When this column started, I explained that insurance is built on six principles: indemnity, insurable interest, proximate cause, subrogation, contribution and utmost good faith. Last week, we treated subrogation, albeit not exhaustively, but as it relates to claims. Today, we are going to treat indemnity as exhaustively as our limited space will allow us.
Indemnity in insurance simply means that if an incident leading to a loss occurs, the amount the policy holder will be entitled to will be determined by his actual financial loss. For instance, if a policy holder’s vehicle is involved in an accident, and it will take 200,000 to put the vehicle in the state it was before the accident, his financial interest is N200,000 and that is all he is entitled as far as this incident is concerned, even if the sum insured of the vehicle is N5,000,000. He can only be placed in the exact financial position he was before the loss, no more, but it can be less due to some factors we shall come to presently.
It is against public policy to make profit on your insurance contract of indemnity. Remember insurance fund is a financial pool where all policy holders contribute by way of premium and from where those who suffer losses are compensated. When a policy holder who suffered a loss attempts to make a profit, it is against public because other policy holders who contributed to the pool will be done by. Moreover, it is illegal because before you can make profit, you have to engage in fraudulent acts like inflating cost of materials or repairs.
Except for life and personal accidents, virtually all other insurances are contracts of indemnity. Life and personal accident policies are not strictly contracts of indemnity because you cannot really put financial value on health, life or limb. In specific terms, how much does a human life cost? What the cost of that leg or arm that beautiful lady lost in an accident? It is impossible to cost them in naira and kobo; that is why they cannot be contracts of indemnity, strictly speaking.
Life and personal accident insurances are benefit policies and compensation is usually determined by the sum insured/assured at the occurrence of the event insured against. Mr. A takes a life policy with an assured sum of N200m; Mr. B also takes a life policy with an assured sum of N5m. Both of them die before the maturity of the policies. Mr. A’s widow, who is the next of kin, gets N200m compensation, while Mr. B’s widow, also the next of kin, gets N5m. So, it is a matter of sum assured determined by financial muscle, not the value of the lives assured.
We said earlier that there are certain factors that prevent policy holders from getting full indemnity. They are: one, excess. Excess is the proportion of each and every claim borne by the policy holder. Virtually all non life policies carry the excess clause. It is usually inserted as a deterrent to ensure that the policy holders treats the insured property as if it were not insured, knowing he will participate in the claims payment. It is usually expressed in percentage or figures and whichever is higher devolves to the policy holder in the event of a claim. However, in motor insurance, there is provision for excess buy back, where the policy holder can pay an extra amount, usually one per cent of the sum insured, and have the excess clause deleted from his policy. The implication is that in the event of a loss, he does not participate in the claims payment and gets full payment.
Two, sum insured. This is the value the policy holder insured the property for. It should normally represent the full value, replacement value or value at risk. If not, in the event of a total loss, the claim paid will not be able to replace the property thereby denying the policy holder full indemnity, which unfortunately is self-inflicted.
The third is average. If a policy holder insures the subject matter for less than the actual value, the insurance company penalises the policy holder for underinsurance in the event of a claim. For instance, if the sum insured is N10m and the value at risk is N15m and there is a claim of N3m, the insurance company will pay only N2m, while the policy holder bears N1m as a punishment for underinsurance.
It works this way: N10,000,000 X N3,000,000
The third way a policy holder can get less than indemnity is through deductible. Deductible is a large excess the policy holder voluntarily accepts, which makes him his own insurer for small claims he has determined that he can accommodate. In return, he gets either a lower premium rate or substantial discount on his premium. The implication is that if the deductible is N100, 000, for instance, he is solely responsible for any loss within the deductible. He can only have recourse to the insurance company when the loss is above the deductible.
Finally, we have franchise. Franchise is like excess. An amount is fixed and if the loss is within the amount, the policy holder bears it alone, but once the claim is above the franchise, the insurance company pays the full claim, unlike excess, where the policy holder still participates.
There are basically four methods insurance policies provide indemnity: cash, replacement, repair and reinstatement. In most cases, companies opt for cash payment which is more convenient. Companies only go for the other options if it will be more advantageous or where the policy holder insists on more cash, but the insurance company feels the offer is full indemnity and can place him in the financial position he was before the loss.
Francis Ewherido is the Managing Director of Titan Insurance Brokers and can be reached on +2348132433631 or firstname.lastname@example.org