Indemnity
Overview
Insurance exists to put you back on your feet, not to make you rich. That single idea is the principle of indemnity, and it quietly governs almost every claim ever paid. It explains why a three year old laptop is not replaced with a brand new one, why a trader who insures a shop for less than it is worth recovers less than the fire destroyed, and why the insurer, not the insured, usually decides whether to repair or to pay cash.
In this lesson you will learn what indemnity really means, the four ways an insurer can deliver it, and the limits that decide how much money actually reaches the claimant: the sum insured, average, the excess and the franchise. You will work through the calculations examiners set every year, meet the two classes of insurance to which indemnity does not apply at all, and learn the traps that cost candidates easy marks.
Objectives
- Define indemnity and explain how it restores the insured to the former financial position
- Explain why indemnity prevents the insured from profiting from a loss
- Describe the methods of providing indemnity: cash payment, repair, replacement and reinstatement
- Explain the operation of average, excess, franchise and the sum insured as limits on indemnity
- Identify the contracts of insurance to which indemnity does not apply and explain why
Lesson Note
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Lesson Evaluation
Congratulations on completing the lesson on Indemnity. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- The principle of indemnity means that the insured is: A. Paid the original cost of the property B. Restored to the same financial position held immediately before the loss C. Paid the cost of replacing the property with a new one D. Paid the sum insured in every case Answer: B
- Which of the following is NOT a method of providing indemnity? A. Cash payment B. Repair C. Replacement D. Subrogation Answer: D
- Property worth 2,000,000 naira is insured for 1,500,000 naira under a policy subject to average. A fire causes a loss of 800,000 naira. How much will the insurer pay? A. 800,000 naira B. 600,000 naira C. 500,000 naira D. 1,500,000 naira Answer: B
- Which of the following is NOT a contract of indemnity? A. Fire insurance B. Motor own damage insurance C. Life assurance D. Marine cargo insurance Answer: C
- The first amount of every claim which the insured must bear is called the: A. Franchise B. Excess C. Salvage D. Premium Answer: B
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Recommended Books
Past Questions
Wondering what past questions for this topic looks like? Here are a number of questions about Indemnity from previous years
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