The principle of indemnity is such a principle of insurance stating that an insured may not be compensated by the insurance company in an amount exceeding the insured’s economic loss. In a contract of indemnity, selection of proper sum insured is important as this is always the limit within which indemnity will be considered. The word indemnity denotes security or protection against loss. The effect of indemnity to insurance protects the insured from losses. The principles of indemnity state that the insurer undertakes to indemnify the insured or policy-holders for the losses caused due to the occurrence of certain accidents by receiving compensation form the insurer, the policyholder becomes neither better nor worse but remains in the same position as before. This principle has got a wider application to property insurance and insurance of liabilities. This principle is not applied to life insurance where it becomes difficult to measure financial loss. There are various methods of providing indemnity to the insured.
- In the form of cash. This is the usual way of making payment of a claim. This method is simpler, easier and less cumbersome.
- In the form of replacement. Usually, in case of total loss, the insurers may replace the subject-matter by another one of the same standard, age, and quality.
- In the form of repair. Rather than making a cash payment, the insurers will get the loss repaired to pre-loss condition as far as practicable.
- In the form of reinstatement. This is usually considered with regard to buildings damaged or destroyed by fire.