PRINCIPLES OF INDEMNITY-INSURANCE

 INTRODUCTION

The principle of indemnity applies to all policies of insurance, except that of life and personal accident insurance on one’s own life or that of a spouse, unless it is excluded by express conditions in the contact. Indemnity and insurable interest are closely linked because the principle of indemnity means that the insured cannot recover any sum exceeding the extent of his or her insurable interest.

 Definition of Indemnity

Indemnity is a mechanism by which insurers provide financial compensation in an attempt to place the insured in the same financial position after the loss as he enjoyed immediately before it: or indemnity can be defined as effect financial compensation sufficient to place the

insured in the same financial position after a loss as he enjoyed immediately before it occurred.

The importance indemnity plays in insurance was emphasized in the case Castellain V. Preston (1883). The judge stated that, the very foundation in his opinion, of every rule which has been applied to insurance law is this, that the contract insurance contained in marine or fire polity is a contract of indemnity and of indemnity only and that if a proposition is brought forward which is at variance with, that is to say, which either will prevent the assured from obtaining a full indemnity or which gives the assured more that a full indemnity, that proposition must certainly be wrong.

The Concept of Indemnity

The principle of indemnity lays down that following a loss, an insurer should attempt to provide financial compensation which would place the insured in the same financial position as he was immediately before the loss.

In the case of Castellain V. Preston (1883), Lord Justic Brette said that indemnity is the controlling principle in insurance law. Due to the centrality of indemnity to insurance the opposition of insurance problems has arisen.

There are difficulties in defining the concept, how it is to be applied to the various classes of insurance and how, if at all, it is to be modified to cope with changing needs.

The problem really is deciding how much an insured is to receive when the insured against event occurs. For example, if an insured who bought a machine for N1,000,000 five years ago now knows that it would cost N1,5000,000 to replace today; how much should he receive if there is a valid claim under his insurance policy?

 Indemnity and Insurance Interest

There is a link between indemnity and insurable interest. This is because the insured interest in the subject matter of insurance is what is insured. If any claims arise, the payment to be made to the insured cannot exceed the extent of his interest. However, there are some cases where the insured receive less than the value of their interest.

Just as in insurable interest, the principle of indemnity relies heavily on financial evaluation of insurance which makes determining the financial valuation difficult. For example, in life assurance and personal accident

insurance there is generally unlimited interest and in these cases indemnity is not possible. It is thereby normally said that life and personal accident policies are not contract of indemnity as the value of a person’s life or limb cannot be measured by money. There are exceptions to this general rule. For example, where an employer effects a personal accident policy on his staff, the medical expense in relation to the benefits of the policy is subject to the principle of indemnity, because the benefit is subject to reimbursement to the employer for any medical expenses incurred on an insured employee.

 Application of the Principle of Indemnity

Although indemnity is fairly easy to define, it can be very difficult to apply in practice. This is because the application depends on the different classes of insurance or whether losses are total or partial and on the policy holder’s circumstances.

As we stated, life and personal accident contracts are not contract of indemnity unless they are on a life of another basis. In liability and pecuniary insurance the measure of indemnity is the value of the court award or out-of–court settlement of pecuniary loss. The expenses of setting the claim, such as legal fees, are usually added.

In property insurance, the application of the principle of indemnity presents problems as can be seen below.

In property insurance, indemnity is provided by claim payment, reinstatement, repair and replacement. The option as to which method is to be employed is normally given to the insurers by the wording of the policy.

However, insurers sometimes agree with the insured’s requests for indemnity to be provided by a specific means. While they are willing to assist the insured in this way they would not look favorably on a method which increases their costs.

Total Losses

Total losses occur when the subject matter of the contract is totally destroyed. The insured can recover no more and no less than its financial value of the time and place of loss.

In the event of total destruction of buildings and machinery the calculation of indemnity of second–hand value is based on the estimated repair or replacement costs with deductions for wear and tear. A deduction is also made for betterment where, because of technological

advances, the modern equivalent is of better quality than the outdated item it replaces.

Where stock is totally destroyed the insurers will examine its purchase price and will add handling costs, although any marketing expenses saved through its destruction must be deducted.

In marine insurance, a total loss sometimes arises even though the ship has not been completely destroyed, for instance where the cost of recovering a ship is greater than its value. This is described as constructive total loss: the vessel is then abandoned to the insurer. The insurer treats it as if it had been totally lost and taking over ownership. b. Partial Losses

Where a partial loss occurs, the insurer is entitled to recover the difference between the second–hand value of the damaged property before the loss and afterwards. This is obviously pertinent to damage to cars and machinery; once they have been damaged their second–hand value is likely to be next to nothing. In such cases, the cost of repair should be used as the basis for indemnity with the usual deductions made for wear and tear betterment.

The best way to illustrate the circumstances is by case laws.
In Leppard V. Excess, Mr Leppard was paid £3,000 rather than the cost of repair because there was substantial evidence that he had no intention of rebuilding the damaged cottage. If Mr. Leppard had demonstrated that he wanted to live in the cottage, however, it would have been unfair to have given him less than the cost of repair.

Another case is that of Reynolds and Anderson V. Phoenit Assurance Co. Ltd and Others (1978). In this case, the plaintiffs owned a massively constructed old malting which they used for storing grain; this was largely destroyed by fire. The insurers eventually paid over £30,000 for the rebuilding of the malting because Messrs Reynolds and Anderson had demonstrated a genuine need to rebuild. But if they had wisely wished to replace the warehouse facilities, their £30,000 would have been quite sufficient to buy a modern equivalent.

 Modification to Indemnity

Generally the principle of indemnity applies to all non–life insurance unless modified expressly by contract conditions. There are three main instances where such conditions may be used.

1.  Modified to deal with situations where no clear measure of indemnity can be agreed. 
2.  Modified to allow the insured to receive more than a fair indemnity with the insurer’s consent. 
3.  Modified to empower the insurer, with the consent of the insured, to provide less than a full indemnity. 

CONCLUSION

The principle of indemnity is to allow the insured to be compensated adequately. The intention is to place the insured in the same financial position he was be immediately before the loss.

 SUMMARY

Not all classes of insurance are subject to the principle of indemnity. All non–life insurance policies are subject to the principle except modified. Life assurance policies are not subject to the principle of indemnity with a few exceptions as mentioned.

Indemnity is a financial compensation provided by insurers in an attempt to place the insured in the same pecuniary position after the loss as he enjoyed immediately before the loss.

Indemnity and insurance interest are linked because the insured’s interest in the subject matter of insurance is what is insured. The insured cannot claim more than the extent of his interest.

Application of the principle of indemnity depends on the different classes of insurance. It is fairly easy in liability and pecuniary insurances because the measurement of indemnity is the value of the court award or out-of-court settlement or pecuniary loss. However, in property insurance, problems arise as to how to measure damages. Insurers have the option to make payment by cash, reinstate, repair and replace.

Indemnity might be based on total losses, partial losses and the circumstances of the policymaker. The principle might be expressly modified by the contract conditions so that the insured might receive more than a fair indemnity or less than a full indemnity with the consent of both parties.