Legal Tips

Principle of Indemnity in Insurance

Document Date: 09-Apr-1997

Here are some Frequently Asked Questions on the topic "Principle of Indemnity in Insurance":

1. What is the principle of indemnity in insurance?
2. What about life and personal accident policies?
3. What is the scope of this principle of indemnity?
4. What are the methods of indemnity?
5. What are the factors limiting indemnity?

1. What is the principle of indemnity in insurance?

   The principle of indemnity in insurance is to compensate the insured by placing him in the same financial position after the loss as before it. Under this principle, an insured person cannot make a profit as a result of his loss.

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2. What about life and personal accident policies?

   Life and personal accident insurances are not contracts of indemnity. They are considered benefit policies. Generally, a person can effect any sums assured so long as he can afford the premiums and the insurer is prepared to underwrite the risk.

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3. What is the scope of this principle of indemnity?

   Under this principle, the occurrence of the insured event does not entitle the insured to compensation unless the insured suffers a monetary loss. Where a monetary loss is suffered, the insured can only claim the actual amount of his loss, which cannot be more than the sum insured.

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4. What are the methods of indemnity?

   An insurer can indemnify the insured by one of the following methods:

   • make a cash payment
   • repair the damaged property
   • replace the damaged property with another
   • reinstate the damaged property to its original or as near as its original condition

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5. What are the factors limiting indemnity?

   The factors limiting indemnity are:

   • the sum insured
   • limits eg. for travel insurance, a limit is placed as to the amount you can claim for lost luggage
   • excess - this means that the insured has to bear a fixed amount of the loss before the insurer becomes liable under the policy
   • average - If the insured does not insure his property for the full value, in the event of loss or damage, he has to bear a rateable portion of the loss.