Indemnity Principle
AdvancedThe indemnity principle is the insurance principle that a policyholder should be restored to the same financial position after a loss as they were in immediately before it, but should not profit from the loss.
Insurance is meant to compensate for losses, not to provide a gain. The indemnity principle ensures that payouts reflect the actual loss suffered, up to the policy limit.
This principle underpins several insurance rules. Insurers pay only for the actual loss, not more. If a policyholder has insurance with several insurers for the same risk, they cannot claim the full loss from each, and the insurers share the cost, a principle called contribution. After paying a claim, the insurer can recover the amount from a third party responsible for the loss, known as subrogation.
For example, if a car insured for 20,000 is worth 12,000 when it is written off in an accident, the insurer typically pays 12,000, its actual value, not 20,000.
The indemnity principle applies mainly to property and liability insurance. It does not apply in the same way to life insurance or certain personal accident policies, which pay agreed amounts, since the value of a life cannot be measured precisely. Some property policies offer new-for-old cover, which goes beyond strict indemnity by an agreed amount.
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