III IC-57 common mistakes
III IC-57 · Understand the traps and how to avoid them.
Treating the average (pro rata) condition as applying to every fire policy claim, instead of first checking whether the sum insured is stated as a full-value or agreed-value basis and whether the clause is even attached.
Candidates memorise 'underinsurance means average applies' as a blanket rule and then apply it mechanically to total losses, agreed-value policies, and policies where the clause is excluded, producing wrong settlement figures.
What to do instead
Before computing any settlement, write three lines at the top of your working: (1) basis of sum insured (full value vs agreed value vs reinstatement), (2) does the average clause appear in this policy, (3) is the loss partial or total. Only if it is a partial loss under a full-value policy with the clause attached do you apply the proportion. Practise with a mixed set of five short scenarios and label each before calculating.
Confusing the reinstatement value with the indemnity value when calculating the claim, or failing to deduct depreciation and salvage where the policy is on an indemnity basis.
The word 'reinstatement' is used loosely in study material, and candidates default to new-for-old figures because they are easier to source from the scenario, forgetting that indemnity means the value of the property at the time of loss less wear and tear.
What to do instead
Build a one-page comparison table: basis of valuation, what is deducted (depreciation, salvage, betterment), and what is not. On every calculation question, state the basis explicitly in the first line of your answer and show the deduction line separately so the examiner can award method marks even if the arithmetic slips.
Ignoring exclusions and conditions that limit cover, such as the exclusion of loss caused by the insured's own deliberate act, spontaneous fermentation, or gradual deterioration, and answering as if any physical damage is covered.
Candidates focus on the perils insured and skim the exclusions list, which is usually buried in the middle of a long clause. Exam scenarios are often written so that the obvious cause is a peril but a subtle exclusion or proximate-cause argument changes the outcome.
What to do instead
For every scenario, run a fixed four-step checklist: identify the proximate cause, check it is an insured peril, check each exclusion for an exception to the exclusion, then check conditions precedent (notice, proof, protection of property). Write the checklist out in your answer so the examiner sees each step, even where the conclusion is that cover applies.
Misapplying the proximate cause doctrine by treating the last event in the chain as the cause, rather than the dominant, effective cause, and failing to recognise when an excepted peril is the proximate cause.
The doctrine is taught with classic cases and candidates try to pattern-match rather than reason from the facts. They also forget that an exclusion can bite even if an insured peril appears earlier in the chain.
What to do instead
Practise articulating the chain in words: 'the loss would not have occurred but for X, and X was the dominant cause because...'. For each practice scenario, write the chain, name the proximate cause, and state whether any exception to the exclusion applies. Do five chains of three or more links so you are comfortable with intervening events.
Applying average to the wrong sum insured, for example using the building sum insured for a contents claim, or failing to include the value of the whole property at risk when the policy covers several items under one sum insured.
Scenario questions often present multiple sums insured and a loss that touches more than one item. Candidates grab the first figure they see and do not check whether the policy aggregates items or applies a separate sum to each.
What to do instead
Redraw the schedule from the question in your own table before calculating: item, sum insured, value at risk, loss amount. Then check the policy wording for whether the sum insured applies per item or in the aggregate. If it is aggregate, state that you are using the total and show the total in your working.
Confusing consequential loss (business interruption) with material damage cover and answering a BI question with fire policy concepts, or vice versa, particularly on what is insured and what is excluded.
The two domains share the same triggering event, so candidates blur the boundary. They forget that BI insures loss of profit and increased cost of working, not the physical asset, and that the fire policy must respond first for the BI claim to arise.
What to do instead
Write a two-column summary: what is insured, what is the measure of loss, what conditions apply, what is excluded. Then, for every BI question, open with the sentence 'the material damage policy must first respond, and the BI policy then indemnifies the consequential loss of profit and increased cost of working'. Use that framing before any calculation.
Calculating the rate of gross profit incorrectly, or using the wrong turnover figures, when computing the sum insured and the claim under a BI policy.
The rate of gross profit is defined as gross profit divided by turnover, and candidates either use net profit or confuse the historical year with the indemnity period. They also forget to add back the uninsured working expenses correctly.
What to do instead
Write the formula explicitly: rate of gross profit = (turnover less uninsured working expenses) divided by turnover, expressed as a percentage. Then apply it to the turnover that would have been achieved in the indemnity period. Do three worked examples with different add-back assumptions and check each against the policy's definition of gross profit.
Ignoring the indemnity period and the maximum indemnity period when computing a BI claim, so the loss is calculated over the full period of disruption rather than the shorter of the indemnity period and the actual interruption.
The scenario may describe disruption lasting longer than the indemnity period, and candidates compute lost profit for the whole disruption because it is the most visible number in the question.
What to do instead
Before calculating, write down the indemnity period from the schedule and the actual interruption period from the facts, then state 'the claim is limited to the shorter of the two'. Show the cut-off date in your working and, where the disruption exceeds the indemnity period, note that the excess period is uninsured.
Forgetting that increased cost of working is subject to the economic limit, namely that the expenditure must not exceed the loss of gross profit it is expected to avoid, and claiming the full additional cost without that test.
Candidates treat increased cost of working as a straightforward reimbursable expense and do not apply the economic limit test, which is the central control on that head of claim.
What to do instead
For every increased cost item, write the test as an inequality: additional expenditure must be less than or equal to the gross profit saved plus any saving in insured standing charges. Show the comparison explicitly. If expenditure exceeds the saving, state that only the amount up to the saving is recoverable.
Overlooking the savings in insured standing charges when computing loss of gross profit, so the claim is overstated by the expenses that would have been incurred but were not.
Savings are a deduction in the calculation and candidates focus on the lost turnover and add-backs, treating standing charges as a fixed constant even where the business was closed and some costs ceased.
What to do instead
Build the claim in a standard vertical layout: turnover lost, less savings in insured standing charges, plus increased cost of working, less any other savings, then apply the rate of gross profit and any average condition. Always include a line for savings, even if the answer is nil, so the examiner sees you considered it.