Indemnity means security
, protection’ and
compensation” given against damage, loss, or injury. It is what the Insurance Company promises the Insured if he suffers any loss within the period of Insurance as agreed.
Methods of providing indemnity;
1. Cash payment
2. Repairs
3. Replacement
4. Reinstatement
Cash Payment-This method is common in motor and liability policies. It simply means the insurer will pay cash, issue a bank Cheque, do fund transfer or issue a bank draft to the insured at the time of claims settlement.
Repairs-This method is common in motor, engineering, and building insurances. Here, the insurer takes on the damaged subject matter and repair it up to the tune (extent) of the agreement.
Replacement-This method is common for household insurances. The insurer replaces the damaged item.
Reinstatement-This is a method of providing a face-lift on the old. E.g., renovating a burnt building.
**However, in the case of Life Assurance, the principle of indemnity does not
apply because the value of human life cannot be measured in terms of money. This means indemnity is only applicable to general insurance businesses.
**The principle of indemnity ensures the Insured does not make a profit from the contract. This means that the insured at no point should receive more compensation than his sum insured (the stated and agreed value of the property). This is the reason the principles of contribution and subrogation are there to take care of that possibility.
The Principle of Contribution
Sometimes, risks become too large for an insurer to bear alone. He Calls on other(s) to co-insure. When a claim arises, he then calls on the same fellow Insurer(s) to pay compensation to the claimant according to how it was shared initially.
The insurers may not be equally liable. What this means is, an insurer might just take part in 10% of the risk< so he pays only 10% of the claim. In the same vein, an insurer who takes part in 40% of the risks pays only 40% of the loss.
Bear in mind that the insurer who had taken 10% of the risk and 10% of the loss has also been paid 10% of the premium.
So also the insurer who took 40% of the risk and paid 40% of the loss would have been paid 40% of the premium.
In other words, if the Insured claims the full amount of compensation from one Insurer he cannot still claim the same compensation from another Insurer and make a profit. The principle of indemnity does not allow for profiting from the contract.
Secondly, if one Insurer pays the full compensation then it can recover the same proportion from the other insurance company.
Worthy of note is that the following conditions must be met before contribution can be possible: 1. Two or more policies must be in force already
2. The two policies must be policies of indemnity (life and general insurance policies cannot contribute towards the same claim)
3. The two or more policies must actually cover the same interests (contribution cannot be possible if one covers Mr. Lawal’s car and the others cover Mr. Eze’s car; they are both indemnity policies but the interest differs).
4. It is not enough to cover the same interest; the policies should logically cover the same subject matter.
5. All the insurers must truly be liable for the loss. This means everything about the insurance contract must be intact as to make the claim a payable one
Summarily all Insurers must all have covered the same interest as the same subject matter
The Principle of Subrogation
This principle is only applicable after the Insured has been compensated for the loss.
Subrogation is a right the insurers exercise to take over a property (subject matter) after they must have finished compensating the Insured. They do so because the Insured is not allowed to take possession of the property (subject matter) after being adequately compensated (this amounts to double indemnity).
It can also happen whereby a loss happens by another person entirely (a third party). The insurer can recoup the money they have paid as compensation from the third party who is supposed to be at fault.
A simple example is Ade damaging Emeka’s car. Emeka’s insurer compensates Emeka but recoups his money from Ade. The insurer is exercising subrogation rights.
** Emeka is also expected to give out every useful information about how to access and recover from Ade.
