Definition
Indemnity Principle
The principle of indemnity ensures an insured is restored to their pre-loss financial position but cannot profit from a claim, applying to general insurance.
Indemnity governs property, motor and most health insurance: the payout is limited to the actual loss suffered, not more. This is why a motor claim settles at the vehicle's actual value within the IDV, and why a health claim pays actual hospital costs up to the sum insured.
Indemnity does not apply to life and personal accident benefit policies, where a fixed sum is paid because a human life cannot be valued precisely. Related doctrines like subrogation and contribution exist to uphold indemnity by preventing double recovery.
Related terms
- SubrogationSubrogation is the insurer's right, after paying a claim, to step into the policyholder's shoes and recover the loss from the third party who caused it.
- Contribution PrincipleThe principle of contribution allows insurers to share a claim proportionately when the same risk is covered by more than one indemnity policy.
- Insurable InterestInsurable interest is the legal requirement that the policyholder stands to suffer a genuine financial loss from the insured event, making the contract valid.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.