PRINCIPLE NO. 3-INDEMNITY, WITH CONTRIBUTION AND SUBROGATION

The contract of insurance is one of indemnity, except in the case of life assurance and personal-accident insurance. In everyday use the word 'indemnity' means to restore someone to the position that he was in immediately before the event concerned took place. For instance, an employer undertakes to indemnify his employee if the employee is put to expense of any sort on behalf of the employer’s business. If I pay out fares, or postage for my employer he will refund the money to me.

The contract of insurance is the same, in that a person suffering a loss after insuring against it will be indemnified for the amount of the loss. He will be restored as near as possible to the condition that was in immediately before the loss occurred. Indemnity never restores us to a better position than we were in before, if it did people might fell tempted to make the loss occur. Therefore any depreciation in value suffered by the property since it was purchased new, must be take into account.

Example. A motor vehicle which originally cost RM60,000 is wrecked in an accident two years after purchase. From the current list published by the motor traders, the insurance company can see that the vehicle is now worth only RM48,000. This sum will therefore be complete compensation.