Indemnity – a simple concept?
Let’s start with a simple statement:
In accepting and dealing with your claim, your insurance company aims to restore you to the same financial position as you were in beforehand. This is known as the principle of Indemnity.
Let’s look at 2 simple examples of Indemnity in Motor and Home Insurance:
Where your motor insurance company accepts a claim for damage to your car they will either arrange for it to be repaired or, if it is deemed uneconomical to repair, they will make you a cash offer based on the cars’ current market value. Market value is the amount that you would reasonably pay for the car at the relevant time taking account of it’s’ make, model, age, condition and mileage.
On Home insurance it is normal for insurance companies to settle claims on a ‘new for old’ basis. If, for example, you suffered theft of several household items and your insurance company accepts the claim; then, they will either replace as new those items or pay you the cost of replacing them as new.
There are exceptions to this. For example, most insurance companies make a deduction for wear and tear in respect of clothing.
In terms of how they deal with claims involving household property, insurance companies normally give themselves options. The main methods being by repair, replacement or payment of a cash sum. This allows insurance companies to settle claims in the most efficient and/or economical manner. Which option they choose depends on the type and circumstances of a claim.
For example, my neighbour suffered loss and damage to his kitchen and flooring caused by water escaping from a burst pipe on the first floor. His insurance company arranged for replacement of his kitchen and flooring; and for repair of damage to ceiling and walls.
If you lose a piece of jewellery it goes without saying that the repair option is not appropriate! The insurance company is likely to settle the claim either by replacing the item or by agreeing a cash settlement.
As you can see, things are not that simple. There are different ways both of assessing the sum of your financial loss and of settling the claim. Insurance companies can’t decide willy nilly on what basis they will deal with a claim. Basis of claim settlement is outlined within the policy wording. There are differences not just between insurance products but also for elements of cover within the same product.
Regardless of how an insurance company chooses to settle any particular claim, their fundamental aim will be to restore the policyholder to the same financial position they were in before the loss occurred.
About the author:Founder and Managing Director of Map Cover Ltd. Technical Motor & Property Insurance Underwriter turned Entrepreneur and Expert Witness.
Date:June 19th, 2018