Introduction:
Insurance is a vital sector in modern day living, and people have the luxury of transferring the risks of occurrence of uncertain future events to the insurance companies. This practice, although it provides the insured with a second chance, can also be abused in certain instances in view of profit taking through deliberate actions.
In such instances, the insurer who undertakes to pay the insured for losses resulted from occurrence of uncertain event, could rely on the principle of indemnity and will never allow the insured to take profit from his loss.
What is ‘Principle of Indemnity’?
Therefore, Principle of indemnity is the most important fundamental principle of insurance law in favor of the insurer. Thus, the only concern for the insurer is to place the insured, after the loss, in the same position as he occupied immediately before the loss.
Hence, the rationale behind this principle is to prevent the insured from making profit from his loss or obtaining any benefit than the loss suffered by him. If the insured is allowed to recover any amount excess to the loss, he himself may cause the loss on his own property so as to make a profit. Then, it would obviously be a threat to the public interest and amount to a moral hazard.
Exceptions:
Therefore, the principle of indemnity must be followed by all insurance contracts except by the life and the personal accidental policies.
In certain circumstances, the principle of indemnity would not allow the insured to be indemnified for the full value of his loss. For example, a person whose house is covered by a fire insurance policy, and which is destroyed by fire, would not be able to recover the loss unless the policy is specifically designed to deal with these losses.
In addition, there are two corollaries which support the principle of indemnity, namely subrogation and contribution.
Subrogation:
Hence, the concept of subrogation enables the insurer, having paid the loss to the insured, to recover the loss from third party who is primarily responsible for the loss. The object of the concept of subrogation is to prevent the insured recovering the loss from both insurer and the third party and avoid making profit from loss.
Contribution:
Thus, where the insured has several insurance on the same subject –matter, the insurer who has already paid a loss under a policy is entitled to recover proportionate amount from other insurers who are liable for the same loss. Accordingly, insured is not entitled to claim for the loss from other insurer and make a profit out of loss.
Ways of achieving indemnity:
However, indemnity can be achieved through cash, reinstatement, by way of repair or replacement. For an instance, in a situation where a building is destroyed, insurer could reinstate. Thus, where a motor vehicle is partially damaged, insurer can repair the vehicle instead of paying cash.