Introduction

This article provides two suggestions for improving the Industrial Special Risks (ISR) policy:

1. deleting the Amount of Policy Not Reduced by Loss memorandum; and
2. relatedly, explaining “event” and “aggregate” limits.

The Amount of Policy Not Reduced by Loss memorandum

In the Mk.IV ISR policy, the “Amount of Policy Not Reduced by Loss” memorandum appears in the Memoranda Applicable to All Sections:

Ultimately, this memorandum doesn’t make sense in the ISR policy and should be deleted.

In the ISR policy, the Limit of Liability and Sub-Limits of Liability apply “for any one loss or series of losses arising out of any one event at any one Situation” (i.e. per event and per Situation). Subject to the exceptions (see “Event and Aggregate Limits”, below), the quoted words mean that:

1. If an event affects multiple locations, the Limit of Liability and Sub-Limits of Liability apply to each location (“Situation”) separately; and
2. For each event, the full amounts of the Limit of Liability and Sub-Limits of Liability are available. That is, the Limit of Liability and Sub-Limits of Liability are not reduced (or “eroded”) by previous events.

Given this, the “insurance under each section and/or item of this Policy and the Indemnity Period” (as those words are used in the “Amount of Policy not Reduced by Loss” memorandum) does not need to be reinstated by the payment of additional premium, because the insurance was never reduced in the first place.

In this respect, the Limit of Liability and Sub-Limits of Liability in the ISR policy are fundamentally different from the “sums insured” in other Property policies which may be eroded by loss.

Event and Aggregate Limits

So, what about those exceptions? In the ISR policy, Sub-Limits of Liability (and, potentially, Limits of Liability) may apply:

1. “per event” or “any one event”; and/or
2. “in the aggregate” or “in the annual aggregate”.

While these terms are reasonably well understood within the insurance industry, their meaning may not be clear to those outside it – and this can create confusion for insureds. At their most basic,

1. If a limit applies “per event” or “any one event”, then that limit is intended to apply across all insured locations combined. For example, if an insured has multiple locations that are affected by a single Flood event, and there is a Flood limit of $1,000,000 applying “per event”, then the insured would only be able to claim $1,000,000 in respect of that Flood event, regardless of the number of insured locations affected; and
2. If a limit applies as an “annual aggregate”, then it is intended to apply for all such events occurring during the Period of Insurance. Ambiguity may arise, however, as to whether an aggregate limit applies to a) each location individually or b) all locations combined – this is considered below (see “Clarifying aggregate limits”).

So a limit of liability which applies as an “annual aggregate” could be eroded. But it doesn’t make sense for an annual aggregate limit to be automatically reinstated for a pro-rata additional premium calculated on the loss (to paraphrase the Amount of Policy not Reduced by Loss memorandum) because:

1. the rationale for an “annual aggregate” limit is to limit the insurer’s exposure;
2. the amount of the loss settlement may not be known until well after the event which has caused the damage. This is particularly relevant if there is resultant business interruption. If the insured hasn’t made the payment, is the insurance reinstated? The wording memorandum of the memorandum suggests that the answer is “no”; and
3. if there’s a total loss, what would the reinstated insurance be covering? Why should the insured be required to pay a premium if there is no property to be insured?

Hopefully, the preceding discussion demonstrates that the “Amount of Policy not Reduced by Loss” memorandum serves no purpose in the ISR policy. It should be deleted.

Clarifying aggregate limits

As describe above, ambiguity may arise as to whether an aggregate limit applies to a) each location individually or b) all locations combined. It is therefore prudent for insurance brokers and insurers to define these terms. An example of such a definition is as follows:

The second paragraph of this example may seem unnecessarily wordy. However, aggregate limits could apply to events like Flood or to contingent business interruption covers (i.e. covers that do not require damage to property used by the insured at the insured location). Furthermore, the words “in respect of the Period of Insurance” are used because an indemnity period could commence during the Period of Insurance but extend beyond it – this makes the phrase “during the Period of Insurance” problematic. There may be better ways of explaining event and aggregate limits but, for now at least, the above should suffice as an example.