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Principle of Indemnity

The second fundamental principle is that all contracts of insurance are contracts of indemnity, except those of life and personal accident insurances where no money payment can indemnify for loss of life or bodily injury. In case of marine and fire insurances, the insurer undertakes to indemnify the insured for loss or damage resulting from specified perils. In case of loss, the insured can recover from the insurer the actual amount of loss, not exceeding the amount of policy. If there is no loss under the policy, the insurer is under no obligation to indemnify the insured. The purpose of indemnity is to place the insured, after a loss, in the same position he occupied immediately before the event. Under no circumstances, is the insured allowed to benefit more than the loss suffered by him. This is because, if that were so, the temptation would always be present to desire the insured event and thus to obtain the policy proceeds. This would obviously be contrary to public interest. 

Even contracts of fire or marine insurance cease to be contracts of indemnity when they provide for the payment of a fixed sum of money in the event of total loss or destruction by the peril insured against, without demanding any further proof of actual loss. This is so in the case of 

‗valued policies.‘ Of course, in such policies as well, if partial loss is there then the insured is only indemnified, because no body is allowed to make a profit of his loss. 

It must also be noted that indemnity is linked with ‗insurable interest.‘ If a one-fourth co-owner gets the full property insured, he shall be indemnified to the extent of his interest or share only in the case of total destruction of the property insured. 

This principle applies to insurance of objects (property insurances) and liability insurances. According to this principle, property and liability insurances are contracts for indemnity or compensation, which, in principle, is equal to the actual value of the object or the amount of economic loss or damage sustained by the insured. Hence, in cases of insurance of objects, the liability of the insurer, if the risk materializes, shall be to pay compensation i.e., the actual value of object on the day of occurrence, where the object is totally destroyed or lost or the cost of repair in cases of partial damage, provided that such compensation cannot exceed the amount of guarantee/sum insured provided in the policy. (Arts 678, 665(2)) 

The principle of indemnity implies that the sum insured or the amount of guarantee provided in the policy is not necessarily payable. This is in line with purpose of insurance, i.e., reinstating a person who has suffered a financial loss to his original financial position. It also shows that the insured cannot claim its payment where the risk materializes unless the sum insured is equal to actual value of the object at the time of loss or damage or unless the policy is a valued policy as discussed above. 

However, there are instances, in which the principle of indemnity does not apply, i.e., the insurer does not have the obligation to compensate the insured person. One such instance is where the object or liability is under-insured. Under-insurance occurs where the amount of guarantee /sum insured agreed upon in the policy is lesser than the actual value of the object or the amount of potential liability of the insured. In such cases, the insurer‘s obligation is to pay the amount of guarantee/ sum insured, rather than compensation of the insured (Art 679).  

The other such instance is related to insurance of persons, where the parties freely fix the amount of guarantee and is payable regardless of the actual damage sustained where the risk materialized. This is mainly because it is generally accepted that human life or limb cannot be valued in terms of money and are irreplaceable and the insured or beneficiary who receives it cannot be considered to have made a net profit out of ithe nsurance. (Art 689) 

Source: Insurance, Banking & Negotiable Instruments Law Teaching Material

The second fundamental principle is that all contracts of insurance are contracts of indemnity, except those of life and personal accident insurances where no money payment can indemnify for loss of life or bodily injury. In case of marine and fire insurances, the insurer undertakes to indemnify the insured for loss or damage resulting from specified perils. In case of loss, the insured can recover from the insurer the actual amount of loss, not exceeding the amount of policy. If there is no loss under the policy, the insurer is under no obligation to indemnify the insured. The purpose of indemnity is to place the insured, after a loss, in the same position he occupied immediately before the event. Under no circumstances, is the insured allowed to benefit more than the loss suffered by him. This is because, if that were so, the temptation would always be present to desire the insured event and thus to obtain the policy proceeds. This would obviously be contrary to public interest. 

Even contracts of fire or marine insurance cease to be contracts of indemnity when they provide for the payment of a fixed sum of money in the event of total loss or destruction by the peril insured against, without demanding any further proof of actual loss. This is so in the case of 

‗valued policies.‘ Of course, in such policies as well, if partial loss is there then the insured is only indemnified, because no body is allowed to make a profit of his loss. 

It must also be noted that indemnity is linked with ‗insurable interest.‘ If a one-fourth co-owner gets the full property insured, he shall be indemnified to the extent of his interest or share only in the case of total destruction of the property insured. 

This principle applies to insurance of objects (property insurances) and liability insurances. According to this principle, property and liability insurances are contracts for indemnity or compensation, which, in principle, is equal to the actual value of the object or the amount of economic loss or damage sustained by the insured. Hence, in cases of insurance of objects, the liability of the insurer, if the risk materializes, shall be to pay compensation i.e., the actual value of object on the day of occurrence, where the object is totally destroyed or lost or the cost of repair in cases of partial damage, provided that such compensation cannot exceed the amount of guarantee/sum insured provided in the policy. (Arts 678, 665(2)) 

The principle of indemnity implies that the sum insured or the amount of guarantee provided in the policy is not necessarily payable. This is in line with purpose of insurance, i.e., reinstating a person who has suffered a financial loss to his original financial position. It also shows that the insured cannot claim its payment where the risk materializes unless the sum insured is equal to actual value of the object at the time of loss or damage or unless the policy is a valued policy as discussed above. 

However, there are instances, in which the principle of indemnity does not apply, i.e., the insurer does not have the obligation to compensate the insured person. One such instance is where the object or liability is under-insured. Under-insurance occurs where the amount of guarantee /sum insured agreed upon in the policy is lesser than the actual value of the object or the amount of potential liability of the insured. In such cases, the insurer‘s obligation is to pay the amount of guarantee/ sum insured, rather than compensation of the insured (Art 679).  

The other such instance is related to insurance of persons, where the parties freely fix the amount of guarantee and is payable regardless of the actual damage sustained where the risk materialized. This is mainly because it is generally accepted that human life or limb cannot be valued in terms of money and are irreplaceable and the insured or beneficiary who receives it cannot be considered to have made a net profit out of ithe nsurance. (Art 689) 

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