MOFS Guide to Legal Indemnity Insurance - Flipbook - Page 14
Determining the Limit of Indemnity
Under-Insurance and Averaging
One of the main challenges when arranging legal
indemnity insurance is determining what figure and
which losses should be considered to determine the
limit of indemnity.
A mistake is often made where a limit of indemnity
is chosen that does not reflect the potential loss that
could be incurred by the Insured. As the vast majority
of policies cover diminution in value, cover should
be taken out for full value of the property/full gross
development value as previously explained so that
the Insured is covered in the event of a catastrophic
claim that results in complete loss.
As a general rule, if the policy is required on a continued use basis where
no development (either change of use or alterations) is intended, the limit
of indemnity should reflect the market value of the property at the policy
date. If development is intended and the insurance policy is obtained on
the basis that permits development, then the limit of indemnity should
reflect the gross development value of the property upon completion of
the development works.
A standard legal indemnity policy will cover the Insured for ‘standard
heads of loss’. The principal loss in the event of a claim will be diminution
in value, i.e. the difference in value of the Property immediately before
an Order or settlement following a claim and its value after the Order or
settlement. Other standard heads of loss include compensation which
the Insured is required to pay to the claimant pursuant to an Order or
settlement and any costs incurred in dealing with a claim.
All these costs should be covered by the limit of indemnity stated in the
policy. Consideration should be given if the Insured requires cover above
and beyond the standard heads of loss – see Consequential Losses later.
For Chancel Repair cover, the Limit of Indemnity should represent a
figure the Insured thinks would be ample to offer protection in the event
of a claim for contributions and need not necessarily be the market
value. See also the earlier comments regarding Contaminated Land
It is generally not advisable to ‘guess’ what the potential cost of a claim
could be to the Insured as this could lead to under-insurance, in which
case the Insurer can apply the condition of average in the event of a claim.
This means that the Insurer can reduce the amount of the claim by the
same percentage by which the property is underinsured.
Averaging can be avoided if the Insurer agrees to insure on what is called
a First Loss Basis if the underwriter is satisfied that the limit of indemnity
requested reasonably represents what would be the Insured’s maximum
loss in the event of a claim (for example, where a claim would only affect
one property on the Insured’s development, the Insured may consider
insuring for just the value of that one property). However, very often there
is not a massive cost saving for the Insured as the premium for cover for
full value is determined by the underwriter considering what the maximum
loss would be for the Insured in the event of a claim in any event.
If in doubt, always ensure that cover is being sought for full value.
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