Indemnity principle
| Indemnity principle |
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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[1].
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[2].
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).
Subrogation
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[3].
Advantages of Indemnity principle
The indemnity principle ensures that the insured is not able to benefit financially from a loss. There are several advantages of this principle including:
- It prevents the insured from receiving a benefit greater than their insurable interest. This allows them to receive a fair amount of compensation in the event of a loss.
- It ensures that the insured will not be able to take advantage of the insurance policy by claiming more than what they are entitled to.
- It encourages people to take out insurance policies, as they are confident that they will be protected in the event of a loss.
- It also encourages insurance companies to offer fair and reasonable policies, as they know that the insured will not be able to gain a financial benefit from the policy.
Limitations of Indemnity principle
The Indemnity Principle is not without limitation, which are as follows:
- It does not allow for compensation beyond the amount of the actual loss. This means that any additional costs incurred, such as those associated with restoring property to its pre-loss condition, are not covered by the insurance policy.
- It does not allow for compensation of consequential losses, such as lost profits or increased costs.
- It does not allow for compensation of claims that arise as a result of changes in the law or regulations.
- It does not cover losses caused by the insured's own negligence, intentional acts or omissions.
- It does not cover losses caused by a third party's negligence, unless the insured can demonstrate that the third party was legally liable.
- It does not provide coverage for certain types of risks, such as moral hazard and fraud.
The Indemnity Principle is just one of the approaches in insurance law which determine the limit of the benefit an insured can receive based on the amount of damage suffered. Other related approaches include:
- The Principle of Restitution – this concept states that an insured should be restored to their original condition prior to the damage occurring.
- Principle of Subrogation – this principle allows the insurer to take over the rights of the insured when a third party is responsible for the damages.
- The Principle of Utmost Good Faith – this concept states that both the insurer and insured must act in good faith and disclose all relevant information when entering into an insurance agreement.
In conclusion, the Indemnity Principle is just one of the approaches that dictate how an insurance policy works and how much compensation an insured can receive. Other related approaches include The Principle of Restitution, Principle of Subrogation, and The Principle of Utmost Good Faith.
Footnotes
References
- 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
