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Ksh. 2,500,000
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A property with a value of Ksh. 4,000,000 is insured for Ksh. 6,000,000. Part of the property worth Ksh. 2,500,000 is destroyed. Calculate the amount of compensation awarded and give the reason for your answer.
Step 1: Identify the relevant values. Actual value of property = Ksh. 4,000,000 Insured value = Ksh. 6,000,000 Value of destroyed part (actual loss) = Ksh. 2,500,000
Step 2: Determine the compensation. Since the property is over-insured (insured value > actual value), the compensation is based on the actual loss suffered, provided it does not exceed the actual value of the property. The principle of indemnity applies.
Step 3: State the reason. The reason is the Principle of Indemnity. This principle states that an insurance contract is a contract of indemnity, meaning the insured should be compensated for the actual loss suffered and should not be allowed to make a profit from the insurance claim. In cases of over-insurance, the insurer will only pay for the actual loss, up to the actual value of the property, regardless of the higher sum insured.
The amount of compensation awarded is: Reason: Principle of Indemnity.
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This business/management problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.