What is Indemnity?

Insurance is defined as: the equitable exchange of risk from one party to another in return for an agreed fee. One of the mechanisms that enables the equitable exchange of risk is “Indemnity.”

Indemnity is a core concept to many types of insurance coverage and is defined as exact financial compensation of an insured loss. Under the concept of indemnity, the compensation provided to offset any financial loss must be the exact amount of the loss; no more, and no less.

However, while indemnity found on many types of insurance, it does not and cannot apply to all forms of insurance. This is due to the simple fact that some losses under some types of insurance cannot be measured in purely financial terms. Life insurance and Personal Accident insurance are perfect examples of this, as the death of a human being (or their injury) cannot be stated in precise monetary terms.

Within the concept of indemnity, the insurance policyholder will receive compensation for the exact amount of any financial loss they may experience (subject to policy terms and conditions).

How does Indemnity work?

Under policies which include indemnity the insurance company will normally state that a financial loss will be settled in one of four ways:

• Cash Payment: The insurer provides a cash payment to the policyholder for the full amount of the loss. This is the most common form of indemnification.
• Repair: The insurer pays a repairer to fix the loss. This is a common form of indemnification under Car insurance policies.
• Replacement: The insurer may replace the loss. This is common for losses on new items or possessions which have not depreciated in value to a significant extent. Replacement is encountered on Travel Insurance and Home Insurance policies in relation to physical possessions.
• Reinstatement: While this word may be similar in practice to Repair and Replacement, as an indemnification method it provides for the restoration of property to the condition it was in immediately prior to the loss.

While reinstatement is its own, legal form of covering indemnity under insurance in Hong Kong there will be overlap between Repair, Replacement, and Reinstatement. The terms and conditions of an individual policy will determine in which manner the indemnity is handled depending on the loss in question.

Modifications of Indemnity under Insurance

Although indemnity is defined as exact financial compensation for an insured loss many insurance policies will include terms and conditions that mean that an amount less than full indemnity is payable following a loss.

If any of these terms appear on your policy, then it is important to understand that you may not receive full indemnification for a loss you have experienced.

Average and Indemnity

Most non-marine insurance policies in Hong Kong are subject to the principle of “average.” Under this principle, the insurer expects any policyholder to insure their property up to its full value. If the property is not insured to its full value, and a loss occurs, then the claim payable will reduce in proportion to the under-insurance of the property.

If a Fire Insurance policy is covering a home worth $4 million, but the policyholder has only insured it for $1 million then, under the concept of average, the property was only 25% insured. Consequently only 25% of the loss is covered.

Under-insuring a property may achieve significant premium savings, but will expose you to significant stress and uncertainty in a loss situation. It is also important to note that under non-marine products “average” essentially means “partial loss.” With relation to marine insurance, “average” is far more complex and will not be discussed further here.

Excesses and Deductibles

A major modification to receiving full indemnity can be found with the existence of any deductibles or excesses on your policy. A deductible is the monetary amount that you will contribute towards any claim, with the insurance company covering the remaining balance.

A deductible is always deducted from a claim settlement and can be normally found on Health insurance and Motor insurance policies.

Using Motor Insurance as an example. If a car insurance policy has a $5,000 deductible, and the policyholder experiences a covered loss of $15,000 to their vehicle, then the insurer is responsible for $10,000 of the claim. For a claim under $5,000 in value, the insurer would have no liability and the policyholder would need to cover the loss out of pocket.

Policy Limits

Many insurance policies will include a maximum sum insured representing the insurers total liability towards any claim. Any loss over the maximum sum insured will not be covered under the policy, and will mean that the policyholder will not receive full indemnification.

Another common method for limiting liability under the policy is to determine Single Article Limits. This is normally encountered on a Home Contents policy. Because home contents insurance, by its definition, provides broad coverage to all “contents” in your home, there is a risk that you have a personal possession that is valued in excess of the sum insured for the policy. If that possession is not named as a specified item under the policy, then the insurer will cap the coverage for a loss at the single article limit, which could be far less than the value of the item in question.

Understanding Indemnity

Indemnity is a critical component of insurance as it impacts what you will receive following a loss. Under the concept of indemnity, a person should be able to recover what they have lost. In practicality, there are a number of mechanism and contractual conditions that may limit your full indemnification following an insured loss.

Many people and policyholders may be confused and even angry at this – the promise of insurance is that you will be compensated, exactly indemnified, for your loss. This is why it is critical that you examine and fully understand the terms and conditions of your policy before purchase. There are many factors which play a part in insurance claims handling, including things like depreciation and prior damage, which may not see you receive the full value of a loss.

While Hong Kong insurance can be confusing, the expert brokers at CCW Global are fully experienced and able to walk you through all the complexities of your coverage. So, whether you want more information about Indemnity and Insurance, or you simply want to receive a free, no-risk, no-obligation quote for a Hong Kong Insurance plan, Contact Us today and let us simplify your insurance.