Policy Provisions Providing More Than Indemnity

Indemnity is very logical and technically easy to defend. However, in practice, most policyholders are ignorant of this and are confused and offended when insurers ‘reduce’ their claims, by deducting depreciation, wear and tear, etc. As a marketing or public relations exercise, insurers sometimes offer or agree to grant property insurances which may be said to give a commercial rather than a strict indemnity. Some examples are as follows:

(a) Reinstatement insurances (or insurances on a reinstatement basis): This is one of the several uses of the term ‘reinstatement’ (see 3.4.4(d) above) and is often found with fire and commercial ‘all-risks’ insurances. The meaning is that where reinstatement takes place after a loss, no deductions are made from claim payments in respect of wear and tear, depreciation, etc.

(b) ‘New for Old’ cover: Again, this means that no deductions are made in respect of wear and tear, deprecation, etc. This term is more generally used with household and marine hull policies.

(c) Agreed value policies (or valued policies): Such policies may be used for articles of high value, where depreciation is unlikely to be a factor (e.g. works of art, jewellery, etc.) or where property valuation contains a rather subjective element. The sum insured is fixed on the basis of an expert's valuation, and agreed between the insured and the insurer as representing the value at risk of the property throughout the currency of the policy. In non-marine insurance, a valued policy undertakes to pay this sum in the event of a total loss, without regard to the actual value at the time of loss, whereas in the event of a partial loss, the actual amount of loss would instead be payable without regard to the agreed value.

(d) Marine policies: Almost without exception, marine hull and marine cargo policies are written on a valued basis, and the agreed value will be taken as the actual value at the time of loss for the purposes of both partial and total loss claims.

The Practical Problems with Indemnity

Indemnity, as mentioned above, is extremely logical. What makes more sense than to say that a person should only recover what he has lost? He should not profit from a loss! However, most people feel that they should receive the amount they have insured for, with a total loss. Moreover, the fact or amount of depreciation is an area where you, or the claims handler, may definitely expect problems with the claimant. When claims are being made, a lot of claimants will say that their property has not depreciated at all, or only marginally!