What will an insurer pay when a vehicle with motor comprehensive insurance right-side driving mirror gets damaged by another vehicle and we are not able to obtain one side mirror but to purchase the pair? Will the insurer pay for the cost of the pair or just the right side mirror that got damaged?
Some insurance contracts are valued policies. One example would be insuring fine arts, paintings or sculpture. The insured might specify the amount for a painting or sculpture which could be different from the market value. The actual market value of the painting or sculpture may be more or less but the policy will pay the agreed value. Under most valued or agreed policies, the insurer and the insured agree on a limit that approximates the current market value or the future value of the insured property.
Other policies are benefit policies and these include most life assurance policies and personal accident policy. The principle of indemnity does not apply to valued and benefits policies. Aside, most insurance contracts are base on the principle of indemnity.
Indemnity in insurance contracts may be looked at as the exact financial compensation sufficient to place the insured in the same financial position after a loss as he enjoyed immediately before it occurred. This was defined in the case of Castellain v. Preston (1883). They emphasize the importance of the indemnity principle. A contract of indemnity does not necessarily fully indemnify insureds. However, the amount the insurer pays is directly related to the amount of the insured’s loss. Most policies contain a policy limit that specifies the maximum amount the insurer will pay for a single claim. Many policies also contain limitations and other provisions that could reduce the amount of recovery.
The purpose of insurance is to indemnify insureds that suffer a loss. To indemnify is to restore a party that has had a loss to the same financial position it held before the loss occurred. The Principle of Indemnity states that no party to the insurance contract should benefit from a loss. The objective of insurance is to put the insured into the same position he enjoyed before a loss occurred.
Property insurance generally pays the amount of money necessary to repair covered property that has been damaged or to replace it with similar property. The policy specifies the method for determining the amount of the loss. In motor insurance, the method could include replacement of part(s) or the whole vehicle, payment of repair cost, repair or payment of the cost of vehicle. There is a popular clause in most motor insurance policy and this is, “we will pay the sum insured or the market value whichever is less”. For example, most motor policies, both personal and commercial, specify that vehicles are to be valued at their cash value at the time they are taking the policy. If a covered accident occurs that causes a covered vehicle to be a total loss, the insurer will normally pay the actual cash value of the vehicle, less any applicable deductible. This means that, if you insured your vehicle for an amount of GHS50,000.00 and at the time of loss the market value is GHS40,000.00, the insurer would pay GHS40,000.00 but not the amount insured. On the other hand, the insurer can decide to replace you with the same type of vehicle but not a new one. Insurers could also apply depreciation or delete anything that makes you better than before.
Liability insurance generally pays to a third-party claimant, on behalf of the insured, any amounts (up to the policy limit) that the insured becomes legally obligated to pay as damages because of a covered liability claim, as well as the legal costs associated with that claim. For example, if an insured with a liability limit of GHS300,000 is ordered by a court to pay GHS100,000 for bodily injury incurred by the claimant in a covered accident, the insurer will pay GHS100,000 to the claimant and will also pay the cost to defend the insured in court.
Insurance policies generally include certain requirements that reinforce the principle of indemnity. Policies usually contain another insurance principle to prevent an insured from receiving full payment from two different insurance policies for the same claim. Insurance contracts usually protect the insurer’s subrogation rights. Other insurance provisions and subrogation provisions clarify that the insured cannot collect more than the amount of the loss. For example, following a motor accident in which the insurer compensates its insured when the other driver is at fault, the subrogation provision demands that the insured’s right to recover damages from the blamable party is transferred (subrogated) to the insurer. The insured cannot receive from both the insurer and the liable party.
An additional element enforcing the principle of indemnity is that a person ordinarily cannot buy insurance unless that person is in a position to suffer a financial loss. In other words, the insured must have an insurable interest in the subject of the insurance. For example, property insurance contracts cover losses only to the degree of the insured’s financial loss in the property. This constraint prevents an insured from collecting more from the insurance than the amount of the loss he or she suffered. We will discuss in detail the principle of insurable interest in our next write-up.
A contract has been defined as a legally enforceable agreement. We have explained in our earlier write-ups the elements that make a contract be legally enforceable agreement. These we said include agreement (offer and acceptance), capacity (the competence of all parties), mutual assent, consideration, legal purpose, and the form required by law.
Insurance contracts should have all the necessary elements of a legally enforceable contract, so they are similar to other contracts in many ways. Nonetheless, insurance contracts have distinctive features and their own body of law. In addition to having the necessary elements of all contracts, valid insurance contracts have certain special characteristics. We have discussed three of the elements which include adhesion, utmost good faith and conditional contract. Today we discussed insurance as a contract of indemnity.
The writer is a Chartered Insurer and an Associate of the Chartered Insurance Institute of United Kingdom and also Ghana (ACII-UK, ACIIG),
+233 (0) 549705031 [email protected]
Navigating the Legal Landscape of Insurance, American Institute for Chartered Property and Casualty Underwriters. Edited by Martin J. Frappolli