ISR question on whether the test for Co-Insurance is done against the Limit of Liability.

Good morning Allan

Thank you for your time just now.

The insurer is saying we need to increase our Limit of Liability or co-insurance may apply.  Which from reading their wording we do not believe the Limit of Liability is a factor.

Their solution, they want us to split the risk into 2 locations and revise our Limit of Liability.

Could you please review and provide me with your thoughts.

Regards

Name and email provided but withheld.

I replied as follows:

Hi H…..

I think there is a misunderstanding somewhere in the process. What I am referencing is from a traditional Mark IV Modified ISR policy.

There are two tests for co-insurance. The first is at the third provision of the Reinstatement and Replacement Memorandum.  This test reads:

“(iii)       Property insured under this memorandum is separately subject to the following
Co-insurance clause:”

“In the event of damage to any property insured hereunder at any situation caused by any event hereby insured against, the Insurer(s) shall be liable for no greater proportion of such damage than the amount that the Insured’s declaration of value of property insured at such situation on the day of the commencement of the Period of Insurance[1] bears to the sum representing eighty-five per cent (85%) of the cost which would have been incurred in reinstatement if the whole of such property had been destroyed on that day, but not exceeding the Limit of Liability expressed in the Schedule; provided that if the sum actually incurred or expended in rebuilding or replacing the damaged property, within the meaning of sub-paragraph (a) of the abovementioned definition of reinstatement, exceeds the amount which would have been payable under this Policy if this memorandum had not been incorporated herein but is less than the cost of reinstatement as above defined, then the sum so actually incurred or expended shall, for all purposes of this memorandum, be deemed to be the cost of reinstatement of the property.”

You will see that the test is against the Declared Values at the situation and not the Limit of Liability.

The second Co-insurance clause is found as the last of the Memorandum to Section 1.

This reads:

“CO-INSURANCE

Unless otherwise stated herein to the contrary, this Policy is subject to the following Co-insurance memorandum:

In the event of damage to property insured hereunder at any situation caused by any event hereby insured against, the Insured(s) shall be liable for no greater proportion of such damage than the amount of the Insured’s declaration of value of such property on the day of the commencement of the Period of Insurance bears to the sum representing eighty-five per cent (85%) of the actual value of property insured at such situation on the day of commencement of the Period of Insurance but not exceeding the Limit of Liability expressed in the Schedule.

Provided that this clause shall not apply if the amount of the damage does not exceed 5% of the amount of the Insured’s declaration aforementioned.

It is expressly understood and agreed that the provisions of this Co-insurance Memorandum shall not apply in respect of that part of any claim which is made under the provisions of the Reinstatement and Replacement Memorandum.”

This second Co-insurance clause was inserted for when the Insured elects to claim indemnity. Having said this, the test is still against the declared values at the situation and not the Limit of Liability.

The Limit of Liability is just that, a limit. It is referred to in the second and third clauses of the Policy and here it states:

“Whereas the Insured named in the Schedule has paid or agreed to pay to the Insurer(s) specified below the Premium shown on the Schedule, now the Insurer(s) agree(s), subject to the terms, Conditions, Exclusions, Memoranda, Warranties, limitations and other provisions contained herein or endorsed hereon, to indemnify the Insured as specified herein, against loss arising from any insured events which occur during the Period of Insurance stated in the Schedule or any renewal thereof.

“Provided that the total liability of the Insurer(s) at any one Situation shall not exceed the appropriate Limit or Sub-Limit(s) of Liability as stated in the Schedule or such amount(s) as may be substituted therefore by endorsement or memorandum hereon or attached hereto and that each Insurer specified below shall only be liable to contribute to any loss covered by this Policy that proportion of the loss as is specified beside its name.”

Back at the Reinstatement and Replacement Memorandum, the fourth proviso also refers to the Limit of Liability. It reminds us that after the test for co-insurance is completed at memorandum 3, then the claim is still limited to the overall Limit of Liability. I reproduce proviso 4 below.

“(iv)    No payment beyond the amount which would have been payable under this Policy if this memorandum had not been incorporated herein shall be made until a sum equal ·to the cost of reinstatement shall have been actually incurred; provided that where the Insured reinstates or replaces any lost or destroyed property at a cost which is less than the cost of reinstatement (as defined) but greater than the value of such property at the time of the happening of its loss or destruction, then the cost so incurred shall be deemed to be the cost of reinstatement.”

In practice, it is not unusual, and in fact good practice to have a Limit of Liability completely different from the declared values.

I am not in a position to comment on the adequacy of the Declared Values or Value at Risk/Declared Values but based on our discussions you have based this on the maximum probable loss that has been independently determined.  If the Insured and your office are comfortable with this, it should be acceptable to insurers.

I hope this explains the situation for you.

Regards Allan