Question

Explain principle of indemnity.

Answer 1

• Indemnity means protection against future loss. The main objective of an insurance contract is to compensate a future loss.
• This principle is used to decide how much amount an insurance company needs to pay to the insuree in case he faces a loss.
• The insuree can only get the actual compensation for his loss and cannot earn profit i.e. cannot get additional amount other than pre-decide in his insurance policy.
• In case the insuree takes the insurance for a lesser amount then he will get only that much amount for which he has taken the insurance. The remaining loss will have to be borne by him.

Example:

• Assume that the price of a product is ₹ 5 lakh but a person takes insurance of only ₹ 2 lakh. If the product gets damaged completely, or if car is stolen, etc. he can claim an insurance of maximum ₹ 3 lakh only i.e. the insured value and not ₹ 5 lakh.
• In case the product is insured for ₹ 3 lakh and it gets damaged and estimate to repair the product is of ₹ 2 lakh, the insuree may get maximum ₹ 1,20,000 as compensation. This amount is proportioniate of the insured amount i.e. ₹ 3 lakh .
• In case the insuree has taken a full insurance i.e. of ₹ 5 lakh then in event of complete damage he will get the compensation of entire amount i.e. ₹ 5 lakh.