Lesson Notes By Weeks and Term - Senior Secondary 1

Term – 2^nd Term

Week: 6

Class: Senior Secondary School 1

Age: 15 years

Duration: 40 minutes of 2 periods each

Date:       

Subject:      Insurance

Topic:-       Indemnity II

SPECIFIC OBJECTIVES: At the end of the lesson, pupils should be able to

1. Discuss the application/measurement of indemnity in property, life and liability insurance
2. Explain some special terms peculiar to the principles of indemnity
3. Outline factors limiting indemnity
4. Discuss some modifications to the principle of indemnity

INSTRUCTIONAL TECHNIQUES: Identification, explanation, questions and answers, demonstration, videos from source

INSTRUCTIONAL MATERIALS: Videos, loud speaker, textbook, pictures

INSTRUCTIONAL PROCEDURES

PERIOD 1-2

NOTE

The application/measurement of indemnity in property, life and liability insurance

The payment of exact financial compensation to the insured for the loss depends on the nature of the insurance involved. The life assurance and personal accident insurance contract involves payment of liquidate damages (which means that the amounts to be paid are known before the happening of the loss). In case of property, liability and non-life insurance policies, they deal with inliquidated damage, where the amount payable in the event of the claim will only be determined at the occurrence of the event.

The indemnity payable in respect of different classes of insurance is calculated as:

a.) Marine insurance policies: The measure of indemnity will be determined based on the form of loss suffered, either a total loss or partial loss.

Total loss: the measure is fixed by the policy;

Partial loss of goods: settlement is made of a proportion of agreed value according to the amount of depreciation;

Partial loss of ship: indemnity is represented by the cost of repairing the damage.

b.) Building: In the case of loss or damage to building, the measurement of indemnity will be based on the cost of repairs or reconstruction at the time of loss. This will exclude any betterment. Betterment could take two forms: (i)Replacement or repairing of a damaged or lost property can bring about new for old; New electrical wiring, new plumbing, decoration.

(ii)Betterment can arise where the repaired or replaced articles are better than how the original one was when it was new; extra storey added to a building during reconstruction. The insured entirely bear the cost of betterment in case of second form of betterment.

c.) Machinery: The cost of indemnity is usually the cost of repair or replacement less allowance for wear. Where the machine is disposed of, it is destroyed or sold as scrap and the insured cannot purchase a replacement on second hand.

d.) Manufacturer’s stock in trade: it includes raw materials, work in progress and finished goods.

i.) Raw materials: the cost of replacing the destroyed raw materials with the cost of delivery;

ii.) Work in progress and finished goods: the cost of raw materials along with other costs such as labour charge, production cost which are to be based on the market price at the time of loss representing the cost of production of the goods fully or partially.

e.) Wholesaler’s and retailer’s stock in trade: The measure of indemnity is based on the wholesale price but not the selling price since the selling price would include profit.

f.) Farming stock:

i.) Livestock and farm produce: indemnity payable is the local market price and where the farm produce is for sale, it is usually based on the market price less processing, handling or transportation cost which are saved from its destruction.

ii.) Any cost property which is for consumption at the farm such as dairy cows, straw, feedstuffs, the indemnity is the cost of replacement which must take into account any additional cost that will ensure replacement of such farm stock at the farm.

g.) Pecuniary insurance: The indemnity is ascertained through the actual financial loss suffered by the insured following the dishonesty to the insured staffs like cashier, accounts staff.

h.) Liability insurance: The indemnity is the amount awarded by the court. This may be negotiated by out of court settlement in addition to other costs and expenses incurred while processing the claim.

Special terms peculiar to the principle of indemnity

1.) Salvage: This is the amount of money received by an insurer from the sale of damaged property on which a total loss has been paid to the insured. Where there is total destruction of the subject matter, there is no issue of salvage but where there is partial loss of the subject matter e.g. a shoe factory affected by fire where the shoes are damaged by smoke, the insurer is allowed to take the possession of the damaged shoes.

2.) Abandonment: This is applicable only in marine insurance; this means that in certain circumstances, the insured can abandon the subject matter. It means that in the event of constructive total loss, the assured is entitled to abandon all the rights on the subject matter of the insurance and claim for a total loss. This may be due to:

(a) The possibility of recovering the ship or the goods is zero.

(b) the cost of recovering the ship or goods may be higher than their values.

The factors limiting indemnity

1.) Sum insured: This is the maximum obtainable by the insured in the event of the claim under an insurance policy, although this may not represent a full indemnity but the insurer cannot be compelled to pay more than the sum insured.

2.) Average: This is a devise used by the insurance companies to discourage or combat under insurance by involving the insured in the sharing of loss with the insurer when it is discovered that the subject matter is insured for less than its actual value.

3.) Policy excess: This is the compulsory amount the insurer and the insured agreed at the inception of the policy that the insured will be responsible for the event of each and every claim made.

4.) Policy franchise: It is the amount the insured had agreed with the insurer to be responsible for in the event of each and every claim. Limit: This is the amount the insurance companies have agreed to pay in the event of claim following the loss of an article by insured peril.

5.) Deductible: This is where the insured accepts a substantial excess and agrees to be responsible for smaller claim in order to obtain a useful saving in premium cost.

Modifications to the principle of indemnity

1.) Reinstatement: This is used to represent the amount of money that would be paid by an insurer in respect of claim without deduction of wear and tear and depreciation under a property insurance policy covering building and machinery.

2.) New for old: It provides the insured the opportunity to replace the property of about 3 to 5 years damages by insured peril’s with new property. This form of arrangement attracts higher premium and it excludes clothing.

3.) Agreed additional cost: In property insurance, the insured often incurs additional cost as a result of a fire or other damage such as debris, removal expenses, cost of complying with public authority for rebuilding, architect’s fee and surveyor’s fees. These expenses can be included in the insurance cover and any payment relating to them will amount to more than strict indemnity

EVALUATION:    1. Discuss the indemnity payable to the following classes of insurance

1. marine insurance policies
2. Building
3. machinery
4. manufacturer’s stock in trade
5. Wholesaler and retailer’s stock in trade

2. Write short notes on the following

1. Salvage
2. Abandonment

3. List three factors limiting the principles of indemnity

4. Explain the modifications to the principles of indemnity

CLASSWORK: As in evaluation

CONCLUSION: The teacher commends the students positively