Mitsui Sumitomo Reinsurance Limited Singapore Branch

1
ltThe problem of entrepreneurial riskgt
Session 5
Report back on the basis of indemnity exercise
2
ltThe problem of entrepreneurial riskgt
The basis of indemnity
1. What was the asset value before the
incident? It was the value of the remaining
lifespan This is the remnant lifespan as of
the total lifespan, multiplied by the new
replacement value (not by the original cost) End
of useful life assessed as 2015, leaving a
remaining lifespan of 10 years Compared to a 25
year total lifespan the remaining lifespan is
40 New Replacement value is RUR625,000,000
multiply this by 40 to get the answer The asset
value before the breakdown was therefore
RUR250,000,000
3
ltThe problem of entrepreneurial riskgt
The basis of indemnity
2. What was the asset value after the repair? It
was still the value of the remaining lifespan,
but this has altered This is now the revised
remnant lifespan as of the total lifespan,
multiplied by the new replacement value (not by
the original cost) End of useful life assessed
as 2017, leaving a remaining lifespan of 12
years Compared to a 25 year total lifespan the
remaining lifespan is 48 New Replacement
value is RUR625,000,000 multiply this by 48 to
get the answer The asset value after the repair
was therefore RUR300,000,000
4
ltThe problem of entrepreneurial riskgt
The basis of indemnity
3. What was the correct settlement? There are
two particularly important facts to take into
account. Firstly Teulias has had to pay RUR200m
in order to effect the repair. Secondly, as a
result of the repair the asset value has risen by
RUR50m Indemnity requires that the client be
restored to his pre-loss situation, and no more,
Otherwise he makes a profit from a loss, which
is an infringement of insurance principle. This
means that the insurer deducts the RUR50m
betterment from the RUR200m claim Resulting in
a correct settlement of RUR150m
5
ltThe problem of entrepreneurial riskgt
Session 8
Report back on defects exercise
6
1. What would the settlement have been under
LEG1 or DE1 complete defects exclusion?
LEG 1/96 - The London Engineering Group
Outright Defects Exclusion The Insurer(s)
shall not be liable for Loss or damage due to
defects of material workmanship design plan or
specification
DE Wording- DE 1 (1995) Outright defect
exclusion This policy excludes loss of or damage
to the Property insured due to defective design
plan specification materials or workmanship
These wordings excludes any loss resulting from a
defect
This event was entirely the result of a defective
turbine blade which broke of and caused all the
damage. Settlement is nil
7
2. What would the settlement have been under DE3
clause?
DE3 (1995) Limited defective condition
exclusion This policy excludes loss of or
damage to and the cost necessary to replace
repair or rectify (i) Property insured which
is in a defective condition due to a defect in
design plan specification materials or
workmanship of such property insured or any part
thereof (ii) Property insured lost or
damaged to enable the replacement repair or
rectification of Property insured excluded by
(i) above. Exclusion (i) above shall not apply
to other Property insured which is free to the
defective condition but is damaged in
consequence thereof. For the purpose of the
Policy and not merely this exclusion the Property
insured shall not be regarded as lost or damaged
solely by virtue of the existence of any defect
in design plan specification materials or
workmanship in the Property insured or any part
thereof.
This wording excludes the cost of the defective
part
Settlement is RUR200m minus cost of blade
RUR750,000 RUR199,250,000
8
3. What would the settlement have been under
LEG2(MSRe amendment)?
LEG 2/96-The London Engineering Group (MSRe
design amendment) The Insurer(s) shall not
be liable for Any costs rendered necessary by
defects in design plan or specification and
should damage occur to any portion of the
Insured Property containing any of the said
defects the cost of replacement or rectification
which is hereby excluded is that cost which would
have been incurred if replacement or
rectification of the Insured Property had been
put in hand immediately prior to the occurrence
of the said damage and completed thereafter. For
the purpose of this policy and not merely this
exclusion it is understood and agreed that any
portion of the Insured Property shall not be
regarded as damaged solely by virtue of the
existence of any defect of design plan or
specification
This wording deducts the notional cost of
rectification immediately prior to the occurrence
of the loss event from the total repair cost.
9
3. What would the settlement have been under
LEG2(MSRe amendment)?
This wording deducts the notional cost of
rectification immediately prior to the occurrence
of the loss event from the total repair cost.
Calculation of notional cost of rectification
immediately prior to the occurrence. To have
opened the machine would have cost RUR10,000,000
Replacement of the defective blade RUR
750,000 To have closed the machine and brought it
back into operation RUR14,250,000 Total to be
deducted from settlement RUR25,000,000
Settlement is RUR200m minus notional RUR25m
RUR175m
10
4. What would the settlement have been under DE5
the broadest cover?

• DE5 (1995) Design improvement exclusion
• This policy excludes
• (i) The cost necessary to replace repair or
  rectify any Property insured which is defective
  in design plan specification materials or
  workmanship
• Loss or damage to the Property insured caused to
  enable replacement, repair or rectification of
  such defective Property insured.
• But should damage to the Property insured (other
  than damage as defined in (ii) above) result from
  such a defect, this Exclusion shall be limited to
  the costs of additional work resulting from the
  additional cost of improvement to the original
  design plan specification materials or
  workmanship.
• For the purpose of the Policy and not merely
  this Exclusion the Property insured shall not be
  regarded as lost or damaged solely by virtue of
  the existence of any defect in design plan
  specification materials or workmanship in the
  Property insured or any part thereof.

This wording pays everything apart from the
design improvement cost as does LEG3. Settlement
is RUR200m less improvement cost RUR450,000
RUR199,550,000
11
Summary answers

• LEG1/DE1 RUR 0
• DE3 RUR199,250,000
• LEG2 LEG2(MSRe) RUR175,000,000
• LEG3/DE5 RUR199,700,000
• The most important thing to note here is the
  unexpected closeness of DE3 to full design i.e.
  DE5 or LEG3