Surinder Chauhan had purchased a bus for ₹40,00,000 to be used as a private service vehicle. It was insured under a comprehensive insurance policy issued by an insurance company. The bus met with an accident and the company assessed the loss at ₹1,00,500 which was paid to Surinder Chauhan. Identify and explain the principle of insurance which is applicable in the above case. Also highlight the applicability of this principle in various forms of insurance.
Answers
Principle of indemnity
Explanation:
The Principle of indemnity states the characteristics of Insurance, providing the statement that a loss on payment will replace what is lost or diminished, putting the insured goods back to where it is financially prone to the loss without rewarding or penalizing the insured for his/her loss.
1. Indemnity states a guarantee or assurance to put the insured in the same position in which he was immediately prone to the happening of the uncertain event.
2. The insurer undertakes several things to make payment of the actual loss incurred by the insured.
3. Insurance contract is signed only for getting insurance against unpredicted financial losses arising from future uncertainties. Compensation is paid in proportion to the losses incurred.
4. All the above quality of indemnity is not applicable to Life insurance as human life cannot be valued in qualitative terms for calculating the actual loss.
5. Therefore, the principle of indemnity is also applicable to life insurance.