Insurance Concepts & Definitions

Insurance Words and Terms

For your information we outline the meaning of some of the words and terms commonly found in insurance policies.

Indemnity – The principle of indemnity operates to place the Insured in the same financial position after a loss as that enjoyed immediately before the loss.

Indemnity Cover – Where property is damaged, this covers the cost of repair (less an allowance for betterment if the repair considerably improves the pre-loss condition of the property).

Where property is lost or destroyed, it generally covers the market value of the property as at the date and place of the loss (other than for marine insurance, when it is calculated at the date of the commencement of the risk).

Reinstatement and/or Replacement Cover – This insures property on a “new for old” basis. In the event of loss, the insurer will pay the cost of replacing the property or restoring the damage to a condition no better or more extensive than new, without deduction for depreciation. The pre-loss condition of the property is not relevant.

If reinstatement is impossible because of changes in planning or building laws, the loss is usually assessed on the basis of the market value of the property at the date of the loss

Extra Cost of Reinstatement Cover – This covers additional costs which might be required to comply with regulatory upgrades in building requirements, eg because more extensive or expensive design and materials are required when rebuilding.

Underinsurance – This clause applies only if you are underinsured and most policies provide 10-15% room for error.  If you are underinsured, the insurer can reduce their liability by the portion that you are uninsured.  For example, if you should be insured for $100,000 and you are only insured for $50,000 then you are taking on 50% of the risk and the insurer is taking 50%.  In this case, the insurer will only ever pay 50% of a claim.  If you lodged a claim for the full $50,000 then the insurer would only pay $25,000.  It is therefore vital that sums insured are accurate.

Many insurance policies contain an Average clause. This means that to ensure that your property is fully insured, you must insure for its full value. The full value will vary depending on whether you purchase replacement or market value cover.

If you do not insure for the full value you will be underinsured, and will be treated as though you have chosen to self- insure the difference. Therefore, you will have to pay for a portion of the loss.

A simple example of how this applies is:

Full insurable value$100,000You are self-insured for 50%.
Selected sum insured$50,000
Cost of repair due to fire damage$40,000You must pay the remaining $20,000
Insurer will pay$20,000

For this reason, it is important to take care to ensure that your property is insured for its full value.

We encourage you to obtain and regularly update valuations for the replacement cost of your assets including buildings, plant and equipment, jewellery and artwork.

Your Duty of Disclosure – Before you enter into a contract of general insurance with an Insurer, you have a duty, under the Insurance Contracts Act, to disclose to the Insurer every matter that you know, or could reasonably be expected to know, that is relevant to the Insurer’s decision whether to accept the risk of the insurance, and if so on what terms.

You have the same duty to disclose those matters to the Insurer before you renew, extend, vary or reinstate a contract of general insurance.
Your duty, however, does not require disclosure of matter:

  • that diminishes the risk to be undertaken by the Insurer,
  • that is of common knowledge,
  • that your Insurer knows or, in the ordinary course of his business, ought to know,
  • as to which compliance with your duty is waived by the Insurer.

Non-Disclosure – If you fail to comply with your duty of disclosure, the Insurer may be entitled to reduce It’s liability under the contract in respect of a claim or may cancel the contract. If your non-disclosure is fraudulent, the Insurer may also have the option of avoiding the contract from its beginning.

Hold Harmless Agreements / Removal of Subrogation Rights – You may prejudice your right to claim if you make any agreement that prevents the insurer from recovering a loss from a third party without first obtaining the insurer’s consent in writing.

Be aware that if you enter into an agreement that imposes a contractual liability on you which would not have existed but for the agreement, that liability is unlikely to be covered by your insurance.

These clauses are often found in rental agreements, maintenance or supply contracts from burglar alarm or fire protection installers and in building or repair contracts, supplier agreements and the like.

If you are in doubt, please consult your Account Manager.

GST On Insurance Policies – In accordance with the “A New Tax System (Goods and Services Tax) Act 1999” (GST Act), most insurance is deemed a taxable supply (ie, it is not GST-free). There are, however, particular classes of insurance that do not attract GST including: Some Travel and Marine Insurances, and Life Insurance.

The ability for an Insured to claim any GST back from the Australian Taxation Office (ATO) as an Input Tax Credit (ITC) depends on the purpose for which the insurance is acquired and on the basis that the Insured’s business is a registered entity, ie:

  • Where the Insured is registered for GST, generally they will be entitled to claim an Input Tax Credit (ITC) for the GST paid.
  • Where there is only part business use, the Insured will only be entitled to claim a part of the GST paid as an Input Tax Credit.
  • Unregistered entities and individuals not in business will not be entitled to Input Tax Credits.
  • An Insured’s ability to claim Input Tax Credits on an insurance premium is of critical importance when it comes to the treatment of claim settlements.

If you are unsure, advice regarding your eligibility to claim Input Tax Credits should be sought from your accountant or financial adviser.