Page 79 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes 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.

Did u know? 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.
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 ` 4 lakh and it meets with
an accident and is a total loss. It is not certain that he will get ` 4 lakh. 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 ` 3 lakh then he is not liable
to pay more than this sum and payment of ` 3 lakh 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 follow this principle in
case of any dispute coming before them.

5.3.1 How is Indemnity Provided?

The Insurers normally provide indemnity in the following manner and the choice is entirely of
the insurer:
1. Cash Payment

2. Repairs
3. Replacement
4. Reinstatement

Cash Payment

In majority of the cases the claims will be settled by cash payment (through cheques) to the
assured. In liability claims the cheques are made directly in the name of the third party thus

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