Question

Pla) state any 3 ways by which insurable interest can exist b) There are basically four methods of providing for - indemnity. Explain these four methods brefly C Adjoe Ltd. insured its property against fire with Vaugard Assurance Company for $60,000 Subject to average. The equipment's value at the time of loss was $72,000 . Calculate the insurers liability when the insured suffers a fire loss of $36,000. Give Reasons for your answer. d) Judith bought a car for $10,000 and insured it with the State Insurance company. After years while the policy was still in force, She told the car to Joshua. In the case of damage to the car : cis Can Judith claim any compensation ? Give Reason for your answer . Can Joshua Claim any Compensation ? Give Reason for your answer ( which insurance principle is at work in the above scenario ! . Four Securities have the following expected returns : SECURITY EXPECTED RETURN FASS 25% CBS SAS 31% STM 22% Calculate the expected returns for a portfolio consisting of all four securites if : i a) The portfolio weights are the same for all securities b) The portfolio weight for Security Fass is 40% and the remainder is equally divided among other 3 securities ů An investment of $200,000 is made, calculate the expected retums in dollars.

Answer 1

a) INSURABLE INTEREST:There are three ways by which insurable interest will arise or can be created. Which are given below:–

By common law: Where the essential elements of insurable interest are automatically present,the same can be described as having arisen at common law. The most straight forward example is ownership. One can own a house, and therefore there is entitlement to insure it. Like the use or driving of a motor vehicle in a public place is sufficient insurable interest for the purpose of effecting insurance in the favor of the third party.

By contract: In some contracts a person will agree to be liable for something, which he or she would not ordinarily be liable for? A landlord is normally liable for the maintenance of property he owns rather than the tenants. A lease may, however, make the tenant responsible for the maintenance, repair etc. of the building. Such a contract places the tenant in legally recognized relationship to the building. This gives him an insurable interest, which would not be present if the contract had not been entered into so these kinds of special contractual relationships give rise to the insurable interest on something on which otherwise one does not have any kind of insurable interest.

By statute: Some time an act of parliament will create an insurable interest either by granting some benefit or imposing a duty. While the statute may create insurable interest where none would otherwise exist. There can be some statutes which can restrict liability and thereby also restrict insurable interest. Like compulsory insurance of the employees by the employer of a company.

b) Methods of Providing Indemnity

There are various ways through which indemnity may be provided. These are;

1. Cash Payment: This is the usual way of making payment of a claim. This method is simpler, easier and less cumbersome.
2. Repair: This is also another way of providing compensation. Rather than making the cash payment, the insurers will get the loss repaired to pre-loss condition as far as practicable.
3. Replacement: Usually in the case of total loss the insurers may replace the subject-matter by another one of the same standard, age, and quality.
4. Reinstatement: The insurers may also reinstate the property by option. This is usually considered concerning buildings damaged or destroyed by fire. Usually, it is the option of the insurers to decide on any one of the above four methods.

c)  In case of under-insurance, the Insurance Company applies the Average Clause. Under-insurance means insuring for lesser value of stock like i the given case where the value of stock is $72,000 and sum insured is $ 60,000.

If the insured value of the stock is less than the total of stock, then the Average Clause may apply, that is, the loss will be limited to that proportion of the loss as the insured value bears to the total cost.

The actual amount of claim is determined by the formula:

Claim = Loss Suffered x Insured Value/Total Cost

Claim = $36,000* 60,000/72000

Claim = $30,000

d)

• If you sell your vehicle, it’s your duty to cancel your auto insurance as soon as the ownership shifts to someone else
• Your car insurance won’t protect the new owner after a bill of sale is signed.
• If you don’t cancel your coverage on a vehicle that you have already sold, the insurance company will deny any claims that are made because the new owner should have their own insurance that pays for the loss.
• In view of above, neither Judith nor Joshua can claim compensation.

• The Principle of Utmost Good Faith would apply here