Fig. 2 is an extract from a newspaper article concerning buildings and contents insurance. YOUR HOME – AND WHY YOU SHOULD NOT UNDER-INSURE IT. To obtain the maximum benefit, it is important that you insure your house and its contents for the correct amount. The most common problem is that people under-insure either to save on premiums or because they have made a mistake. This may mean that if you make a claim, eg. part of your house was destroyed by fire, compensation might be several thousands of dollars less than the cost of rebuilding it. Fig. 2 Use Fig. 2 to help you to answer the following questions.

Mark scheme

Marking points from the official mark scheme (May/June 2013). The mark or mark type is shown in brackets.

1. [1] (a) (i) insuring something for less than its value
2. [2] (a) (ii) Any two points × 1 mark each or one well developed point × 2 marks –
3. they may choose to do so to save on the premium
4. they may not know the value of what they are insuring
5. they may not be able to afford the premium
6. they may think (wrongly) that they will be paid the full value of what they have partly insured, make a claim and make a profit
7. they have made a mistake
8. any other relevant point
9. [6] (b) Any six steps × 1 mark each –
10. contact an insurance company/insurance broker
11. use comparison websites
12. study a leaflet/prospectus giving details of the insurance cover offered
13. complete a proposal form
14. the insurance company will then assess the risk
15. the premium is calculated
16. the premium is paid (so that insurance cover is provided)
17. a cover note may be issued to give immediate cover
18. the policy is prepared
19. giving the terms and conditions of the insurance
20. it may contain exclusion clauses
21. the insurer may also set an excess to be paid by the insured
22. any other relevant point
23. NB the question does not ask for insurance principles
24. [6] (c) Level 2 (4-6 marks) Has discussed the problem and has shown, with reasons, whether or not compensation will be paid. (No mention of jewellery, 4 marks max.) You will be covered under Buildings and Contents Insurance for the theft of the laptop as it was stolen from your house. You have underinsured the laptop by $300. You insured the laptop for 80% of its value, so instead of $1500, you would receive $1200. You did not tell the truth when you insured it so you did not comply with the insurance principle of utmost good faith which requires the insured to tell the truth and give all relevant facts. You tried to make a profit from a loss and so the principle of indemnity applies as you should have been paying premiums to cover the laptop valued at $1500. As regards the jewellery, this may have been adequately insured. We do not know. If it had been insured for its value, the insurance company would have given compensation of $700 less any excess that might have applied on the policy. If it was not insured, you would have received nothing. Level 1 (1-3 marks) Has made some comments about the claim for the laptop computer. You will receive some compensation for the theft of the laptop. You will not get $500 in compensation. You should have insured it for more.
25. [2] (d) (i) Any two circumstances × 1 mark each –
26. when you have decided to be your own insurer for a particular risk
27. when the cover required is so large that it is better to put aside money to cover any occurrence
28. when the premium for insurance would be so high that it is not worth insuring the risk
29. when the item to be insured is of such little value that it is not worth insuring
30. when you know that you will be refused insurance e.g. you have convictions for drink-driving
31. may be a non-insurable risk
32. any other relevant circumstance
33. [3] (d) (ii) Any three points × 1 mark each and up to 2 marks for a well developed point –
34. when you have no insurable interest in the house
35. and so will not suffer financially from its loss
36. this would apply when you rent the house from someone else
37. as you do not own the house
38. no insurance company will insure it e.g. on flood plain/too great a risk
39. any other relevant point