Methods Of Providing Indemnity To Insurance Contract

First Loss Insurance is a type of policy where the sum-insured is deliberately restricted to a sum lesser than the actual value. The concept is this that total loss is rather impossible because of the nature of the subject-matter. For example, in burglary insurance, burglars may not be able to take away all the goods particularly if these are of heavy nature. However, in theory, it can never be guaranteed that there won’t be total loss ever.

In case of total loss, if at all, the insured is not fully indemnified as the sum-insured is lesser than the actual value at risk. Such types of policies are not much in use and considering that the probability of total loss is very remote, such policies in fact do not create any significant impact on the principle of indemnity, since partial losses are always paid in full subject to the limit of the sum insured.

Methods Of Providing Indemnity To Insurance Contract :

There are various ways through which indemnity may be provided. These are :

  1. Cash Payment: This is the usual way of making payment of a claim. This method is simpler, easier and less cumbersome.
  2. Repair: This is also another way of providing compensation. Rather than making cash payment, the insurers will get the loss repaired to pre-loss condition as far as practicable.
  3. Replacement: Usually in case of total loss the insurers may replace the subject-matter by another one of the same standard, age and quality.
  1. Reinstatement: The insurers may also reinstate the property by option. This is usually considered with regard to buildings damaged or destroyed by fire. Usually it is the option of the insurers to decide any one of the above four methods.

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