Non-Life Insurance Concepts and Products: Indemnity, Average Clauses and Proximate Cause
Non-life questions test the indemnity principle in operation - sums insured, deductibles, average or co-insurance clauses - plus the main lines of business and the doctrine of proximate cause.
Indemnity mechanics
The insured is restored to the pre-loss financial position, subject to the sum insured, the deductible and any average clause. Actual cash value (replacement cost less depreciation) contrasts with replacement-cost cover; first-loss policies insure part of a value deliberately; salvage reduces the claim; subrogation lets the insurer pursue the negligent third party; contribution shares a loss among insurers.
Lines of business
Fire and allied perils (standard fire policy with earthquake, typhoon and extended cover), marine cargo and hull, motor (own damage, theft, compulsory third-party liability), engineering (contractors' and erection all risks, machinery breakdown), liability (public, product, professional, D&O), surety bonds, personal accident, health, and SME package policies.
Proximate cause
The efficient, dominant cause of loss, not interrupted by a new cause, determines cover. If an excluded peril is the proximate cause, the claim fails even though an insured peril also operated.
Worked example
A building worth P10M is insured for P6M under a fire policy with an 80% average clause. Fire causes P2M of damage. Required insurance is 0.8 x P10M = P8M, so recovery is P2M x (P6M / P8M) = P1.5M, less the deductible. The clause scales the claim to the ratio of cover bought to the cover required, penalising underinsurance.
Traps
- Paying the sum insured instead of the adjusted loss.
- Using market value where the policy promises replacement cost.
- Treating the CTPL limit as the full third-party exposure; it is only a statutory minimum.
- Ignoring that an excluded proximate cause defeats the whole claim.