Principle of indemnity

Principle of indemnity refers to

on the happening of a loss the insured shall be put back into the
same financial position as he used to occupy immediately before
the loss.
IN A WARD , THE INSURED SHALL GET
NEITHER MORE NOR LESS THAN THE
ACTUAL AMOUNT OF LOSS SUSTAINED .
ACTUALLY A CONTRACT OF INSURANCE IS
NECESSARILY A CONTRACT OF INDEMNITY
(EXCEPT LIFE AND PERSONAL ACCIDENT
INSURANCE) AND OF INDEMNITY ONLY ,
AND THIS MEANS THAT IN CASE OF A LOSS
THE INSURED SHALL BE FULLY
INDEMNIFIED
Application of indemnity

• applicable
• FIRE
• MARINE
• MOTOR
• LIVE-STOCK
• And others

• Non-applicable
• LIFE
• PERSONAL
• ACCIDENT
 LIFE AND PERSONAL ACCIDENT
INSURANCE

Life and personal accident

insurance are not contracts of
indemnities simply because life or
limb cannot be valued in terms of
money. Here insurance company
just tries to assist the insured or the
dependants
 NON-LIFE INSURANCE

� Apart from life and personal accident insurances, all

other types of insurances are contracts of indemnities.
Therefore, Marine, Fire, Motor, CAR, Burglary, Fidelity
Guarantee, Employers liability, Public liability, Aviation,
Engineering, Products liability, Crop insurance, Live-
stock insurance etc. are all contracts of indemnity.
Method of providing
indemnity

• INDEMNITY
• CASH
• PAYMENT
• REPAIR
• REPLACEMENT
• REINSTATE
• -MENT
 • This is the usual way of making
Cash payment payment of a claim. This method is
simple, easy and less cumbersome
 • This is also another way of
providing compensation. Rather
Repair
than making cash payment, the
insurers will get the loss repaired to
pre-loss condition as far as
practicable.
 •Usually in case of total loss
Replace
the insurers may replace the
-ment
subject-matter by another one
of the same standard, age and
quality.
 •The insurers may also reinstate
the property by option. This is
usually considered with regard
to buildings damaged or
Reinstate
destroyed by fire.
-ment
•Usually it is the option of the
insurers to decide any one of the
above four method
 Impact of Excess, Franchise & Average
on principle of indemnity

Above three terminologies are important

because they create an important impact on the
principal of indemnity.

EXCESS: This means that with regard to any

loss, a certain predetermined amount shall be
deducted and the balance, if any, shall be paid.
 EXCESS
Example 1: excess
Excess tk. 100
loss tk. 200
payable tk. 100

Example 2: Excess
excess tk. 100
loss tk. 100
payable tk. Nil

Here it will be observed that due to a policy condition, the

insured is not put back into same financial position after a
loss.
 FRANCHISE
Excess-----cond.

To
If akeep
policy
a check
is made
on subject
moral hazard
to franchise,
with regard
then in
to order
an to
insured
get a claim
whothe
hasextent
a habitofofclaim
making
must
constant
reach the
trivial
amount of
claims.
franchise when the insured gets full claim.

To control the administrative expenses which are quite

often more than the claim amount itself.
 FRANCHISE
FRANCHISE

IfIfaapolicy
policyisismade
madesubject
subjectto
tofranchise,
franchise,then
thenin
inorder
orderto
to
get
getaaclaim
claimthe
theextent
extentof
ofclaim
claimmust
mustreach
reachthe
theamount
amountofof
franchise
franchisewhen
whenthe
theinsured
insuredgets
getsfull
fullclaim.
claim.

If not then insured gets nothing.

So it’s a pre-condition to get a full claim.
 FRANCHISE

EX 1: franchise tk. 100

loss tk. 99
payable tk. Nil

EX 2: franchise tk. 100

loss tk. 150
payable tk. 150

EX 3: franchise tk. 100

loss tk. 100
payable tk. 100
 AVERAGE
AVERAGE

Average is a method by which under-insurance

Average is a method by which under-insurance
is defeated.
is defeated.

Thenorms
The normsof ofinsurance
insurancedemand
demandthat
thatthere
there
shouldalways
should alwaysbe befull
fullvalue
valueinsurance.
insurance.Under
Under
insurancedeprives
insurance deprivesthe
theinsurer
insurerin
ingetting
gettingactual
actual
premium. .
premium
 Types of AVERAGE

i) Pro-rata condition of average

ii) Special condition of average

iii) Two condition of average

 Pro-rata
Pro-rata condition
condition

At
At the
the time
time of
of loss,
loss, if
if the
the actual
actual value
value of
of the
the
property
property is
is more
more than
than the
the sum
sum insured,
insured, then
then the
the
insurer
insurer will
will pay
pay that
that proportion
proportion ofof actual
actual loss
loss that
that
the
the sum-insured
sum-insured bears
bears to
to the
the actual
actual value.
value.

Example:
Example:
sum insured tk. 10,000
sum
actualinsured
value tk. 100,000
20,000
actual
loss value tk. 200,000
tk. 1,000
loss
policy payable tk. 10,000
tk.(10,000/20,000)×1,000
policy payable =500 tk.(100,000/200,000)×10,000
=tk. 5000
 • Special condition of average

• This is also known as 75% condition of average. Under this type of

average if at the time of loss it is found that the sum-insured is less
than 75% value of the property then the insurers will pay that
proportion of the loss that the sum insured bears to the actual
value.

• If the sum insured is at least to the extent of 75% (or

more) of the actual value then no average applies.
 Special condition of average

Example 1:
sum insured tk. 75,000
actual value tk. 100,000
loss tk. 10,000
policy pays tk. 10,000
Example 2:
sum insured tk. 70,000
actual value tk. 100,000
loss tk. 10,000
policy pays tk.(70,000/100,000)×10,000
=tk. 7000
 Two condition of average

The second part says

The first is that if at the time of
exactly pro- loss it is found that
rata there is more specific
condition policy covering the
of average. same loss then that
specific policy shall
pay the loss first.

If there is still balance of claim left then only this policy shall come
forward to pay the balance loss, and
In case of underinsurance average shall apply in the usual manner
on the balance.
 Two condition of average

Ex 1:
Policy A-sum insured tk. 100,000 property 1&2
Policy B-sum insured tk. 75,000 property 1
Value: property 1 tk. 100,000
property 2 tk. 100,000
Loss: property 1 tk. 50,000
Policy B pays first = tk. 50,000 (sum insured
fully covers the loss)
Policy A pays nothing (as loss is fully paid by B)
 continued…..

Example: 2
All proposition of ex-1 are same. Only loss= tk.
100,000
Policy B pays first= tk. 75,000 (being limit of sum
insured)
Policy A pays (100,000/200,000)×25,000 (balance
of loss) =12,500
Insured bears balance of loss tk. 12,500
 The main point of all types of
average

If insurance is not properly arranged on full value

insurance, i.e., if there is under insurance then the
insured will not get full indemnity.

The benefit of average is to be obtained by

insurers then they must put this average condition
in the policy. Otherwise, even though there is
under-insurance average cannot be applied.
POLICIES EFFECTIVE ON
PRINCIPLE OF INDEMNITY
VALUED POLICIES
FIRST LOSS INSURENCE
 � VALUED POLICIES

VALUED POLICIES ARE THOSE POLICIES WHERE THE

VALUE OF THE PROPERTY IS AGREED BEFOREHAND.

The condition of such a policy is that if

• There is a total loss then full sum insured is to be paid.

• There is a partial loss then it is settled on indemnity basis as is usually done on

the ordinary market value basis.
 FOR TOTAL LOSS TWO EVENT MAY
BE HAPPENED TO INSURED-

• If the actual value of the property is less than the sum insured, the insured will
be gainer.
• If the actual value is more than the sum insured ,the insured will be loser.
It is argued that valued policies are departures from
principle of indemnity. The following points should be
noted in this regard-

• Only in the case of total loss there is possibility of making

either over-payment or under-payment which is very rare.

• In case of partial loss which is more common ,the loss is

treated under normal indemnity basis.

• Valued policies are not usually given to those persons whose

bona-fides are not in the knowledge of insurers.
 • Valued policies are usually issued on articles of fairly stable market value.

• Under valued policies the measure of indemnity is decided at the inception but
under ordinary policies the measures of indemnity is decided at the time of claim.

From we can say that valued policies are the modification of principle of indemnity
and not departures from it.
 FIRST LOSS INSURENCE
� Under first loss insurance the sum � For example; in burglary
insurance ,burglars may not
insured is deliberately restricted to be able to take away all the
the sum lesser than the actual value. goods particularly if these
are of heavy nature.
� The concept is that total loss is rather
impossible because of the nature of
the subject matter but it is not
guaranteed.
 In case of total loss ,if at
Partial losses are paid in
all the insured is not fully
full subject to the limit of
Under first loss insurance indemnified as the sum
the sum insured.( no
insured is lesser than the
application of pro- rata)
actual value at risk.
 PRINCIPLE OF SUBROGATION

It is a right that a person has of standing in the place of another

and availing himself of all the rights and remedies of another,
whether already enforced or not.

It can also defined as the transfer of rights and remedies of the

insured to the insurer who has indemnified the insured in respect
of the loss occurred.

In insurance , after payment of a claim, the insurers shall be

entitled to take over the legal right of the insured against the liable
third party for the purpose of recovery.
❑In other words, subrogation in its most common usage
refers to circumstances in which an insurance company tries
to recoup expenses for a claim it paid out where another
party should have been responsible for paying at least a
portion of that claim.
❑‘ If an insured has a means of diminishing the loss, the
result of the use of these means belongs to the insurers.’
(CASTELLAIN V PRESTON, 1883)
 CASE STUDY

� D drives a car negligently and damages X's car as a

result.
� X, the insured party, has Collision insurance, and claims
under his policy against his insurer.
� The Insurer pays in full to have X's car repaired.
� Insurer then sues D for negligence to recoup some or all
of the sums paid out to X.
� Insurer receives the full amount of any amounts
recovered in the action against D up to the amount to
which Insurer indemnified X. X retains none of the
proceeds of the action against D except to the extent that
they exceed the amount that Insurer paid to X.
 CONTINUED………….
� If X were paid in full by the Insurer and still had a claim
in full against D, then X could recover "twice" for the
same loss. The basis of the law of subrogation is that
when the Insurer agrees to indemnify X against a certain
loss, then X "shall be fully indemnified, but never more
than fully indemnified ... if ever a proposition was
brought forward which is at variance with it, that is to
say, which will prevent [X] from obtaining a full
indemnity, or which will give to [X] more than a full that
proposition must certainly be wrong.”
 CONTINUED………
� Insurer will normally (but not always) have to bring the
claim in the name of X. Accordingly, in situations where
subrogation rights are likely to arise within the scope of
a contract (i.e. in an indemnity insurance policy) it is
quite common for the contract to provide that X, as
subrogor, will provide all necessary cooperation to
Insurer in bringing the claim.
HOW THIS RIGHT OF SUBROGATIOAN
ARISES
� Right of subrogation arises in the following ways

❖ Under tort : This is a wrongdoing to another. In other

words, it is a breach of duty owed to a third party. A
person cannot do wrong to another thereby causing
damage to another’s property or inflicting injury to
the of that another. If it is so done then a right of
action accrues in favour of the wronged and to the
detriment of the wrong –doer.
CONTINUED……..
❖ Under contract : A contract may put
some obligation on the person making breach of the
contract to compensate the person who has been
aggrieved as a result of the breach. As for example,
obligation under contract of affreightment and
contract of bailment etc.
CONTINUED………
❖ Under statute : Statutes may also create liability, for
making compensation, arising out of a breach thereof.
Examples are , Factories Act. Occupiers Liability Act.
The Riot Act, Carriage of goods by sea Act etc .
APPLICATION OF SUBROGATION IN
CLAIMS

• Under common law the position is that the

When insurers must pay the claim first before the right
subrogation of subrogation can be exercised. In other words,
arises the insurers cannot go against the third party
for the purpose of recovery unless
they(innsurers) have made payments to the
insured.
Under contractual terms and conditions, this position
however be varied by means of policy terms and conditions.
in non-marine policies there is usually a policy condition,
known as subrogation condition, whereby the insurers
may require the insured to recover(or take all steps of
recovery) against the liable third party first at insurer’s
cost and expenses.
 B) EXTENT OF SUBROGATION
� If the insurers recover more than the amount paid out, then they are
entitled to retain from the recovery only to the extent of the payment they
made to insured. The balance amount must be refunded to the insured.

� If however, the recovery is less than the amount of claim paid out to the
insured, there is no question of realizing balance money from the insured.

� If the insured already recovers from the third party and if that is full
indemnity, he has no claim against his insurer.

� If the amount revived from the third party does not represent full
indemnity then he is entitled to claim only the balance from his insurers.
EXAMPLES OF THE EXTENT OF
SUBROGATION

Example-1
Insurer pays 1000
Insurer recovers 1200
Insurer retains 1000 &throws back 200 to
the insured

Example-2

Insurer pays 1000

Insurer recovers 800
Insurer retains 800 &insured is not required
to pay back 200 to his
insurer
 EXAMPLE -3
Actual loss 1000
Insured gets from third party 1000 & he has no claim on insurer
Insured gets from third party 700 & he has claim of 300 from his
insurer

Example -4
Actual loss 1000
Insurer pays 900
Insured recovers from third party 700 & he has to refund 600 to
insurer
c)E
x–
Gr
ati Although
Althoughnot notlegally
legallyliable,
liable,insurers
insurersdo dosometimes
sometimes
a pa make
makepayments
paymentsunder
undertheir
theirpolicies
policiesasasaamatter
matterof
of
ym
e nt s grace
graceororfavor.
favor.May
Maybe,
be,there
therehas
hasbeen
beenminor
minorbreaches
breaches
of
ofpolicy
policyterms
termsfor
forwhich
whichthe theinsurer
insurercould
couldeasily
easily
repudiate
repudiatethetheclaim.
claim.But
Butconsidering
consideringthe thecommercial
commercial
aspect,
aspect,the
the insurer
insurer will
willbebewilling
willingtotomake
makesome
some
payment
payment(whether
(whetherininfull
fullorornot)
not)without
withoutadmitting
admitting
liability
liabilityunder
underthe
thepolicy.
policy.Such
Suchpayments
paymentsare areknown
knownas
as
Ex
am ex-gratia
ex-gratiapayments.
payments.
ple
suppose ompany ‘ABC
suppose, ,aaccompany ‘A’ has’ made
has made
a insurance
an insurance
contract
contract
with an
with
insurance
an insurance
company
company
under
under
employee
employee
welfare
welfare
for making
for making
compensation
compensation
with with
the terms
the terms
if anyifemployee
any employee
dies indies
workplace
in
workplace
. But suppose
. Buta suppose
employeean died
employee
outsidedied
the outside
workplace.
the workplace.
In this case In
thethis
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case the
repudiated
insurer the
repudiated
contract and
thedid
contract
not make
and any
did not
compensation.
make any compensation.
But the company But made
the company
some payment
made some
under the
payment
Ex-Gratiaunder
payments.
the Ex-Gratia payments.
 This usually refers to remains of the property
after a loss.

•salvage The damaged property or may be it is a case of

partial loss

The rule is that when it is a case of partial

loss, the insured can only claim to the extent
of the loss or damage sustain.

The situation may be different only if the insured

surrenders the remains of the property and the
insurer also agrees to accept the salvage. In such
a situation, the claim shall be paid in full and the
insurer shall become the owner of the salvage
 Abandonment

Abandonment usually means surrendering by the insured the

remains of the damaged property to the insurer and claiming total
loss. When , therefore, the insurer pays a total loss he takes over
the salvage as owner thereof. He becomes the absolute owner
irrespective of what value is received from subsequent sale.
PRINCIPLE OF CONTRIBUTION

Contribution is a right that an insurer has, who has paid

under a policy, of calling other interested insurers in the loss
to pay or contribute ratably to the payment.
� This means that if at the time of loss it is found that
there are more than one policy covering the same loss
then all policies should pay the loss proportionately
to the extent of there respective liabilities so that the
insured does not get more than one whole loss from
all these sources.
 APPLICATION OF CONTRIBUTION
TO CLAIMS

Some considerations must be noted for the application. They are:

(a) When contribution operates,
(b) How contribution works,
(c) Position of contribution under common law
and policy condition,
(d) Specific insurances.
 WHEN CONTRIBUTION
OPERATES

1. There must be more than one policy and all the policies must
be active.
2. All the policies must cover the same subject matter.
3. All the policies must cover the same peril causing the loss.
4. All the policies must cover the same interest of the same
insured.
 HOW CONTRIBUTION WORKS

When the above factors are satisfied then the next

Step is to find out the liability under each policy.
The formula is : Sum insured under each policy Loss
Total sum insured under all policies

It is commonly known as proportionate liability of each

policy .
EXAMPLE 1 :

Policy A : sum insured tk. 1000,

Policy B : sum insured tk. 2000,
Policy C : sum insured tk. 4000, Loss tk. 700.
Now,
.·. Total sum insured= 7000.
.·. Policy A pays= (1000/7000) X 700 = 100
.·. Policy B pays= (2000/7000) X 700 = 200
 POSITION OF CONTRIBUTION UNDER
COMMON LAW AND POLICY
CONDITION

Even though it is not mentioned in the policy, it is the legal

right of the insurers to get the benefit of contribution. Under
common law the insured can claim the full amount of loss from
any of the insurers of his choice, but under a policy condition
the insurers may require the insured to claim proportionately
from all the insurers.
 SPECIFIC INSURANCES

Sometimes a special clause is put in a policy to keep away

from contributing where the loss is covered by a more
specific policy. Then the non-specific policy shall not
contribute to the loss unless the specific policy is
exhausted.
❖Principle of indemnity
❖Principle of Subrogation
❖Principle of Contribution

FINDINGS AND SUMMARY:

PRINCIPLE OF INDEMNITY

1. Putting back into the same financial position as the insured used to occupy
immediately before the loss and would not entitle the insured to get more than the
actual loss.
2. It keeps the business of insurance in track and keeps it free from wagering.
3. Types of contract of insurance are Motor, Marine, Fire, Car, public Liability, crops
etc.
4. Life and personal accident insurance are not contracts of indemnities because these
cannot be valued in terms of money.
5. Excess, Franchise & Average are the three technologies and two policies VALUED
POLICIES,FIRST LOSS INSURENCE which have impact on principle of
indemnity,
There are three types of Average:
Pro-rata condition of average
Special condition of Average
Two condition of Average
6. Indemnity could be provided through Cash payment, Repair, Replacement &
Reinstatement
PRINCIPLE OF SUBROGATION

1. Defined as the transfer of rights and remedies of the

insured to the insurer who has indemnified the insured
in respect of the loss occurred.

2. Insurer proceed against the liable third party direct &

recover the loss or5 damage for their own benefit

3. This principle is corollary to the Principle of indemnity,

has its birth & existence to preserve Principle of
indemnity

4. Right of subrogation arises in the ways of Under Tort,

under Contract & under statute/
PRINCIPLE OF CONTRIBUTION

Contribution is the right of the insurer who has paid

under a policy, to call some other interested insurers
in the loss to pay or contribute to the payment.

To operate Principle of Contribution :

⮚ There must be more than one policy
⮚ All the policies covering the loss must be in force.
⮚ Cover same subject matter,
⮚ Cover same peril causing the loss.
⮚ Cover the same interest of the same insured.
� THESE ARE THE MAIN PRINCIPLES OF THE
INSURANCE CONTRACTS. FOR THE POPER
CONTINUTION, SETTLEMENT & ACCEPTANCE
IN COURT ALL THE NECESSARY TERMS AND
CONDITIONS OF THESE PRINCIPLES MUST BE
FULLFILED.