What is Principle of Indemnity?

The principle of indemnity governs that an insurance contract compensates you for any damage, loss or injury caused only to the extent of the loss incurred. Insurance contract ensures that the insurer does not make a profit in the event of an incurred loss.

Principle of Indemnity Example

Jethalal is a businessman having an Electronics shop. He has insured his goods worth Rs 10 lakhs. Part of the goods got damaged when a fire broke in the warehouse. Jetha claimed a full 10 lakhs as compensation. Upon examination, it was found that only goods worth Rs 2 lakh were damaged. Now, only Rs 2 lakh will be provided to him.

So, if you have a car which you purchased 5 years ago, and it got involved in an accident. Then the insurer while calculating the loss, will take the depreciated value of the car and not the value which it was first purchased at.

Functions of Principle of Indemnity

a) The objective of the insurer is to put you back in the same financial condition which you were in before the loss.
b) You are compensated after the insurer fully inspects and calculated the loss. The claim you receive is neither less nor more than the loss.
c) This principle is followed to ensure that you do not get profited through insurance claim.