Page 269 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes 3. At the time of loss, i.e., in the event of loss the insured should have the interest in the
property so that he can claim the insurance money.

In marine insurance, the insurable interest must exist, at the time of loss. It may not be there at
the time of taking cover or during the currency of the policy.

In personal accident insurance, it is deemed that a person has unlimited financial interest on his
own life. However, in practice there is monetary limit to the amount of insurance which matches
the life of an individual. Insurable interest exists as between a husband and a wife, a parent and
a dependent child. Employer is deemed to have Insurable interest in employee. A creditor has
interest in his debtor.

Self Assessment

Fill in the blanks:
1. A person has unlimited ....................... interest on his own life.

2. An ...................... of the property (and joint owner) has insurable interest in the property.

3. A bank has insurable interest in the goods on the ........................ of which it has advanced
loans. The interest is limited to the amount of the loan. Usually, under such circumstances,
the policies are issued in joint names of the insured and the bank.

4. The owner of a .............................. has insurable interest in the vehicle as well as in a
potential third party liability. If a third party is injured in the accident, the damages
payable to the third party would be a financial loss to the insured. Hence, he can insure his
third party liability too.
5. A ship owner has insurable interest in the ship owned by him. .............................. owners,
both sellers and buyers, have insurable interest in the goods owned by them. A ship
owner has insurable interest in the freight he is going to get by carrying the cargo.

Indemnity

The objective of insurance is to indemnify i.e., to place the insured in the same financial position
as he was just before the occurrence of loss. The principle prevents the insured from making a
profit out of insurance. Insurance only makes good the loss and ensures public interest at large.
The indemnity is the net loss suffered by the insured, and therefore, if there is any salvage/left
over of the damaged property, the value of the salvage is deducted from the amount of loss
subject to a maximum of the sum assured.

There are four methods of indemnification in general insurance, namely:
1. Cash Payment
2. Replacement

3. Repair
4. Reinstatement

Example: Explain the principle of indemnity
If a vehicle is insured and is destroyed by fire, the insurance company will make good the loss
by taking into consideration the depreciation and the wear and tear of the vehicle, having been
in use by the insured. The insurance company will not pay the price of new car. It will not be true

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