In this context, the above three terminologies are important because they do create an impact on the principle of indemnity. It has already been explained that indemnity is provided subject to certain terms and conditions of the policy. Excess, Franchise and Average – their impact of the Principle of Indemnity
Therefore, Marine, Fire, Motor, EAR, CAR, Burglary, Fidelity Guarantee, Employers Liability, Public Liability, Aviation, Engineering, Products Liability, Crop insurance, Livestock insurance, etc.
Non-LifeĪpart from life and personal accident insurances, all other types of insurances are contracts of indemnities. It has to be clearly conceived here that such a check is purely an underwriting check so that the principle of indemnity is not completely shattered, but such a check is not a legal check, that is to say, from the legal point of view such policies are indeed not contracts of indemnities and there is no reason why a man cannot legally get any number of policies for any amount. In theory, any person can affect any number of policies for any amount and at the time of claim, all such policies must pay all the sum insured under all such policies.Įven though this is the position of law, nevertheless, insurers would always try to put a check on the possible moral hazard by restricting the sum-insured on the financial capability and standing of a man, that is to say, his continued premium payment capacity.
Legally, therefore, these two types of insurances have been kept outside the scope of the principle of indemnity. Life and personal accident insurance are not contracts of indemnities simply because life or limb cannot be valued in terms of money. Application of Principle of Indemnity to Various Branches of Insurance LifeĮxcept for life and personal accident insurance, all insurance contracts are contracts of indemnity.
The essential requirement of insurance is that it should be full value insurance. Sum-insured should, therefore, always base on the actual market value of the subject matter of insurance at the time of effecting the policy of insurance. This will simply mean the payment of excessive premium without any corresponding benefit. Similarly, there is also no point in arranging an excessive sum-insured as that will never entitle him to get more than the actual amount of loss as already explained. Therefore, if the sum insured is restricted to a lesser amount than the actual value then in the case of a total loss the insured gets the sum insured which does not indemnify him.Įven if it is not a total loss, nevertheless, using a policy condition known as ’average’ the insurers will not pay more than the proportionate loss, i.e., corresponding the ratio between sum-insured and actual value. In a contract of indemnity, the selection of proper sum insured is important as this is always the limit within which indemnity will be considered. That is the fundamental principle of insurance and if ever a proposition is brought forward, which is at variance with it, that is to say, which either will prevent the insured from obtaining a full indemnity or which will give the insured more than a full indemnity, that proposition must certainly be wrong”. Preston (1883) in the following way “A contract of insurance is necessarily a contract of indemnity (except life and personal accident insurance) and of indemnity only, and this means that in case of a loss the insured shall be fully indemnified, but shall never be more than fully indemnified. The principle of indemnity was well cared for in the leading case of Castellain V. Well, in that case, it can be said with definite certainty that there will always be a temptation to create an insured event deliberately for the sole purpose of making a profit out of a loss. This also checks the moral hazard of a man and at the same time allows him to get the actual amount of loss and certainly not more than that.Ĭonsider a proposition wherein through over-insurance somebody is allowed to take more than the actual amount of loss.