THE PRINCIPLE OF INDEMNITY IN INSURANCE

By Amaka Ezeno, MCLArb

The essential feature of Insurance Transactions is Risk Coverage and Indemnity. The Principle of Indemnity stipulates that where a loss occurs, the insured should be placed by the insurer in the financial position he would have been but for the occurrence of the risk insured against.

The principle of indemnity is premised on the notion that on grounds of Public Policy, a person is not expected to benefit from their misfortune. Thus, the insured is entitled to a measure of their loss.

The principle has received judicial blessing in a plethora of cases. In Castellan v. Preston (1883) 1 Q.B.D. 380 (CA), it was held that the principle of indemnity is applicable to all classes of insurance except Life and Personal Accident Insurance.

Indemnity is about restoration of the insured to his former position and not to confer him with profit from his loss. Where the damage to the subject matter of the Insurance Policy is partial, he will be entitled to only the cost of repairs or restoration to its former state. However, if the damage is total, then the insurer’s liability is

restricted to the sum insured which is the estimated value of the subject matter at the time of the insurance contract.

It has been held in Esewe v Asiemo (1975) NCLR 433 that a contract of insurance is meant to indemnify the assured and not to enrich him over and above that which was necessary to enable him to recoup his loss.

EXCEPTIONS TO THE NON-PROFIT RULE

Although the principle is designed for the maintenance of equity in insurance contracts by ensuring that parties do not make profit from their loss, there are some exceptions to this rule.

1. Life Insurance: the cost of replacing a life cannot be measured with arithmetic precision and is therefore, incapable of being quantified.
2. Replacement Cost Insurance: here, claims do not take cognizance of the depreciation of the item.
3. Value Policy: in value policy, attention is not given to

insured.

METHODS OF PROVIDING INDEMNITY

1. Cash: this is the most appropriate method of indemnity for bodily injury or death liability classes and benefit policies. For example, on occurrence of death, the life cannot be reinstated, a lost limb cannot be repaired by any amount of money, and that is why they are benefit policies.
2. Repair: repair is used in property insurances especially in motor vehicle insurance.
3. Replacement: this is commonly used in glass insurance where a glass is broken. It is also used for Motor Vehicle Insurance for partial losses of say, a broken windscreen, which cannot be repaired but replaced.
4. Reinstatement: this involves the restoration of the insured subject matter like a building. Where it is impossible to reinstate, the insurer is expected to elect for payment.