Average
When the sum insured is lower than the value (or re-instatement) of the property at the time of loss, this results in underinsurance. To counter this Insurers apply average whereby their liability is restricted to that proportion of the loss that the sum insured bears to the value (re-instatement) of the property at the time of loss. This can be shown by an example.

Sum Insured £40,000
Loss £12,000
Property Value at the time of loss £60,000

Insurer Liability 40,000/60,000 x 12,000 = £8,000
In this example the Insured bears £4,000 of the loss as a result of underinsurance.

Breach of Utmost Good Faith
This renders the insurance contract null and void or voidable according to the circumstances and is classified as follows:

Cancellation
The Insured is not legally entitled to any return of premium once cover is in force. If there is no change in the property insured neither party is entitled to cancel the policy during the term unless the policy contains a cancellation clause. In the event of an alteration to the risk covered, the Insurer can refuse to continue the insurance and again is not obliged to make a return premium. Though not obliged Insurers will customarily allow a refund.

Co-Insurance Clause
A clause used by Insurers, which warrants that a specified proportion of the risk (insurance) must be carried by the Insured. In the event of a loss the Insured must bear his rateable proportion.

Co-Insurers
Where a policy is issued to cover a large risk and a number of Insurers take a proportion of the risk. The policy is issued by the Leading Office (also referred to as lead Insurer) with the name of all Co-Insurers noted with the respective proportions.

Commencement and Expiry
The commencement and expiry dates are specified in the policy but the time is not given. It was usual to state that the policy expired at a particular time though this is no longer the case. Where no particular time is detailed, the policy is in force until midnight of the expiry date named.

Contribution
Where an Insured has multiple policies covering the same risk (subject matter and interest) each Insured makes a contribution to the loss.

Cover Note
The cover note provides confirmation of cover for a limited period usually 30 days The cover is subject to the printed terms and conditions of the Insurers usual policy and it is made clear that Insurers have the option of terminating the cover on giving written notice to the Insured. The issuing of a cover note does not signify final acceptance of the insurance.

Day One Basis
One of several methods of combating inflation. Instead of asking the Insured to predict the re-instatement value of a property in the near future, Insurers request the correct re-instatement value of the property at inception of the policy and an inflation provision. Insurers add this inflation provision to the ‘Declared Value’ to arrive at the sum insured, the maximum amount payable in the event of a loss.

Declared Value
The property value on a re-instatement basis declared to Insurers at inception of the policy on which the sum insured is based.
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Declinature
Insurers can decline to issue a policy after the proposal has been made and they can decline to invite renewal of an existing policy.

Escalator clause
Where the Insured selects a sum insured, which represents the value at risk (either on an indemnity basis or re-instatement basis) at inception of the policy and selects a rate of inflation to be applied during the coming 12 months. The sum insured is therefore increased each day and the premium charged for this is normally 50% of the inflation figure requested.

Excess/Deductible
The value of each and every loss that the Insurer is not responsible for often expressed as 'the first £100 of each claim'.

Facultative Reinsurance
This is where an Insurer offers an individual risk to Re-Insurers who can decline or accept whatever sum they consider appropriate.

First Loss
Where the sum insured is agreed and fixed deliberately below the full value of the property insured.

Full Value (indemnity basis)
The sum insured on an Indemnity basis for the insurance of:
1. Buildings should represent the cost of rebuilding in a similar fashion with the addition of a suitable sum for Public Authority requirements, Professional Fees and debris removal.
2. Machinery, Office Equipment etc. should be the cost of replacement at the date of the loss less an appropriate allowance for depreciation.
3. Raw Materials should be the cost of replacement including the cost of transport.
4. Work in Progress should be the cost of manufacture – no profit element unless under contract.
5. Wholesale Stock, should be the cost of replacement including the cost of transport.
6. Farm Produce should be the market cost less the cost of threshing and transport charges not incurred.
7. Live Stock should be the cost of replacement including transport

Indemnity
To indemnify a person is to compensate him/her for a loss sustained either by monetary payment, re-instatement or replacement (subject to the sum insured being the limit of the Insurers liability) placing them as near as possible in the same financial position as prior to the loss.

Insurance Premium Tax
A government tax levied against UK insurance premiums currently set at 5% in respect of all insurances except travel which incurs a rate of 17.5% in line with Value Added Tax.

Insurable Interest
The Insured to substantiate a claim must show he has suffered a financial loss by destruction of the property affected

Insurance Contract
This is the contract whereby the Insurer in return for a consideration (premium) undertakes to indemnify the Insured against financial loss which he may sustain by reason of certain defined property insured being lost, destroyed or damaged by Fire or other stated perils within a stated period, the liability of the Insurer being limited to a specified amount referred to as the sum insured.

Joint Insured

Where more than one party have have the same insurable interest in the insurance policy and are named as Insured or Policyholder.

Loss Adjuster
An insurance specialist appointed by the Insurer to investigate the loss/claim on their behalf.

Loss Assessor
An insurance specialist appointed by the Insured to negotiate the settlement of the claim on their behalf.

Material Facts
‘Every circumstance is material which would influence the judgement of a prudent underwriter in fixing the premium or determining whether he will take the risk.’ If in any doubt as to whether information is material or not, always disclose it.

Proposal Form
The statements made by the proposer in writing to Insurers, which form the basis on which the policy is written.

Re-Insurance
The method by which Insurers limit their risk by placing part of their risk with a third party.

Representation
This is a statement made by the proposer during negotiations to induce Insurers to accept the risk.

Slips
Insurance Intermediaries often when offering insurance to Insurance Companies use ‘slips’. This is a document setting forth brief details of the insurance required. If the risk or a portion thereof is accepted by the Insurers, they initial and date the ‘slip’ stating the amount of their acceptance. The initialling of a slip is equivalent to the issuing of a Cover Note.

Subrogation
This is the right of the Insurer, after having indemnified the Insured to use his rights and remedies to recover his losses form a third party.

Sum Insured
The total sum insured is the maximum liability of the Insurer under the policy. The sum insured is neither an admission by the Insurers of the value of the property nor is it the amount, which they promise to pay in the event of a loss. The sum insured is simply a limit of the Insurers liability and a basis on which the premium is calculated. It is the proposers responsibility to calculate and fix the sum insured, which should always represent the full (re-instatement) value of the property covered.

Term
The insurance policy provides that the property is held insured for a specified period known as the term. There is no legal period for which a policy is issued. Usually policies are issued for a period of 12 months and are known as annual policies.

Treaty Reinsurance
An agreement between an Insurer and a Re-Insurer whereby a specified proportion of every risk accepted by the Insurers is placed with the Re-Insurer or where the excess above that which the Insurer wants to hold is placed with a Re-insurer.

Underinsurance
When the sum insured is lower than the value (or re-instatement) of the property at the time of loss resulting in a lower insurance premium being paid. In the event of a loss Insurers will apply average to arrive at a settlement figure.

Utmost Good Faith
It is not sufficient that a proposer is honest in his dealings with the Insurer and his statement is true. A higher duty of full disclosure of all material facts applies. This duty also applies to the Insurer though this duty rests largely with the proposer for the reason that he and he alone knows or ought to know all the material facts relating to the proposed risk.

Warranties
This is an undertaking by the Insured to the Insurer (normally imposed by the Insurer) that he will (or will not) do a certain thing or that certain facts are as stated.