Indemnity according to the Cambridge International Dictionary is
“Protection against possible damage or loss” and the Collins Thesaurus suggests
the words “Guarantee”, “Protection”, “Security”, “Compensation”, “Restitution”
and “Re- reimbursement” amongst others as suitable substitute for the word
“Indemnity”. The words protection, security, compensation etc. are all suited
to the subject of Insurance but the dictionary meaning or the alternate words
suggested do not convey the exact meaning of Indemnity as applicable in
Insurance Contracts.
In Insurance the word indemnity is defined as “financial
compensation sufficient to place the insured in the same financial position
after a loss as he enjoyed immediately before the loss occurred.”
Indemnity thus prevents the insured from recovering more than the
amount of his pecuniary loss. It is undesirable that an insured should make a
profit out of an event like a fire or a motor accident because if he was able
to make a profit there might well be more fires and more vehicle accidents.As in the case of Insurable Interest, the principle of indemnity
also relies heavily on the financial evaluation of the loss but in the case of
life and disablement it is not possible to be precise in terms of money.
An Insurance may be for less than a complete indemnity but it may
not be for more than it. To illustrate let us take the example of a person who
insures his car for Rs.4 lacs and it meets with an accident and is a total
loss. It is not certain that he will get Rs.4 lacs. He may have over valued the
car or may be the prices of cars have fallen since the policy was taken. The
Insurer will only pay an amount equal to the value of the car at the time of
loss. If he finds that a car of the same make and model is available in the
market for Rs.3 lac then he is not liable to pay more than this sum and payment
of Rs.3 lacs will indemnify the Insured.
Similarly in the case of partial loss if some part of the car
needs to be replaced the Insurer will not pay the full value of the new part.
He shall assess how much the old part had run and after deduction of a
proportionate sum he shall pay the balance amount. An insured is not entitled
to new for old as otherwise he would be making a profit from the accident.
However there are two modern types of policy where there is a
deviation from the application of this principle.
- One is the agreed value policy where the insurer agrees at the outset that they will accept the value of the insured property stated in the policy (sum insured) as the true value and will indemnify the insured to this extent in case of total loss. Such policies are obtained on valuable pieces of Art, Curious, Jewellery, Antiques, Vintage cars etc.
- The other type of policy where the principle of strict indemnity is not applied is the Reinstatement policy issued in Fire Insurance. Here the Insured is required to insure the property for its current replacement value and the Insurer agrees that in the event of a total loss he shall replace the damaged property with a new one or shall pay for the replacement in full.
Other than these there are Life and Personal Accident policies
where no financial evaluation can be made. All other Insurance policies are
subjected to the principle of strict Indemnity. In most policy documents the
word indemnity may not be used but the courts will follows this principle in
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