Indemnity 彌償

Definition 定義

Indemnity is exact financial compensation from the insurer that puts the insured back in the financial position they were in immediately before the loss.

The key idea is "no more and no less". After the claim is paid, the insured should be neither richer nor poorer than they were before the loss.

Implications 含義

Because the insured cannot profit from a loss, there is no incentive to cause one. The principle therefore helps to reduce moral hazard.

Property and liability insurance are contracts of indemnity, because the loss can be measured accurately in money. Life and personal accident insurance are generally not contracts of indemnity: a life or a limb cannot be valued in money, so the insurer pays a fixed benefit stated in the policy.

Subrogation and contribution are corollaries of indemnity (covered in their own sections). They stop the insured from being paid more than once for the same loss.

Link with Insurable Interest 與可保權益的關聯

The indemnity an insured can receive is limited to the value of their insurable interest. Without an insurable interest the insured suffers no financial loss, so there is nothing to indemnify.

For example, a mortgagee bank can recover only the outstanding loan, not the full value of the property, and a part-owner can normally claim only for their own share.

How Indemnity Is Provided 如何提供彌償

The insurer can normally choose between four methods: (1) cash payment, the most common; (2) repair of the damaged item, for example a motor insurer arranging repairs at a garage; (3) replacement with a similar item, where the insurer can often obtain a trade discount; and (4) reinstatement, which means restoring the property, usually a building, to its condition before the loss.

The choice normally belongs to the insurer. Once the insurer elects to reinstate, it must complete the work, even if the cost turns out higher than expected.

Measurement: a property loss is usually based on market value at the time of loss, or on the cost of repair or replacement less a deduction for wear and tear. In liability insurance it is the damages the insured is legally liable to pay plus related legal costs, up to the policy's limit of indemnity.

Salvage 損餘

Salvage is whatever is left of damaged property that still has some value, such as the wreck of a car that is a total loss or stock that can still be sold after a fire.

Once the insurer has paid for a total loss, the salvage belongs to the insurer, which can sell it to reduce the net cost of the claim. If the insured received full payment and also kept the salvage, they would receive more than an indemnity.

Alternatively, the insured can keep the salvage and the insurer deducts its value from the claim payment.

Abandonment 委付

Abandonment is the insured giving up all rights in the damaged property to the insurer in return for payment as a total loss.

Abandonment matters most in marine insurance. Where there is a constructive total loss (for example, where saving or repairing the property would cost more than it is worth), the insured can give the insurer notice of abandonment and claim for a total loss. The rules are in the Marine Insurance Ordinance (Cap. 329).

In non-marine insurance, such as fire insurance, the insurer does not have to accept abandonment. Fire policies usually state that the insured may not abandon damaged property to the insurer, and the insurer decides for itself whether to take the salvage.

Policy Provisions Preventing Indemnity 限制彌償的保單條文

Sum insured or limit of liability: the insurer will not pay more than the sum insured or limit in the policy, even if the actual loss is larger. Some policies also set a separate limit for any single article.

Average: if the sum insured is less than the actual value of the property (under-insurance), the claim is reduced proportionately. The formula is: claim payment = loss × sum insured ÷ value of the property at risk.

Excess or deductible: the insured bears the first part of every claim. A franchise works differently: a loss below the franchise is not paid at all, but once the loss exceeds it, the whole loss is paid.

Policy Provisions Providing More Than Indemnity 提供超額彌償的保單條文

Reinstatement basis (new for old): the insurer pays for, or rebuilds with, new items without deducting wear and tear. This is common in home contents and buildings insurance. Because the insured ends up with newer property than before, this goes beyond a strict indemnity.

Agreed value policy: the insurer and insured agree the value of the subject matter when the cover starts, and a total loss is paid at that agreed value whatever the market value at the time of loss. It is common for items that are hard to value, such as antiques, works of art and ships.

Life and personal accident policies pay fixed benefits unrelated to the actual financial loss, so the principle of indemnity does not apply to them.

The Practical Problems with Indemnity 實際執行彌償時所面對的難題

Valuation is difficult: unique items such as antiques or jewellery have no clear market price, second-hand items may have no market at all, and sentimental value is not paid for.

After a deduction for wear and tear, the payment is often not enough to buy a new replacement, so the insured feels unfairly treated. This is why new-for-old cover is offered.

Inflation and rising asset values mean the sum insured can fall behind actual value, causing under-insurance and the application of average. Assessing the loss also takes time and money, and a loss adjuster often has to be appointed.