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7/2 W01/March 2017 Award in General Insurance

Introduction

In this chapter we discuss the concept of indemnity and how it is applied and modified in relation to
insurance contracts.
When an insured peril causes a loss, the policyholder submits a claim to their insurer. The insurer
checks the validity of the claim and, if valid, accepts it, agreeing to meet their obligation under the terms
of the insurance contract. The actual settlement or the amount payable by the insurer depends on a
number of factors, including the nature of the cover, the extent of the cover and any conditions limiting
the amount payable. Most short-term (non-life insurance) contracts are contracts to indemnify the
policyholder in the event of loss: in other words, to provide indemnity. They are called short-term
policies because the insurer has the option of offering renewal at the end of each period of insurance.

Key terms

This chapter introduces the following terms and concepts:
Agreed value policies Average Cash payment Deductible
Excess First loss policies Item limits New for old cover
Reinstatement Repair Replacement Sum insured

A Definition of indemnity

Indemnity can be defined as:
financial compensation sufficient to place the insured in the same financial position after a loss as they
enjoyed immediately before the loss occurred.
The importance of the principle of indemnity was emphasised by Brett, LJ, in the case of Castellain v.
Preston (1883):
The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely that Reference copy for CII Face to Face Training
the contract of insurance contained in a marine or fire policy is a contract of indemnity and of indemnity
only…and if ever a proposition is brought forward which is at variance with it, that is to say, which either will
prevent the assured from obtaining a full indemnity, or which gives the assured more than full indemnity, that
proposition must certainly be wrong.
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Chapter A1 Benefit policies

Some short-term We can see straight away that short-term policies that provide fixed benefits, mainly for accident and
policies are not sickness, are not policies of indemnity. It is impossible to place a price on the loss of a limb or loss of
policies of indemnity sight, so the principle of indemnity cannot apply and, in the event of a claim, a defined amount is paid.
You should note, however, that insurers do take account of an individual’s circumstances and earnings
when agreeing to insure weekly benefits for temporary illness or incapacity. This is because the policy
benefits should not to act as an incentive to remain off work longer than necessary. Apart from life,
pensions, annuity and investment contracts, policies that fall into the category of benefit policies are:
• personal accident;
• sickness;
• critical illness;
• payment protection indemnity;
• hospital cash plans;
• income protection; and
• elements of travel insurance.

A2 Options available to insurers
Now we have established that not all contracts of insurance are policies of indemnity, we now consider
the vast majority that do seek to provide exact financial compensation.