Question 7 – Learning Outcome 8 (20 Marks)

Introduction

This question examines the principle of indemnity and its application to different
categories of insured items. Section 9A of the study text outlines the principle of
indemnity.

Aleya submitted a claim for items damaged in a garage fire under her household
insurance policy.

According to Parsons et al, M05 (2023-2024) Ch9 A 'indemnify' means, literally, to

save from loss or harm and, accordingly, 'indemnity' means protection or security
against damage or loss. The concept of indemnity thus implies that the object of
insurance is to provide exact financial compensation for the insured. However, it also
implies that the insured should not be over-compensated and should not ‘make a profit’
from their loss.

The case of Castellain v. Preston (1883) (Parsons et al, M05 (2023-2024) Ch9 A
Example 9.2): Berret LJ stated; The very foundation, in my opinion, of every rule
which has been applied to insurance law is this, namely, that the contract of insurance
contained in a marine or fire policy is a contract of indemnity and of indemnity only,…
and if ever a proposition is brought forward which is at variance with it, that is to say,
which either will prevent the insured from obtaining a full indemnity or which gives the
insured more than a full indemnity, that proposition must certainly be wrong.

Measure of indemnity, Parsons et al, M05 (2023-2024) Ch9 B A claim under a policy
of indemnity may be described as a claim for liquidated damages. This means that the
exact amount of the compensation is not known in advance but is to be fixed afterwards
on the basis of the loss actually suffered. The method by which indemnity is to be
measured depends upon the type of insurance involved and the nature of its subject
matter.
Parsons et al, M05 (2023-2024) Ch9 B1A provides for the general rule; the measure
of indemnity for the loss of any property is determined by its value at the date of loss
and at the place of loss (rather than its cost).

The case Sartex Quilts & Textiles Limited v Endurance Corporate Capital Limited
[2019] EWHC 1103 (Comm) reaffirmed that an insured is entitled to recover costs
necessary for reinstatement without profit, emphasizing that insurers must restore the
insured's financial position.

Basis of Indemnity for Each Item

Garage Roof (4 Marks)

Under most household insurance policies, damage to the structure of a property,

including a garage roof, is typically covered on a replacement cost or repair cost basis.
This means that the insurer will cover the costs necessary to repair or replace the
damaged roof to restore it to its pre-loss condition.

Parsons et al, M05 (2023-2024) Ch9 B1B notes that; Where a building is damaged,
the normal basis of indemnity will be the cost of repair or reconstruction at the time of
the loss with, in many cases, a deduction for ‘betterment’. In this case betterment
occurs in two scenarios; First, when a building is repaired, certain parts of the structure
will often have to be renewed so that when the work is complete the building is likely to
be in a better condition than it was before the loss, and the other way in which
betterment can arise is where the quality of the building is improved in the course of
carrying out repairs.

In the case of In Leppard v. Excess Insurance Co. Ltd, the plaintiff, Mr. Leppard,
owned a cottage that was insured for its full value. After a fire destroyed the cottage, he
submitted a claim for indemnity. The insurer contended that the measure of indemnity
should be based on the market value of the property at the time of loss rather than the
reinstatement cost because Mr. Leppard had intended to sell the cottage prior to the
fire.
Measure of Indemnity: The court held that the measure of indemnity should reflect the
value to the insured at the time of loss. In this case, it was determined that Mr.
Leppard's intention to sell the cottage was relevant to assessing its value. The court
noted that if an insured intends to demolish or remove property, its value may be
significantly diminished. The court further emphasized that understanding the insured's
intention at the time of loss is crucial in determining indemnity. If Mr. Leppard had
intended to continue using the cottage as a dwelling, then its reinstatement cost would
be applicable; however, if he intended to sell or demolish it, then market value would be
more appropriate.

The decision in Leppard aligns with earlier cases such as Gould v AIG Europe Ltd
[2012] EWHC 1058 (Comm), which affirmed that insurers must assess claims based on
actual losses suffered by the insured rather than potential future profits or benefits.

The ruling in Leppard v. Excess Insurance Co. Ltd establishes important precedents
regarding how indemnity is calculated in property insurance claims. It underscores that
both the actual intent of the insured and their financial interest in the property at the time
of loss are critical factors in determining whether indemnity should be based on
reinstatement costs or market value.

In relation to Aleya's claim for damage to her garage roof, the principles established in
Leppard can be applied as follows:

If Aleya intends to repair and continue using her garage, then her claim would likely be
assessed based on replacement cost, aligning with her intention to restore her property.

If there were indications that she planned to sell or not use the garage again, then
market value could become relevant, similar to how it was considered in the case of
Leppard.

This approach ensures that Aleya is compensated fairly based on her intentions and
actual financial interests regarding her property following the fire incident.

Antiques (4 Marks)
Valued Policies: For antiques, which may not have a readily measurable market value,
insurers often use valued policies. These policies allow for a predetermined amount to
be paid in case of a total loss, which is particularly useful for unique items like antiques
that can fluctuate in value. This approach aligns with the principle articulated in
Castellain v. Preston (1883) 11 QBD 380, where it was established that indemnity
contracts must ensure that the insured is fully compensated for their loss but not more
than that.

Market Value vs. Replacement Cost: In assessing claims for damaged antiques,
insurers may consider either market value or replacement cost:

Market Value: This reflects what the item could be sold for on the open market at the
time of loss. In the case of Leppard v. Excess Insurance Co. Ltd [1979] 1 WLR 512,
which emphasized that compensation should reflect the financial position of the insured
immediately before the loss.

Replacement Cost: This considers what it would cost to replace the item with a similar
one at current prices, minus depreciation. This method is often used when items can be
replaced with similar objects rather than unique antiques.

In the case of Leppard v. Excess Insurance Co. Ltd, it was determined that when
calculating indemnity, insurers must consider the actual financial position of the insured
at the time of loss. In this case, Mr. Leppard was compensated based on the market
value just before a fire destroyed his property rather than its potential rebuilding cost.

The court in Gould v AIG Europe Ltd [2012] EWHC 1058 (Comm) reaffirmed that
claims must be assessed based on actual losses suffered rather than potential future
profits or benefits, further supporting fair compensation principles.

Given the unique nature of antiques, obtaining professional appraisals is critical for
establishing their value and ensuring adequate coverage under an insurance policy.
Insurers often require detailed descriptions and photographs to support claims and
facilitate accurate assessments during claims processing.
In conclusion, indemnity for antiques within insurance policies is governed by principles
designed to ensure fair compensation without allowing policyholders to profit from their
losses. The application of valued policies, considerations of market value versus
replacement cost, and relevant case law all contribute to how claims are assessed and
settled for antiques. In summary, Aleya's claim for indemnity concerning her antiques
will be evaluated based on their market value or agreed value.

Golf Clubs and Bag (4 Marks)

In the context of Aleya's claim for her golf clubs and bag damaged in the garage fire, the
principles of indemnity in insurance law will apply.

Basis of Indemnity

Market Value: The indemnity for Aleya's golf clubs and bag will likely be assessed
based on their current market value, accounting for depreciation. This means that if the
clubs are not new or have been used, the insurer will compensate Aleya based on what
she could realistically sell them for at the time of loss, rather than replacing them with
new items.

According to the FAQs from The Golfers Club, items that are not purchased new will be
replaced on an indemnity value basis, reflecting their value at the time of loss or
damage. This aligns with the general principle that compensation should reflect the
financial position of the insured immediately before the loss, as established in Leppard
v. Excess Insurance Co. Ltd [1979] 1 WLR 512.

Replacement Cost: If Aleya had purchased her golf clubs and bag new and they are
less than three years old, some insurance policies may provide coverage on a
replacement cost basis. This means that she would receive compensation to replace
her clubs and bag with new equivalents without accounting for depreciation. For
example, Golf Care offers "New for Old" coverage for golf equipment that is less than
three years old, ensuring that if her clubs are damaged beyond repair, they will be
replaced with brand new ones.

Insurance Policy Provisions: Many golf insurance policies specifically cover loss or
damage to golf equipment, including clubs and bags. For example: According to Golf
Care's insurance policy, coverage includes theft, loss, and accidental damage to golf
equipment. The policy states that they will indemnify up to the amount shown in the
Certificate of Insurance for repairing or replacing golf equipment that sustains direct
physical loss or damage. Policies often specify that they will indemnify against loss or
damage to golf bags and clubs caused by fire, theft, or accidental damage while on the
course or in transit.

In Leppard v. Excess Insurance Co. Ltd case, it was determined that when
calculating indemnity, insurers must consider the actual financial position of the insured
at the time of loss.

The case of Gould v AIG Europe Ltd [2012] EWHC 1058 (Comm) reaffirmed that
claims must be assessed based on actual losses suffered rather than potential future
profits or benefits.

Documentation and Evidence: To support her claim effectively, Aleya should provide
documentation such as receipts for her golf clubs and bag, photographs, and any
appraisals that indicate their value prior to the loss. This evidence will help substantiate
her claim and facilitate a fair assessment by her insurer.

In conclusion, Aleya's claim for her damaged golf clubs and bag will be assessed based
on either replacement cost or market value according to her insurance policy's terms.
The principles of indemnity ensure that she is compensated fairly without profiting from
her loss. By providing adequate documentation and understanding the coverage
specifics outlined in her policy, Aleya can navigate the claims process effectively and
seek appropriate compensation for her valuable golfing equipment.
Household Electrical Equipment (4 Marks)

Replacement Cost: Insured on a new-for-old basis, as stipulated in many household

policies.

Basis of Indemnity

Replacement Cost: Aleya's household electrical equipment, are likely insured on a new-
for-old basis. This means that in the event of a loss, the insurer will cover the cost to
replace the damaged items with new equivalents, regardless of their age or condition
prior to the loss. This approach ensures that Aleya can restore her household
functionality without incurring additional costs.

Many household insurance policies explicitly state that they provide coverage on a
replacement cost basis for electrical equipment. For example, according to various
insurance providers, including HDFC Ergo, electronic equipment insurance covers
accidental damage and provides financial assistance for repair or replacement costs,
ensuring that policyholders are not left at a loss due to unforeseen incidents.

Insurance Policy Provisions: Policies often include specific provisions for household
electrical equipment:

Coverage typically includes protection against damages caused by various perils such
as fire, theft, and accidental damage.

In the case of Leppard v. Excess Insurance Co. Ltd [1979] 1 WLR 512, it was
determined that compensation should reflect the financial position of the insured
immediately before the loss. This principle supports Aleya’s right to receive
compensation based on replacement costs rather than depreciated values.

The case of Gould v AIG Europe Ltd [2012] EWHC 1058 (Comm) reaffirmed that claims
must be assessed based on actual losses suffered rather than potential future profits or
benefits.
To support her claim effectively, Aleya should provide documentation such as receipts
for her electrical equipment, photographs, and any appraisals that indicate their value
prior to the loss. This evidence will help substantiate her claim and facilitate a fair
assessment by her insurer.

In conclusion, Aleya's claim for her damaged household electrical equipment will likely
be assessed based on the replacement cost principle according to her insurance
policy's terms. The new-for-old basis ensures she is compensated fairly without profiting
from her loss. By providing adequate documentation and understanding the coverage
specifics outlined in her policy, Aleya can navigate the claims process effectively and
seek appropriate compensation for her valuable household appliances.

Sculpture (4 Marks)

Agreed Value or Market Value: Depending on policy terms, indemnity may reflect the
agreed value or appraised market value.

n assessing Aleya's claim for her sculpture damaged in the garage fire, the principles of
indemnity in insurance law will apply. The basis of indemnity may vary depending on the
specific terms of her insurance policy, particularly whether it reflects agreed value or
market value. Here’s a detailed analysis:

Basis of Indemnity

Agreed Value: If Aleya's insurance policy includes an agreed value clause, the
indemnity for her sculpture will be based on a predetermined amount that both she and
the insurer agreed upon at the inception of the policy. This means that in the event of a
total loss, Aleya would receive the specified amount without any deductions for
depreciation or market fluctuations.

Agreed value policies are particularly beneficial for unique items like sculptures, as they
provide certainty regarding compensation and eliminate disputes over valuation at the
time of loss. This approach is supported by case law indicating that insurers must honor
agreed values unless there is evidence of fraud or misrepresentation.
Market Value: If Aleya's policy stipulates that indemnity will reflect the market value,
then compensation will be based on what the sculpture could realistically sell for in the
open market at the time of loss, accounting for depreciation.

The market value approach considers factors such as the artist’s reputation, condition of
the sculpture, and current demand for similar artworks. This method aligns with
principles established in relevant case law, such as Leppard v. Excess Insurance Co.
Ltd [1979] 1 WLR 512, which emphasizes that compensation should reflect the financial
position of the insured immediately before the loss.

Relevant Case Law:

In Gould v AIG Europe Ltd [2012] EWHC 1058 (Comm), it was reaffirmed that claims
must be assessed based on actual losses suffered rather than potential future profits or
benefits. This principle underscores the importance of accurate valuation, whether it is
based on agreed value or market value.

Additionally, Castellain v. Preston (1883) 11 QBD 380 supports the idea that indemnity
contracts must ensure that the insured is fully compensated for their loss but not more
than that.

Documentation and Evidence: To support her claim effectively, Aleya should provide
documentation such as:

An appraisal or valuation report indicating the sculpture's worth at the time of loss.

Receipts or documentation showing its purchase price.

Photographs and descriptions to substantiate its condition and uniqueness.

Conclusion

In conclusion, Aleya's claim for her damaged sculpture will likely be assessed based on
either agreed value or market value, depending on her insurance policy's terms. If an
agreed value is established, she can expect to receive that amount without deductions
for depreciation. If assessed at market value, compensation will reflect current market
conditions and depreciation factors. By providing adequate documentation and
understanding her policy specifics, Aleya can navigate the claims process effectively
and seek appropriate compensation for her valuable sculpture.

Aleya’s claim depends on proper valuation of items under the principle of indemnity.
Policies should be carefully reviewed to ensure appropriate compensation.

(References: Study Text, Section 9A.)