Indemnity is probably the most fundamental principles of insurance.
The aim of an indemnity contract is to provide exact financial compensation to place the insured in the same financial position they were in prior to the loss, in other words to indemnify the insured. The basic idea is that you should not be worse off or better off as a result of a claim!
Life assurance policies and other personal insurance policies, such as Personal Accident are what are known as benefit policies. They are not contracts of indemnity as they provide pre-agreed benefits or Sums Assured. After all, it would be incredibly difficult, if not impossible, to calculate the exact value of someone's life at the time of their death!
Most general insurance policies are indemnity contracts as they often insure a more tangible thing with an obvious value.
This all sounds simple but we will now see why the principle of indemnity can lead to difficulties at the time of a claim.
If you have a colour TV at home and it is stolen, you would no doubt expect to be paid enough to purchase a replacement TV of similar or identical specification.
However, the principle of indemnity says "put you back in the position you were in before the claim". If the insurer gave you the cost of a new TV to replace your old one, you would be better off and therefore indemnity would not have worked.
On an indemnity contract, the insurer would ask how old your TV was and deduct from the replacement cost a figure for wear and tear.
This is where you, as the insured start to get unhappy! If your TV was 9 years old, it might technically have very little value as it is probably near the end of its life. To apply the principle of indemnity strictly, the insurer is only obliged to provide you enough compensation to purchase a 9-year-old TV!
The problem here is that technically the insurer is correct, but the customer feels hard done by. This probably the main reason why "New for Old" cover was developed.
In this type of cover, no deduction is made for wear and tear and generally the claimant will receive sufficient compensation to replace the item with a new equivalent.
On property insurance there is a further twist. If your property was damaged by fire and rebuilt by the insurer, your property could well be better than before and worth more. Again not indemnity! In these circumstances, the insurer may ask for a contribution towards the costs of repair. This is known as betterment.
How is indemnity provided?
Most people's idea of a claim being settled is the sending to the insured of a cheque. Whilst this is certainly still the case in some situations, there are other options.
The policy wording will usually specify the range of settlement options available. The wording will usually make it clear that is the insurer's choice as to how a claim is settled. |
