Page 29 - The Insurance Times February 2026

How is Indemnity provided? any one case is determined by the circumstances. In pri-
vate motor policies, there are specific amounts that an in-
The simplest situation arises with liability policies where in-
demnity will be the amount of Court award, or settlement sured may select to earn as a discount in premium. In other
negotiated out of Court, plus legal costs, if any. cases, such as large fire policies held by industrial concerns,
it will be a matter for negotiation.

In the case of property losses, the majority of cases are dealt
The term excess is usually used for small amounts, for ex-
with by a cash payment. In other cases, the insurers may
instruct repairs as in motor insurance, or replace goods as ample Rs. 150, Rs. 250, Rs. 1000. Where the amount is
larger, for example Rs. 2500, Rs. 10,000 or even Rs. 1 mil-
occasionally occurs with jewellery.
lion, the term deductible is used.
The Measurement of Indemnity
Sum Insured/ Limit of Indemnity and
In a few cases, for example in motor insurance, there may
be a ready second-hand market to establish value in the Average

event of total loss. In all other cases, the measurement of If the sum insured is less than the value lost, then the limit
indemnity for total loss is the cost of replacement less the of the insurer's liability is the sum insured. Where a limit of
value of any betterment. In the case of partial losses, in- indemnity is written into the policy, that is the insurer's
demnity is the cost of repair less betterment, if any. maximum liability.

For example, in a house fire, if it costs Rs. 20,000/- to re- In the event of the sum insured being low, certain policies
place a carpet which was two years old, one must ascer- such as commercial fire and theft are subject to average
tain the expected life-span of the carpet destroyed. If it whereby partial losses are reduced in the proportion of sum
was five years, then the carpet lost was 2/5ths worn and insured to full value.
indemnity would be 3/5ths of Rs. 20,000/- that is Rs. 12,000.
The original cost of the carpet is immaterial. The following formula is used to calculate the amount pay-
able in a case of under insurance.
Amendments to the Principle
SUM INSURED
Policies covering commercial and industrial buildings and X LOSS = SETTLEMENT
machinery, and house policies can be extended to include FULL VALUE
reinstatement or new-for-old conditions, whereby the full
cost of replacement will be paid, that is Rs. 20,000/ in the Gopal's house is valued at Rs. 50,00, 000. He insures it for
case of the carpet loss quoted earlier. Rs. 40,00,000. After a few months he suffers a fire loss of
Rs. 10,00,000. Will Gopal get Rs. 10,00,000?
Another variation is where it would be difficult to establish
value after loss. Examples are ships and their cargoes, or NO. Gopal was underinsured. Then, how much will Gopal
rare articles, and in these cases, their value is agreed at get?
inception and the value paid in the event of total loss. In-
demnity applies for partial losses. S.I. Rs. 40,00,000 X Rs. 10,00, 000 = Rs. 8,00,000
X LOSS =
F.I. Rs. 50,00,000
Distinction between Indemnity and
For instance, if Kiran insured his house for Rs. 150,000 and
Insurer's Liability four months later the house was totally destroyed by an

Ideally, the insurer's liability will be the indemnity, but there earthquake. Kiran would not get more than Rs. 100,000 if
are various ways in which the liability may be less than in- the value of the house at the time of loss was Rs. 100,000.
demnity. The purpose of indemnity is to prevent profiting from insur-
ance and to reduce moral hazard.
Excess or Deductible
Sometimes by choice or otherwise, the insured has to bear The purpose of the average clause is to provide equity in
the Rs. x of each loss and in such cases, the insurer's liability rating and to allow an insurer to collect premiums which
will be that amount less than indemnity. The value of x in are commensurate with the risks insured.

26 February 2026 The Insurance Times