Principle of Indemnity & Contribution - Insurance Contract - Principles of Insurance, B com | Principles of Insurance PDF Download

Principle of Indemnity​ : The principle of indemnity asserts that 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 other words, the insured shall get neither more nor less than the actual amount of loss sustained.

This, of course, is always subject to the limit of the sum insured and also subject to certain terms and conditions of the policy.

Therefore, to put it in a much better way, on the happening of a loss, the insurers will try to put back the insured into the same financial position as the insured used to occupy immediately before the happening of the loss, only if the insurance is properly arranged on full value insurance.

Under-insurance and restrictive terms of the policy may preclude the insured from getting the actual loss. On the other hand, even if the sum insured is more than the actual value of the property or subject matter; this would not entitle the insured to get more than the actual loss.

This principle is indeed very important to keep the business of insuranceon track and to keep it free from wagering. This also checks the moral hazard of a man and at the same time allows him to get the actual amount of loss and certainly not more than that.

Consider a proposition wherein through over-insurance somebody is allowed to take more than the actual amount of loss.

Well, in that case, it can be said with definite certainty that there will always be a temptation to create an insured event deliberately for the sole purpose of making a profit out of a loss.

The principle of indemnity was well cared for in the leading case of Castellain V. Preston (1883) in the following way “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, but shall never be more than fully indemnified.

That is the fundamental principle of insurance and if ever a proposition is brought forward, which is at variance with it, that is to say, which either will prevent the insured from obtaining a full indemnity or which will give the insured more than a full indemnity, that proposition must certainly be wrong”.

What Is the Contribution Principle for Insurance?

The contribution principle of insurance states that if a risk is insured by multiple carriers, and one carrier has paid out a claim, that carrier is entitled to collect proportionate coverage from other carriers.

Example

If you had taken out $1 million in fire insurance on a building from two different carriers for $1 million each, and a fire destroyed the building, and you filed a claim with only one carrier, the carrier would pay the claim. But it would be entitled to go to the other carrier and collect $500,000, the other carrier's proportionate share of the claim.

Restrictions

The total amount insured should not exceed the amount of damage or loss incurred. This is because of the insurance principle of indemnity: No one should profit from an insurance claim after damages are taken into account.

Applicability

The doctrine applies primarily to property and casualty insurance claims, such as fire and marine claims. It does not ordinarily apply to life insurance: When more than one company covers a life, they underwrite that risk independently. However, the applicant must typically disclose how much other coverage is in force or applied for.