Unit Nine

1
Unit Nine

• Indemnity and Its Corollaries

2
Indemnity

• Whats indemnity?

Indemnity is one of the basic principles in
insurance law.
3

• Why we said that there is a link between
• indemnity and insurable interest?

As it is the insureds interest in the
subject-matter of insurance that is in fact
insured. In the event of any claim, the payment
made to an insured cannot therefore exceed the
extent of his interest and, there often are cases
where insured receive less than the value of
their interest.
4

• Whats does the principle of indemnity rely on?

As with insurable interest, the principle of
indemnity relies heavily on financial evaluation.
5

• When a valid claim arises, how many methods
  can the insurer employ to provide indemnity? And
  what are they?

There are at least four methods which insurers
can employ in providing indemnity. Cash Payment,
Repair, Replacement, Reinstatement
6

• As a method of providing indemnity, what
• does repair means?

Insurers make extensive use of repair as
a method of providing indemnity in motor
insurance, where garages are authorized to carry
out repair work on damaged vehicles.
7

• What does reinstatement refer to? And why an
• insurer now would never contemplate an election
• to reinstate a building?

As a method of providing indemnity, it
refers to property insurance and the case where
an insurer undertakes to restore or rebuild a
building damaged by fire.
8
Fire policies give the insurer the
option of substituting the contract to pay money
with one to provide a building. The insurers must
restore the property substantially to the same
condition as before the loss. If the property
falls short of the original in any material way,
the insurer will be liable in damages for breach
of the building contract.
9
Unless the policy so provides, the
insurers cannot limit their expenditure to the
sum insured, since they are bound by their
election to substantially reinstate, irrespective
of cost. For these reasons, it is almost certain
that an insurer would now never contemplate an
election to reinstate a building.
10
Subrogation

• What does subrogation mean?

Subrogation in insurance is the right of an
insurer, having indemnified a person, was
entitled to stand in the place of that other and
avail himself of all the rights and remedies of
that other, whether already enforced or not.
11

• What allows the insurers to recoup
• any profit the insured make from an
• insured event?

Subrogation allows the insurers to recoup any
profit the insured might make from an insured
event
12

• According to the common law, what obligations
• are placed upon the insured?

As the insurers cannot maintain an action
against the third party in their own right,
certain obligations are placed upon the insured
13

• Whats the useful side effect
• of subrogation?

If a man receives indemnity from his insurers
he may decide not to proceed against some other
person who may be liable, say in negligence, to
him.
14
Contribution

• Whats the definition of contribution?

Contribution is the right of an insurer to
call upon others similarly, but not necessarily
equally, liable to the same insured to share the
cost of an indemnity payment.
15

• Under what conditions can contribution be
• applied?

• Two or more policies of indemnity exist
• The policies cover a common interest1
• The policies cover a common peril which gave
  rise to the loss
• The policies cover a common subject-matter
• each policy must be liable for the loss.

16

• What does the Contribution Condition state
• in the most policies?

Policies do not have to cover the same
interest, or perils or subject-matter of
insurance, provided there is an overlap between
one policy and another.
17

• Whats the purpose of ratable proportion?

The insurer is liable for his share only,
and the insured is left to make a claim against
the other insurer(s) if he wishes to be
indemnified.
18

• How ratable proportion should be calculated?

Firstly, one could argue that each insurer should
pay in proportion to the sums insured or limits
of liability of the policies.
19
Policy A Sum insured ?1,000 Policy B Sum
insured ?2,000 Policy C Sum insured
?3,000 Therefore, A pays ?1,000 _________________
____ Loss ?1,000?2,000?3,000 and so on
for each insurer.
20
Alternatively, one could argue that each
policy should pay in proportion to its liability
for the loss, since account should be taken of
restrictive terms which might vary from policy to
policy. Thus, if As liability was ?500, Bs
?1,000 and Cs ?1,000 for a ?1,500 loss, after
the operation of average.
21
A would pay ?500 _________________ ?1,500
?300 ?500?1,000?1,000 similarly, B and C would
each pay ?600. This approach is called the
independent liability method.