Exceptions To The Principle Of Indemnity:
In theory, any person can open any number of policies for any amount and at the time of claim all such policies must pay all the sum-insured under all such policies. Even though this is the position of law, insurers would always try to put a check on the possible moral hazard by restricting the sum-insured on the financial capability and standing of a man. That is to say, his continued premium payment capacity. It has to be clearly conceived here that such a check is purely an underwriting check so that the principle of indemnity is not completely shattered.
In fact, such a check is not a legal check. So, from the legal point of view such policies are indeed not contracts of indemnities and there is no reason why a man cannot legally get any number of policies for any amount. There are certain types of policies which are exceptions to the Principle Of Indemnity and which do create an impact on the principle of indemnity, ultimately.
Exceptions To The Principle Of Indemnity:
- Life insurance: Life insurance is not contracts of indemnities simply because life cannot be valued in terms of money. Legally, therefore, it has been kept outside the scope of the principle of indemnity.
- Personal accident insurance : Personal accident insurance is not contracts of indemnities because body parts or limbs cannot be valued in terms of money. Legally, therefore, it has been kept outside the scope of the principle of indemnity.
- Replacement cost coverage : It is also outside the scope of the principle of indemnity.
- Valued policies and First Loss Insurance
Valued policies are those policies where the value of the property is agreed beforehand and which is made the sum insured under the policy. The condition of such a policy is that if there is a total loss than the full sum insured is to be paid even though the actual value is less than the sum insured. Here, the insured makes a gain. If the actual value is more than the sum insured then the insured sustain losses.
Therefore, the principle of indemnity is not followed strictly as the usual appreciation and depreciation is not taken into account. But if there is a partial loss under a valued policy, it is settled on indemnity basis as is usually done under a normal policy on the ordinary market value basis. The value agreed upon previously may however play an important role in matters of determining liability easily and quickly. It is quite often argued, therefore, that valued policies are departures from the principle of indemnity.
The following points should be noted in this regard –
- Only in case of a total loss there is the possibility of making either over-payment or under-payment. From experience it can be said that the possibility of total loss is very rare as mostly we experience partial losses.
- In case of partial loss, which is more common, the loss is treated under normal indemnity basis.
- Undervalued policies, the value that is agreed upon at inception is not just an arbitrary value but a value having a very realistic bearing on the actual market value.
- Valued policies are not usually given to those parsons whose bona-fides are not in the knowledge of insurers. In other words, issuance of valued policies very restricted.
- Valued policies are usually issued on articles of fairly stable value.
- It may be said that under valued policy the measure of indemnity is decided at the inception as opposed to ordinary policies where the measure of indemnity is decided at the time of claim.
Valued policies actually considered as contracts of indemnity in law and considering the above points it can very well be said that valued policies are in fact modifications of the principle of indemnity and certainly not departures from the principle of indemnity.
