QUESTION
A policy wording states the limit on what an insurer will pay is $5,000 in regards to unspecified jewellery, and they then issue a purchase authority to the jeweller for the full amount (true replacement cost was approx. $8,000). However, the jeweller then gives a discount, and the insurer is only charged $4,500.
The client feels like they have received the full benefit they are entitled to, but has the insurer fulfilled their obligation to pay the $5,000?
EXPERT ANSWER: Crossley Gates, Glaistor Keegan
To answer your question first, the insurer never had an obligation to pay $5,000 based on these facts. Here is why.
An insured cannot profit from insurance; insurance only makes good a loss. The basis of settlement of a claim and the limit payable for a claim are two different considerations.
I assume the basis of settlement was replacement cost (new for old). What monetary loss did the insured suffer? Answer: the replacement cost of $4,500. Was this above the limit payable under the policy of $5,000? Answer: No.
Therefore, the insurer correctly paid the $4,500 (ignoring any excess that applied).
The red herring in this scenario is the apparent discount given. The fact remains that the cost to the insured of the replacement new item was $4,500. Whether this amounted to a discount on the jeweller’s standard price is irrelevant to the calculation. This is what the jeweller charged the insured.
