Blog Question: Erection All Risk – Basis of Loss Settlement Clause
I received a question through the blog as follows:
In the event of any loss or damage the basis of any settlement under this Policy shall be
a) In the case of damage which can be repaired – the cost of repairs necessary to restore the items to their conditions immediately before the occurrence of the damage less salvage, or
b) In the case of a total loss – the actual value of the items immediately before the occurrence of the loss less salvage. However, only to the extent to the costs claimed had to be borne by the Insured and to the extent they are included in the Sums Insured and provided always that the provisions and conditions have been complied with.”
What does this mean?” Arthur [surname and email provided]
I assisted Arthur with the following:
Property insurance typically has 1 of 2 methods to calculate the amount that is to be paid when a claim arises.
The first is called Reinstatement and Replacement, commonly called ‘new for old’. This means that if say a roof was damaged and was 20 years old, the insurer will repair or replace the roof in the event of damage to a condition as new. This means the insured / policy holder gets a new roof without having to contribute to the replacement cost.
The second method, and the one in your example, is what is known as an Indemnity Basis of Settlement where the settlement is based on the pre claim condition of the property – not its replacement cost.
Taking the roof example again, if it were to be damaged and it was half way through its life, the insurer would only pay half the cost to repair or replace it. The policy holder would have to contribute the other half plus the policy deductible.
Having said all that, if it is an Erection All Risks policy I would expect it would all be new materials and so no deduction for age or it’s pre claim condition would be warranted. If the policy covered some existing structure or equipment then it becomes an issue.
With Indemnity settlements their can be disputes over what the amount of any deduction should be where the insurer and policy holder have different views on the age, condition etc, therefore how much is a fair deduction from the claim payout for the damaged property.
The second part of the clause states the insurers maximum payment is the sum insured and nothing more. This is normal and reasonable as this is what the insurance premium has been based on.
The final part states that any claim is subject to the other terms, conditions and exclusions of the policy. This is quite normal but it is important that the policy holder understands all of these to avoid any misunderstandings or to ensure that they do not do something that voids the coverage afforded by the policy.
I hope this explains everything for you.
I hope this assists all of your to understand the Basis of Settlement some more.