Principles of indemnity
A contract of insurance contained in a fire, marine, burglary or any other policy (except Life assurance and personal accident and sickness insurance) is a contract of indemnity. This means that the insured, in case of loss against which the policy has been issued, shall be paid the actual amount of loss not exceeding the amount of the policy, i.e. he shall be fully indemnified. The maximum amount of compensation does not exceed the amount of actual loss or the value of the policy whichever is less. The object of every contract of insurance is to place the insured in the same financial position, as nearly as possible, after the loss, as if the loss had not taken place at all. It would be against public policy to allow an insured to make a profit out of his loss damage.
The principle of indemnity does not apply to life insurance and other personal accident insurance because loss of one individual life cannot be measured in terms of money. Under the contract of life insurance, a fixed sum is agreed to be paid either on the expiry of a certain period or on the death of the insured. Fire insurance is a contract of indemnity whereby the insured cannot claim anything more than the value of goods lost or damaged by the fire or the amount of the policy whichever is less. The amount of the indemnity or compensation will be the market value of the property or goods at the place and as on the date of the loss or damage of property by fire. According to the principle of indemnity (1)The insured can be indemnified only up to the extent of actual loss and (2) the sum of indemnity can never exceed the value of the policy taken. If there is under insurance, then the loss is indemnified proportionally. That is
Amount of indemnity = Actual Loss* Value of the policy/Value of the subject matter
In the case of marine insurance, there is small deviation from the principle of indemnity. The amount of indemnity is decided at the time of taking the policy and in some cases at the time of loss. In marine insurance the insure agrees to indemnify the insured in cash and not by replacing the cargo or the ship.
Main features of the principle of indemnity
- All contracts of insurance except the life insurance and personal accident insurance are contracts of indemnity.
- The amount of indemnity should not exceed the amount of actual loss or the value of the policy whichever is lower.
- The marine insurance is not a pure indemnity contract.
- The doctrine of subrogation is applied after the settlement of the claims.
- Valued policies except marine insurance are not covered under the scope of the principle of indemnity.
The following conditions are to be fulfilled for the complete application of the principle of indemnity.
- It is the duty of the insured to prove that he will suffer loss on the insured subject matter at the time of happening of event and the loss is actual monetary loss.
- Indemnification should not be more than the amount insured.
- If the insured gets more amount than the amount insured, the insurer has the right to get back the excess amount paid.
- If the insured gets an amount from third party alter receiving the full amount of indemnity, then the insurer have the right to receive full amount paid by the third party.
- The principle of insurance is not applied in the case of personal and life insurance because the amount of loss cannot be calculated easily.
Method of indemnity
The following are the important method s of indemnification.
- Cash payment: The insurer pays the amount of the claim to the insured in cash. After receiving the claim form, the insurer conducts a proper inquiry. On the basis of the surveyor’s report, the amount of actual loss is ascertained and paid to the insured in cash or in cheque.
- Repairs: In certain cases, the subject matter may be partially damaged or destroyed. It is also capable of being repaired. In such circumstance, the insurer takes steps to repair the damaged property instead of paying cash.
- Replacement: If there is no possibility of repair, the insurer may make arrangement for replacing such subject matter. This method is generally followed in the case burglary or theft.
- Reinstatement: This method is rarely used. It is used mainly in the case of buildings or other properties damaged or destroyed by fire.