INSURANCE INSIGHTS

IS THE MYTH BEHIND THE SO CALLED “SMALL PRINT” REAL?

What to consider before you seek to enforce the insurance contract for Indemnity purposes.

The sole purpose of buying insurance is Risk transfer. Risk transfer is the mechanism by which financial consequences of an event are shifted from one party to another. Basically, the customer expects to be indemnified by the insurer in the event that he suffers a loss arising from an insured peril. Sadly, more often than not, the insured is dissatisfied with the indemnity provided by his insurer following a loss.What could be the root cause for this disharmony between the two parties when it comes to compensation? Is it just mistrust, ignorance or sheer misunderstanding? Or, is it possible that the insured does not even understand the rationale behind the term Indemnity?

Indemnity is defined as placing the insured in the same financial position after a loss as they occupied immediately before the loss. Note, the key words here, “financial position occupied immediately before the loss.”!Here is an illustration; A customer insures his laptop for a value of Kshs. 100,000/-. Unfortunately, he loses the laptop ten monthslatereither through theft or accidental damage. If it turns out that the replacement cost of a similar laptop or equivalent model at the time of the loss is lower, say Kshs 60,000/-, the insured would be paid not the sum insured but the replacement cost of Kshs. 60,000/. Consequently, by paying the replacement value of the lost item, the insurer has put the customer back to the financial position he occupied immediately before the loss.

The same logic would apply to a claim for a motor vehicle insured at a value of Kshs.500,000/- and subsequently lost through theft, fire or accidental damage. The fact is, unless the vehicle was insured on agreed value basis, the actual financial loss at that point in time would not be the full sum insured but the applicablemarket value of the vehicle or vehicle of similar make, age and mechanical condition. This means depreciation would be factored in to determine the actual financial loss.

Even though the objective of most policies is to provide indemnity, there are other scenarios when the insured does not get fully indemnified. The insured may get less than the full amount because of the limitations of the sum insured such as the policy limit, applicable excess, deductible and average clauses.It is therefore crucial to scrutinize all the applicable clauses, conditions and exclusions therein bearing in mind the fundamental principles of insurance such as utmost good faith, Insurable interest, full disclosure etc, before commencement of legal action.

Further, ensure to pursue the avenue provided for under the contract for dispute resolution; is it Mediation, Arbitration or Court Process?

Author; Wamuyu Waithaka – Partner GMW