According to the principle of indemnity when a damage is caused to an insured property a compensation equivalent to the damage shall be paid.
In other words , the insurance policy will compensate only up to the extent loss or damage , thereby leaving no possibility for making profits .
This principle is not applicable to life insurance or property accident insurance. it is because the value of is human life or part of the human body cannot be assessed in terms of money.
Eg : if we assessed the damage of a vehicle after met with an accident , that the damaged value will compensate for the insured by the insurer.
Why Indemnity Principle is important ?
- Avoid making profits from insurance- Differentiate insurance from gambling
- Control the insurance fund by compensating only the actual amount of the damages.
Concepts Relating to Indemnity
Over Insurance
Over insurance is insuring a property for a value more than the true value ( current market value ) of that property. In this case if there is a damage , compensation is paid only on the assessed value of the damage .Eg : If a machine worth Rs 70,000 is insured for Rs 90,000 it is an over insurance.
- In the event of partial damage - Partial damage is assessed and compensated to cover the loss of the insured.
- In the event of a full damage - The value prevailing on that date will be assessed and payments are made ( the market value as at that date will be paid ) . otherwise compensation is not paid in the amount stated in the policy .
Under Insurance
Under Insurance refers to the insurance a property of an asset less than the real value ( current market value ) of the property or asset.Eg : Property valued at 200,00 being insured at 120,000
- Here if the partial damage caused is Rs. 60,000 the compensation paid is as follows
120,000 x 60,000
_______________
200,000
- If there is a total damage only 120,000 is paid as compensation.
What are the sub principles of Indemnity?
- Contribution- Subrogation
Contribution
Eg : If a motor vehicle valued at Rs. 500,000 is insured in 4 companies A, B, C and D for the following different values.
A = 300,000
B = 200,000
C = 150,000
D = 350,000
If there is a total damage for that particular asset. This is the way how the insurance companies going to compensate for the loss.
A = 500,000 x 300,000 = 150,000
_________________
1,000,000
B = 500,000 x 200,000 = 100,000
______________
1,000,000
C = 500,000 x 150,000 = 75,000
______________
1,000,000
D = 500,000 x 350,000 = 175,000
_______________
1,000,000
Subrogation
Under subrogation , an insurer will take over all the ways in which an insured will receive compensation , if the said insurer has already paid compensation for a damage or loss to the insurer.
Eg: suppose "D" has fully insured his car with janashakhti insurance, and "R" has insured her car with Ceylinco insurance. Think that "D's car is fully damaged and written off, after it meets with an accident with "R's car . subsequently "D' s insurance company Janashakhti pays full damage to "D". Although "D" can receive compensation under "R's insurance policy , he will not be eligible for any claims from "R's insurance company since that right now belongs to 'D' s insurance company , not "D".
The total an insurer receives under subrogation shall not exceed that amount it paid out to the insured and the residual value of the asset belongs to the insurer who ultimately bears the loss due to damages.
Letter of subrogation is given to the insurer by the insured to transfer the ownership of the value that is received from the other sources.
0 comments:
Post a Comment