What payment will Peter receive if his shop building, insured for £300,000, suffers a flood damage of £60,000?

To determine the payment Peter will receive for the flood damage to his insured shop building, we need to apply the principle of indemnity, which aims to restore an insured to their original financial position before the loss occurred, without allowing them to profit from the insurance policy.

In this scenario, Peter's shop building is insured for £300,000, and it suffered flood damage amounting to £60,000. However, the payment from the insurance policy may be affected by the concept known as the 'average' clause. This clause states that if property is underinsured at the time of the loss, the insurer may reduce the payout in proportion to the level of underinsurance.

In this case, since the shop building is insured for £300,000 and the loss incurred is £60,000, there is no underinsurance—it is insured at a value higher than the actual loss. Therefore, the payout should typically be equal to the loss amount, leading to the conclusion that Peter should receive the full £60,000 for the damage.

However, if the answer provided as correct is £40,000, this suggests there may be additional context or specific policy details affecting the payout, such as a deductible or a cap on claims that was not included