reinstatement. If the damage is not extensive a builder’s estimate is obtained. If extensive work is necessary the insurer will instruct an architect to compile a specification and a bill of quantities with detailed measurements may be drawn up. The bill of quantities may be submitted for tender from contractors or be priced and presented to the insurers’ loss adjusters.

Adjustment may be necessary to compensate for betterment. Betterment can arise from:-

(e)Additions or improvements made during the rebuilding

(f)The original structure may have deteriorated, so that rebuilding will give new for old.

Allowances for additions and improvements are deducted, and where rebuilding gives new for old the insured may have to contribute to the cost.

In order to expedite repairs, the occupier of an industrial or commercial building often asks for overtime to be worked by the contractors. The extra cost of this overtime is of benefit to the business as it helps to maintain turnover and production and it should be met under a consequential loss policy.

The basis of settlement need not always be the cost of reinstatement of s serious or total loss. When a mansion or old fashioned private house is affected the cost of restoration to its pre-fire condition be uneconomic or the sum insured may even never have been based on such a cost. A reasonable indemnity would then be the market value of a house with similar or otherwise adequate amenities in accordance with present day requirements.

(b)Machinery

Where repair of machinery is possible, the basis of indemnity is the cost of restoring it to its previous condition.

If the machinery is damaged beyond economic repair, the fairest recompense is the cost of replacing it by second hand machinery of the same age, type, capacity and condition. To do this is often not practicable and new machinery must be bought. Deduction may have to be made because the old machinery is replaced by better machinery or replacement is still by the same type of machinery but must be new for old and depreciation must be taken into account.Insurers are uncomfortable with providing an extension to cover for the first difficulty as it can easily be abused. However, they are very comfortable to provide an extension to cover the second difficulty i.e paying for new machinery in place of old of the same type. They provide for this extension by making the policy subject to the Reinstatement Value Conditions.

(c)Computer records

The usual basis is the value of the materials together with the cost of clerical labour and computer time expended in reproducing such records (excluding any expenses in connection with the production of information to be recorded therein) and not the value to the insured of the information contained therein. There is an obligatory monetary limit on computer policies.

(d)Patterns, models, designs, etc.

The basis is normally the cost of labour and materials necessary to reproduce such property. Monetary limits are not unusual on any one model or pattern. Particularly valuable patterns, models or designs are usually insured separately.

(e)Retailers stock in trade

The indemnity is usual based on the wholesale price paid by the insured, not the selling price, since the latter includes profit. The cost price can easily be ascertained from the wholesalers’ invoices. Discounts should be deducted, since the insured will obtain similar discounts when goods are replaced by new stock. Depreciation may also have to be made for depreciation of stock through age and particularly for goods which have become old fashioned.

(f)Special classes – cotton and tobacco

For cotton and tobacco the calculation of indemnity is based upon custom of the trade and the basis is incorporated in the policy at inception.

(g)Cotton

The basis usual adopted is the market value of like cotton immediately after the fire. It is also customary to allow interest on cotton if payment is not made within a certain period of the fire, say 30 days. To avoid heavy interest charges, if provided in the contract, the offices usually make payments on account when their adjusters certify such payments.

(h)Tobacco

Tobacco appreciates in value by keeping and the basis of settlement sometimes agreed is the cost price of the tobacco plus further sum to cover all subsequent charges, interest, appreciation in value, and extra cost at which the destroyed or damaged tobacco can be replaced within thirty days after the fire.

(g)Manufacturer’s stock

(i)Manufactured good

Indemnity is usually based on the cost of production immediately before the fire. This includes materials, labour, and factory overhead expenses, but excludes profit. In special cases the “contract price” clause may be added to insurances on such goods to cover loss of sold but yet to be delivered goods. The basis of settlement in this case will be the contract price.

(j)Partly manufactured goods (work in progress)

The basis is the cost of raw materials and manufacture incurred up to the time the goods were destroyed.

(h)Farm produce

The measure of indemnity for growing crops is the price at the nearest market less the cost of combining or cutting, threshing and transport. For corn in stacks, threshing is deducted. For hay and straw in stacks the basis is market price at the farm.

(i)Farm implements

The measure of indemnity for farm implements is the value at the time of fire, based upon cost of replacement less wear and tear.