The Principle of Indemnity means insurance should put you back in the same financial position you were in before a loss, without giving you a profit. It ensures payouts only cover the real cost of damage or loss.
Why the Principle of Indemnity Matters?
- Helps keep insurance fair for both customers and insurers.
- Prevents claims from becoming a way to make money.
- Encourages accurate asset valuations at policy setup.
- Reduces disputes during claims because the calculation method is clear.
What the Principle of Indemnity Includes?
- Valuing the asset at the start of the policy, such as replacement value for buildings or market value for cars.
- Assessing actual loss after an insured event like a fire, storm or vehicle collision.
- Adjusting for depreciation so older items are not treated as brand new.
- Paying only the proven loss, even if the policy limit is higher.
Examples of the Principle of Indemnity
- Your work ute is stolen. It is five years old, so the insurer pays its current market value, not the price of a new ute.
- A retail shop suffers water damage. Repairs cost $18,000, so the insurer pays this amount even if the policy covers up to $50,000.
- A small business office has a break-in. Old laptops are replaced based on depreciated value unless the policy offers a specific replacement cover.
Common Mistakes About the Principle of Indemnity
- Overvaluing assets and assuming that means a larger payout. It does not.
- Expecting new-for-old when the policy does not provide it.
- Thinking the policy limit guarantees that full payout. Only the real loss is covered.
- Assuming all insurance uses indemnity. Some covers, like life insurance, do not follow this principle.
When to speak to a broker
Talk to a broker if you are unsure how your assets should be valued, or if you want help choosing a policy that aligns with how you expect claims to be settled.
Need help?
If you want help reviewing your coverage or understanding how indemnity applies to your policy, Tank Insurance brokers can guide you through it.
