The term of indemnity principle determines the rule of insurance law which means an insurance policy would not concede a benefit greater in value than the loss incurred through the insured. In effect, the insured is enabled to compensation up to the limit of her or his insurable interest, according to the amount of damage suffered.
Example of idemnity principle
In some cases, the insured might insure for more than her or his insurable interest. For example, in the case of the house owner who takes out a policy in connection to the building and names the bank as the first mortgagee. In the case when the building would be destroyed:
- the insured is enabled to the value of the building which the amount of the mortgage is downgrades and
- the bank getting a payment equivalent to its debt.
The doubt of what sum is payable in that case depends on:
- provisions in the contract,
- the facts and
- any general law principles which are applicable.
The policy, for example, itself can state a formula which one has to be chosen to establish compensation at the discretion of the insurer. Provision can be made for any one or more of restoration of the building or goods lost, its repair or its replacement.
The insistence on the idemnity principle
The insistence on the indemnity principle is a product which:
- have the desire to prevent insurance contracts from being taken as instruments of wager and,
- as instruments of fraud.
In some countries insured can be penalized for showing increased costs and thus profiting on insurance. There can be exceptions to this rule, e.g. life insurance policies can not only pay for the hospital but also give extra money for living. In commercial insurance, there also can be exceptions if the insurance policy states that the sum is fixed regardless of the loss (e.g. in marine insurance).
Indemnity principle can be related to subrogation. Subrogation means that if one takes compensation from one source, than he/she resigns from taking it from another source. For example, if you insure your car twice, in two insurance companies, you can get only one compensation, as the indemnity principle is still in use. Subrogation usually does not apply to life insurance.
- (J. Jackson 2010)
- (P. Gillies, N. Selvadurai 2008)
- (M. Jeleva, B. Villeneuve 2004)
- Gillies P., Selvadurai N., (2008)., Marketing Law, Federation Press
- Jackson J., (2010)., Proposals for reform of civil litigation funding and costs in England and Wales: implementation of Lord Justice Jackson's recommendations, The Stationery Office
- Jackson R. M., M. Britain., (2010)., Review of Civil Litigation Costs: Final Report, The Stationery Office
- Jeleva, M., Villeneuve B., (2004)., Insurance contracts with imprecise probabilities and adverse selection. Economic theory, 23(4), 777-794.
- Noussia K., (2007)., The Principle of Indemnity in Marine Insurance Contracts: A Comparative Approach, Springer Science and Business Media
Author: Klaudia Święs