Definition
Indemnity is a fundamental legal principle in the insurance industry that ensures that an insured party receives compensation closely equivalent to the loss or damage incurred, but no more. This principle prevents the insured from profiting from a loss or damage incident, aiming instead to restore them to the financial position they were in prior to the incident.
Key Points
- Objective: To make sure that individuals or organizations are restored to their original financial situation after a loss, without the possibility of gaining any additional profit from the insurance compensation.
- Legal Framework: This principal is rooted deeply in common law and influences how insurance policies are structured and claims processed.
- Practical Implications: Helps avoid over-insurance and under-insurance situations and underscores the importance of accurate assessment at the time of underwriting and claim resolution.
Relevant Legal Texts
- Reference to Marine Insurance Act 1906, Sect. 83 : The Act underscores the normalization of compensation to reflect the true extent of financial loss.
Example
Suppose a car valued at $15,000 suffers a total accident loss. Under the principle of indemnity, if insured, the owner receives no more than $15,000 from their insurer, which is the pre-accident value of the car.
Documentation and Further Reading
- For a more comprehensive understanding, Thimble’s Guide on Indemnity and Insurance can be a resourceful read.
- Further legislative framework can also be explored in related sections of the Insurance Contracts Act of 1984 (Australia).
