INDEMNITY

Definition
Indemnity means an exact financial compensation for an insured loss, no more no less.

Implications
Indemnity cannot apply to all types of insurance. Some types of insurance deal with ‘losses’ that cannot be measured precisely in financial terms. Specifically, we refer to Life Insurance and Personal Accident Insurance. Both are dealing with death of or injury to human beings, and there is no way that the loss of a finger, say for instance, can be measured precisely in money terms. Thus, indemnity cannot normally apply to these classes of business. (Note: medical expenses insurance, which is often included in personal accident and travel insurance policies, is indemnity insurance unless otherwise specified in the policies.)
Other insurances are subject to the principle of indemnity.

Note: It is sometimes said that life and personal accident insurances involve benefit policies rather than policies of indemnity. Since indemnity cannot normally apply, the policy can only provide a benefit in the amount specified in the policy for death or for the type of injury concerned.

Link with Insurable Interest
We studied insurable is above. That represents the financial ‘interest’ in the subject matter, which is exactly what should be payable in a total loss situation, if the policyholder is to be completely compensated. However, life and personal accident insurances may generally be regarded as involving an unlimited insurable interest, and therefore indemnity cannot apply to them.

How Indemnity is Provided
It is common for property insurance policies to specify that the insurer may settle a loss by any one of four methods named and described below. However, both marine and non-property policies are silent on this issue so that the insurer is obliged to settle a valid claim by payment of cash.

(a) Cash payment (to the insured): This is the most convenient method, at least to the insurer.
(b) Repair: Payment to a repairer is the norm, for example, with motor partial loss claims.
(c) Replacement: With new items, or articles that suffer little or no depreciation, giving the insured a replacement item may be a very suitable method, especially if the insurer can obtain a discount from a supplier.
(d) Reinstatement: This is a word that has a number of meanings in insurance. As a method of providing an indemnity, it means the restoration of the insured property to the condition it was in immediately before its destruction or damage.

Note: You are absolutely correct if you understand that the term ‘reinstatement’ overlaps in meaning with ‘repair’ and with ‘replacement’.

Salvage
When measuring the exact amount of loss (which indemnity is), it has to be borne in mind with certain property damage that there will sometimes be something left of the damaged subject matter of insurance (fire-damaged stock, the wreck of a vehicle, etc.). These remains are termed ‘salvage’. If the remains have any financial value, this value has to be taken into account when providing an indemnity. For example: (a) The value of the salvage is deducted from the amount otherwise payable to the insured (who then keeps the salvage); or
(b) The insurer pays in full and disposes of the salvage for its own account.

Note: The term ‘salvage’ in maritime law has a very different meaning, where it usually refers to acts or activities undertaken to save a vessel or other maritime property from perils of the sea, pirates or enemies, for which a sum of money called ‘salvage award’ (or just ‘salvage’) is payable by the property owners to the salvor provided that the operation has been successful. The term is sometimes also used to describe property which has been salved.

Abandonment
This is a term mostly found in marine insurance, where it refers to the act of surrendering the subject matter insured to the insurers in return for a total loss payment in certain circumstances. This is quite standard in marine practice, but in other classes of property insurance, policies usually specifically exclude abandonment.

The important thing to be remembered with abandonment is that the subject matter insured (or what is left of it) is completely handed over to the insurer, who may therefore benefit from its residual value. (This will be important with Subrogation).