Definition
Indemnity means an exact financial compensation for
an insured loss, no more no less.
Implications
Indemnity cannot apply to all types of insurance. Some
types of insurance deal with ‘losses’ that cannot be measured precisely in financial
terms. Specifically, we refer to Life Insurance and Personal
Accident Insurance. Both are dealing with death of or injury to human
beings, and there is no way that the loss of a finger, say for instance, can be
measured precisely in money terms. Thus, indemnity cannot normally apply
to these classes of business. (Note: medical expenses insurance, which is often
included in personal accident and travel insurance policies, is indemnity
insurance unless otherwise specified in the policies.)
Other insurances are subject to the principle of
indemnity.
Note: It is sometimes
said that life and personal accident insurances involve benefit policies rather
than policies of indemnity. Since indemnity cannot normally apply, the
policy can only provide a benefit in the amount specified in the policy
for death or for the type of injury concerned.
Link with Insurable Interest
We studied insurable is above. That represents the
financial ‘interest’ in the subject matter, which is exactly what should be
payable in a total loss situation, if the policyholder is to be completely
compensated. However, life and personal accident insurances may generally be
regarded as involving an unlimited insurable interest, and therefore
indemnity cannot apply to them.
How Indemnity is Provided
It is common for property insurance policies to specify
that the insurer may settle a loss by any one of four methods named and
described below. However, both marine and non-property policies are silent on
this issue so that the insurer is obliged to settle a valid claim by payment of
cash.
(a) Cash payment (to the insured): This is the most
convenient method, at least to the insurer.
(b) Repair: Payment to a repairer is the norm,
for example, with motor partial loss claims.
(c) Replacement: With new items, or articles that
suffer little or no depreciation, giving the insured a replacement item may be
a very suitable method, especially if the insurer can obtain a discount from a
supplier.
(d) Reinstatement: This is a word that has a
number of meanings in insurance. As a method of providing an indemnity, it
means the restoration of the insured property to the condition it was in
immediately before its destruction or damage.
Note: You are
absolutely correct if you understand that the term ‘reinstatement’ overlaps in
meaning with ‘repair’ and with ‘replacement’.
Salvage
When measuring the exact amount of loss (which indemnity
is), it has to be borne in mind with certain property damage that there will
sometimes be something left of the damaged subject matter of insurance (fire-damaged
stock, the wreck of a vehicle, etc.). These remains are termed ‘salvage’.
If the remains have any financial value, this value has to be taken into
account when providing an indemnity. For example: (a) The value of the salvage
is deducted from the amount otherwise payable to the insured (who then
keeps the salvage); or
(b) The insurer pays in full and disposes of the
salvage for its own account.
Note: The term
‘salvage’ in maritime law has a very different meaning, where it usually refers
to acts or activities undertaken to save a vessel or other maritime property
from perils of the sea, pirates or enemies, for which a sum of money called
‘salvage award’ (or just ‘salvage’) is payable by the property owners to the
salvor provided that the operation has been successful. The term is sometimes
also used to describe property which has been salved.
Abandonment
This is a term mostly found in marine insurance, where
it refers to the act of surrendering the subject matter insured to the
insurers in return for a total loss payment in certain circumstances. This is
quite standard in marine practice, but in other classes of property insurance,
policies usually specifically exclude abandonment.
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