Limit of Indemnity
No Claim Bonus
To have an insurable interest in an item a person must stand to suffer direct, measurable financial loss if the item were lost, damaged or destroyed. The person must stand to benefit from the continued, unharmed existence of the item, or be prejudiced by its damage or loss or liability, whichever may rise. For example: your television to the value of R6 000 has been stolen from your home. As the owner, you have suffered a measurable loss of R6 000 because you have a financial (insurable) interest in the television.
This is the maximum amount of indemnity provided by a policy. The limit of indemnity is determined by the sum insured and constitutes the insurer’s maximum liability in respect of any one event or series of events. The limit of indemnity is the amount upon which the premium is usually calculated.
This occurs when the insured has not arranged adequate insurance cover for the financial value of the property insured. In the event of a claim the principle of 'average' would then be applied. This is an insurance principle, which deems that, if an item or property is underinsured, the insured must bear a rateable proportion of each and every loss.
Average is applied for three main reasons:
The formula determining average is as follows: Sum Insured / Value at Risk x Amount of Loss
For example: a machine is insured for R10 000. The actual replacement value of the item is
R20 000. If the machine is damaged by fire resulting in repairs to the value of R5 000, the claims settlement would be calculated as follows: (R10 000/R20 000) x R5 000. Amount payable: R2 500
The principle of indemnity is the basis of most short-term insurance contracts. This principle states that after a loss has occurred, the insured shall as far as possible be placed in exactly the same financial position as he was before the loss occurred, subject to adequacy of sum insured and all policy conditions and requirements being fulfilled.
Betterment is best illustrated by example: your television, covered under your insurance policy, is destroyed in a fire. A similar replacement would cost R6 000. You prefer to upgrade to a better model, to the value of R8 500. The R2 500 difference constitutes betterment and would be for your own account.
The portion of a claim that is not covered by the policy is known as the ‘excess’. It is used as an underwriting tool to minimise small, administratively-costly claims or to reduce a loss ratio, and to impose a duty-of-care on the insured. Excess may be Voluntary and/or Compulsory. For example: you have lost your watch to the value of R800 and the excess applicable is R200. The claim will be settled for the amount of R600. Or, a burst pipe results in damage of R375 and the excess applicable is R500. The full R375 would be for your own account because it falls within the excess of R500.
In the event of no claim being made or arising under this section during a period of insurance, the renewal premium will be discounted (No Claim Bonus) and the Claim Free Group will be adjusted accordingly.
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Does all the terminology used by insurance companies confuse you? If it does, please take a look at our Insurance Terminology section to clear up some common misunderstandings about some words used by us.