UNVALUED AND VALUED POLICIES

Most, if not all, policies subject to the principle of indemnity are unvalued policy. This means that the insured must prove his loss in accordance with the terms and conditions of the policy. Once proven, the insurer will be liable up to the sum insured or limit expressed in the policy in respect of the loss. The principle of indemnity ensures that the insured is put back into the same financial position that he was in immediately before the losstook place. Subject to adequacy of insurance, the insured should not be worst off financially after being indemnified by the insurer. He must also not make a gain as a result of the loss.

A valued policy is one where the insurer and the insured enter into an insurance contract to insure the subject matter of insurance for a fixed or agreed amount. In the event of total loss, the amount is paid to the insured without regard to the actual value of the subject matter at the time of loss. For partial loss, the amount payable is in proportion to the extent of loss against the agreed value unless the policy provides for payment of partial loss on indemnity basis. The policy will carry the expression or clause signifying that it is issued on valued or agreed value basis. Expressions like 'so valued', 'this is a valued policy' or 'agreed value' are usually shown in the policy schedule. Valued policies are usually issued to cover 'hull and machinery' and 'cargo' for maritime risks under Marine insurance. Valued policies are seldom encountered in property insurance except for antiques, art pieces and items where the market value can be quite difficult to ascertain. Provided the valuations of the property to be insured are fair and honest and devoid of fraudulent means, valued policies are acceptable even though it is a departure from the working of the principle of indemnity. It is more an exception rather than the rule to issue valued policies.

In Malaysia, valued or agreed valued policies are now being offered to insure private cars. My research shows that we are about the only insurance market offering this form of cover. There is nothing wrong in doing so but it may raise moral hazard issues especially when cars are insured on agreed value for substantially more than the market value. Cars are subject to rapid depreciation and offering agreed value can create losses in circumstances where the insured would happily welcome them.

Your comments please.