Principles of indemnity in insurance of contract

To indemnify someone means to “make someone whole.” The principle of indemnity is one of the fundamental principles of insurance because it is the part of an insurance contract that ensures the insured has the right to compensation and sets limits on how much they can get.

The principle of indemnity states that an insurance policy shall not provide compensation to the policyholder that exceeds their economic loss. This limits the benefit to an amount that is sufficient to restore the policyholder to the same financial state they were in prior to the loss.

In other words, the principle of indemnity ensures that the insured gets made whole from their loss but will not benefit, gain, or profit from an accident or claim. Nor will you get less than what is necessary to restore you to the same financial position.

For example, if you suffer a loss to your home due to a fire and it is estimated that it would cost Rs.37,36,287 to repair the damage, then that is what you would get from the insurance company subject to limits of insurance selected and other terms and conditions of the insurance policy.

If you are underinsured, however - as in you did not purchase a high enough limit of insurance to allow yourself to be fully “made whole”, this principle still holds as you are not profiting from your insurance policy.

The principle of indemnity only applies to proper and casualty insurance policies and not life insurance as the value of human life cannot be quantified in monetary terms.

If an insured purchased a limit of insurance of Rs. 50 lacs on his car and got into a crash. After taking it to a certified body shop, the mechanic estimates it would cost Rs.10 lacs to repair the damage and return the car to its original condition. In that case, according to the principle of indemnity, the insured would only be entitled to Rs.10 lacs in compensation (or “indemnity”) from the insurer as that is what is required to return them to their pre-loss financial position. No more, no less. Just because they had purchased Rs.50 lacs of insurance does not mean they will get Rs. 50 lacs in compensation every time. Payment is made by the insurance company based on the actual amount of loss you have sustained.

Regards,

Anaita Vas