Definition
Indemnity means an exact financial compensation for an insured loss, no
more no less.
Implications
Indemnity cannot apply to all types of insurance. Some types of insurance
deal with ‘losses’ that cannot be measured precisely in financial terms.
Specifically, we refer to Life Insurance and Personal Accident Insurance. Both
are dealing with death of or injury to human beings, and there is no way that the
loss of a finger, say for instance, can be measured precisely in money terms.
Thus, indemnity cannot normally apply to these classes of business. (Note:
medical expenses insurance, which is often included in personal accident and
travel insurance policies, is indemnity insurance unless otherwise specified in the
policies.)
Other insurances are subject to the principle of indemnity.
Note: It is sometimes said that life and personal accident insurances involve
benefit policies rather than policies of indemnity. Since indemnity cannot
normally apply, the policy can only provide a benefit in the amount
specified in the policy for death or for the type of injury concerned.
Link with Insurable Interest
We studied insurable interest in 3.1. That represents the financial ‘interest’
in the subject matter, which is exactly what should be payable in a total loss
situation, if the policyholder is to be completely compensated. However, life and
personal accident insurances may generally be regarded as involving an unlimited
insurable interest, and therefore indemnity cannot apply to them.