Understanding Indemnity Insurance: Protecting What You Own
What you need to know about Indemnity Insurance.
INTRODUCTION
Insurance is a cornerstone of financial protection in modern society. At its core, it is a contractual arrangement where an individual or business transfers the financial risk of potential losses to an insurer (insurance company), in exchange for regular premium payments. This mechanism provides security and stability, ensuring that unexpected events do not result in overwhelming financial hardship.
Among the many forms of insurance available, Indemnity Insurance plays a particularly important role. Unlike life or health insurance, which cover personal wellbeing, indemnity insurance focuses on safeguarding property and assets. Its fundamental principle is straightforward: the insured should be restored to the financial position they were in prior to the loss, but never placed in a better one.
This blog explores the concept of indemnity insurance, its purpose, and the key principles, such as subrogation and salvaging that ensure fairness and balance within the insurance ecosystem.
One important type of coverage to understand is Indemnity Insurance. Let’s break it down.
What is Indemnity Insurance?
Indemnity Insurance, often called propery insurance, specifically covers property, as opposed to life or health insurance. In terms of basic principles of indemnity insurance, the insured is entitled to recover the actual commercial value of what he has lost throuhg the happening of the event insured against. The rationale behind indemnity insurance is that the insured is not permitted to profit from his or her own loss, as this would cause a moral hazard.
What is a Moral Hazard?
Moral hazard refers to the risks that someone or something becomes more inclined to take because they have reason to believe that an insurer will cover the costs of any damages. In other words, a policy holder under indemnity insurance would be less careful if he or she was guaranteed to make profit from their loss.
Two Important Aspects of Indemnity Insurance
Subrogation: Where the insured risk is brought about by the negligence of a third party, the insured has a choice between claiming compensation from the insurer or claiming damages in delict from the wrongdoer. The insured cannot profit from his or her loss - the law of insurance doesnot permit the insured to claim compensation from both the insurer and the third party.
Simply put, if the insured chooses to claim full compensation from the insurer, he or she cannot recover delictual damages from the wrongdoer. Interestingly, the doctrine of subrogation entitles the insurer to proceed against the wrongdoer to recover whatever amount was paid to the insured.
Salvaging: The doctrine of salvaging becomes relevant where the insured is indemnified in full for an object that is categorically damaged or destroyed. This may be the case in at least three circumstances:
Where the insured object is a total loss, meaning that it is destroyed or damaged beyond repair.
When the insured object is destroyed or damaged but there is still some value in it. In this case, the object is still considered to be a total loss in the case that the cost of repairing it is higher than its value when repaired; and
Where the insured object is lost and there is no hope of recovering it.
Salvaging is based on a rule of indemnity insurance that the insured should not recover more than his or her loss. Therefore, whatever little value remains in the insured object, when it is destroyed or damaged, it must be taken by the insurer, not the insured.
More on the Doctrine of Salvage
Article excerpt from Editor Sheila E. Salvatore's "Salavage: Dealing with Undamaged and Partially Damaged Property After a Loss".
The treatment of Salvage under property insurance policies follows these basic principles:
The owner of the property generally has the right to decide whether to retain the salvage itself but cannot require the insurer to take it. If the owner retains property with salvage value, the value will be debited from the insurer's loss payment.
If an insurer pays for a full loss to property, the insurer is entitled but not required to take possession of that property for salvage. However, the insurer cannot debit the loss payment for salvage and claim possession of the salvage.
As an example, suppose a clothier experiences a water loss to garments and cannot sell them afterward at their full value. In some cases the clothier would be able to retain the water-damaged garments and be compensated by the insurer for their loss in value plus extra expenses needed to dry them out and prepare them for sale at a market-down price.
Conversly, the clothier could choose to accept payment from the insurer for the full value of the garments. In almost all cases, the insurer would be entitled to take the garments and sell them to offset its loss payment. This is typically done by salvors who recover and/or restore property and then earn a commission on its sale.
In essence, salvage value amounts to the undamaged portion of a loss. These basic principles can be expressed as a simple equation.
Insurance recovery=property damage plus expenses to recover or restore property minus value of salvage.
CONCLUSION
Indemnity Insurance is a vital safeguard against the financial consequences of unexpected loss. By ensuring that policyholders are fairly compensated, without creating opportunities for profit, it strikes the necessary balance between protection and responsibility. Principles such as subrogation and salvaging further reinforce the integrity of this system, ensuring that both insurers and insured parties act within a framework of fairness.
At AAK Solutions, we specialise in providing clear, practical insurance advice tailored to your needs. Whether you are seeking to understand your coverage, evaluate policy options, or resolve a dispute, our team is here to guide you through every step.
We are also proud to partner with Mlambo and Associates, a leading South African law firm with extensive expertise in insurance law. Through this collaboration, we are able to offer our clients both advisory and legal support, ensuring that their rights and interests are fully protected.
REFERENCES
Cassandra Jones Havard "What does Moral Hazard mean?" <https://sc.edu/uofsc/posts/2023/03/conversation_moral_hazard.ph> University of South Carolina, March 2023
Editor Sheila E. Salvator and Author Joseph S. Harrington CPCU, ARP <https://www.adjustersinternational.com/pubs/adjusting-today/salvage-dealing-with-undamaged-and-partially-damaged-property-after-a-loss/2/index.html>
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About Author
Senior Compliance Officer at AAK Soutions. Graduated at the National University of Lesotho with a Bachelor's Degree in Law.