Insurance is a contract between the insurer and the insured, and as such it is subject to numerous terms and conditions as contained in the policy wording. Beyond this contract there are a number of accepted principles and practices that determine how the insurer should respond to the insured and vice versa. Below, we evaluate various insurance terms that relate specifically to the limit of indemnity or sum insured.
Considering that an insurance policy is a financial contract between the insurer and the insured in which financial compensation is expected and offered, calculation of the correct insurance value, or sum insured, is vitally important. Determination of the sum insured is the responsibility of the insured, not the insurer, and it is always recommended that the services of a suitably qualified property valuator be employed in doing so.
In property insurance policies, the sum insured is a representation of the full replacement value of the insured property. The sum insured is the maximum amount that the insurer may pay out on any claim for damages following an insured incident. This amount will be reflected in the policy schedule.
This value is best defined in insurance as the reasonable cost of rebuilding or repairing the damaged property to the same specification and condition it was in immediately prior to the damage occurring. In terms of the insurance contract, the responsibility of the insurer is to place the insured back in the same financial position they were prior to the loss occurring.
While in certain circumstances the insurer may pay for the improvement of the property by replacing the damaged property with more advanced property, the insurance agreement is to replace existing property on a like-for-like basis. Improving on damaged property is ‘betterment’ which is excluded.
The replacement value refers specifically to tangible property and does not include non-tangible values included in the market or re-sale value of the property (e.g. location, views, etc.). You can read more about the difference between replacement value and market value on our website.
In Insurance Definitions – Sum Insured Part 2 (next week) we will look at the definition of the average clause and the capital additions extension.
Author: Bruce Gibson
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