Alfred Explains The Principles of Insurance – Principle Three: Indemnity

Now this one is a relatively simpler concept to understand compared to the last two we had discussed earlier. Remember them? Uh, may be? Let me remind you – there are essentially 7 basic principles of insurance. The first one being ‘Utmost Good Faith’ and second one ‘Insurable Interest’. Today we discuss the third principle known as ‘Indemnity’. As the name suggests, it is an indemnification, protection or compensation given against a loss, damage or other financial burden. In insurance, this indemnification is enabled through an insurance contract, whereby the insurer provides assurance to put the insured in the same financial position in which he was immediately prior to the accident/injury/loss.

compensationYour car insurance policy is an example of this. As a car owner, you may have indemnity insurance to compensate for any damages to your car. These damages could be through any sources against which you are insured such as, accident, fire, theft, burglary, malicious act of any third party, etc. In such a scenario, the amount of compensation is limited to the amount insured or the actual loss whichever is lower. The claim amount will never exceed the amount of loss or else the claimant stands to make a profit from his insurance. Additionally, the ‘average’ concept plays an important role in making sure that the claimant who is under insured does not financially benefit from it by receiving a full compensation. In simpler words, this is done by ensuring that the settlement is proportional to the ratio of the sum insured to the total value of the risk covered. The point is to reinstate the insured’s financial position not to make it any better! Hence, it is important that you are not under or over insured in any way. You can ensure this by not only disclosing everything you know accurately but also choosing the right partner or broker who will make sure that you have an adequate cover with the right insurer.

This compensation does not necessarily have to be in the form of cash. The insurance companies may offer other means to restore the financial position of the insured such as through repair, replacement or even reinstatement. The insurer may have agreements with chosen agencies offering repair and replacement services for the insured or otherwise, have a list of authorized dealers where the insured can go for a similar arrangement.

However, it is important to note that this principle only allows for restoration of the financial position. Thus, this principle does not apply to those classes of insurance where financial loss cannot be measured. The two insurance contracts void of this principle are Life and Personal Accident. This is because no monetary value can be placed on human life and therefore the loss is impossible to quantify.

So the next time your broker or insurer speaks of indemnification, at least you know what exactly it means and what you need to keep in mind so that you are adequately ‘Indemnified’ and not under insured!

[Image source: hiscoxusa.com]

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