Valuation

• Author: Denis Boivin
• Pages: 437-485

437

CH AP TER 10

VALUATION

A. INTRODUCTION

Assume that an insured risk materi alizes and th at the policyholder

gives notice of his losses, w ithin the time frame required by the con-

tract, along with suff‌icient ev idence to begin a review. Assume also that,

following this review, the insurer deter mines that the losses are indeed

covered and that there are no valid ground s for rejecting the claim. At

f‌irst glance, it might appear th at the settlement process is over. It is not.

There may still be room for dispute between the parties. Indeed, one of

the most important determi nations has yet to be made: the losses must

be evaluated. The parties must put a dollar value on the damages suf-

fered by the insured in light of the ev idence and of the wording of the

policy. As we will see, this determination may require more than invoices,

estimates, and a calculator. In some circumstances, it will require a

consideration of the meaning of value, as well as speculation about the

motives and intentions of the insured, both before and after the losses

occurred. In practical terms, this determ ination can make the differ-

ence between a settlement in four f‌igures and one in si x f‌igures.

Non-indemnity insurance is not governed by the principles dis-

cussed in this chapter. For example, with respect to life insur ance,

there is no need to evaluate anyone’s pecuniary or non-pecuniary losses.

Once the death of the person whose life was insured has been e stab-

lished, the amount payable is determined e xclusively by the insuring

agreement; the policy wil l specify how much money is owed by the

INSURANCE LAW438

insurer and to whom the payment must be m ade. Likewise, most of

the topics covered in this chapter do not apply to liability insurance. In

this context, the pri nciple of indemnity is relevant, but the losses th at

require an asse ssment relate to a third-party claimant — a person to

whom the insured caused injuries or property damages by negligence,

breach of contract, or breach of a f‌iduciary duty. Subject to the policy’s

limits, the insurer will pay the damages assessed by the trial judge or

jury, as the case may be, or the amount of the out-of-court settlement

reached by the partie s. In other words, with respect to liability insur-

ance, the law of remedies is more relevant than the law of insurance in

determining the scope of t he insurer’s f‌inancial obligations.

B. THE INDEMNIT Y PRINCIPLE

In evaluating the insured’s losses, the starting point is the indemnity

principle. Subject to the contract, the policyholder is entitled to be fully

indemnif‌ied for his losse s. The indemnity must correspond as perfectly

as possible to the damages suffered — that is, the insured must not

receive one dollar more or less than the value of the actua l damages

suffered. Insurance is not a mechanism for making prof‌its; it is a legal

channel for compensation. Financially speaking, the in sured should

not be in a worse position following the settlement of a claim. Nor

should the insured be in a better position.

The indemnity principle applies subject to the agreement. Gener-

ally speaking, three distinct features of an insurance contract have an

impact on the principle: (1) the limit of liability, (2) the deductible, and

(3) the basis of valuation. Limits and deductibles signif y that many in-

sureds receive less money than required to achieve full indemnif‌ication.

These features undermine the indemnity principle, but they are law-

ful and non-regulated because t hey keep the costs of insurance under

control — something that is benef‌icia l to everyone in the long run. The

basis of loss settlement affects the principle in a different way. Because

of this feature, some insureds are actually enriched by insurance, de-

spite the indemnity principle. But when this occ urs, there is a valid

reason for their enrichment: t he insurance contract.

1) Polic y Limits

Insurance coverage is never unlim ited. Invariably, the contract will

provide a ceiling for each undertak ing contained in the insuring agree-

ment — that is, a maxi mum amount that the insurer will pay in the event

Valuation 439

of a corresponding claim. Limits of liability provide some certainty in

an otherwise uncertain busines s enterprise. They allow insurers to

predict their exposure, at any g iven time, and make arrangements for

reinsurance, if neces sary.

Limits of liabilit y exist in both f‌irst-part y insurance and third-

party ins urance, and their form varies, depending on the context. Some

limits are general, while others apply to specif‌ic categories of losses

— for example, a homeowner’s house and personal property may be

insured for $500,000 (this amount represents the “face value” of the

policy), but her jewellery, watches, gems, fur garments, and gar ments

trimmed w ith fur, up to $5,000 in total. Some limits are occurrence-

based, while others apply cumulatively dur ing the entire term of the

contract — for example, professional liability in surance may contain

a limit of $1 million per claim and an ag gregate limit of $2 million

per policy period. Some limits are expressed in doll ar amounts, while

others are expressed in percentages of the entire loss — for example,

property insurance may contain an 80 percent “coinsurance clause,” a

provision that limit s the insurer’s liability i n the event that the face

value of the policy is less th an 80 percent of the object’s actual value (in

essence, an underreport ing penalty).

Whatever their form, ceilings h ave a direct impact on the indem-

nity principle whenever the actual losse s sustained by the in sured are

greater than the corresponding limit. Genera lly speaking, there are no

legislative restrictions with respect to lim its, because they keep the

costs of insurance under control. The part ies are free to negotiate what-

ever ceilings they are prepared to accept in l ight of their respective in-

terests. Naturally, the relationship between t he premium and the limit

of liability is directly proportional: the higher the lim it, the more the

insured wil l pay for the corresponding coverage.

2) Deductibles

The deductible is another feature of insurance contract s that affects the

indemnity principle. This is t he amount for which the insured is per-

sonally responsible, each t ime a claim is made under the policy. Limits

of liability come into play only when losses exceed coverage. Deduct-

ibles, on the other hand, are applied regardless of the amount of the

claim. This feature guarantees that the i nsured will not be ful ly in-

demnif‌ied. In fact, when dam ages are relatively minor, the insured may

decide to shoulder the loss entirely, rather than blemish her insurance

record — even if the total loss exceeds t he amount of the deductible.