The Original Purpose of an Indemnity Insurance

Indemnity insurance gives you money to cover a loss you have sustained and can make a dramatic difference in the quality of your life. Insurance is a way to financially protect yourself from a personally catastrophic event. While insurers won't insure events which would be catastrophic to them, they will insure events which would cause significant financial hardship for you. Indemnity insurance is one way insurers protect you from serious financial losses.

Purpose

The original purpose of indemnity insurance was to cover specific kinds of loss and make you whole again once you suffered that loss. For example, if fire had burned down your home, indemnity insurance would pay for all of the costs to rebuild your home. The policy would pay for these costs, regardless of the dollar amount, up to a maximum dollar amount specified in the policy contract.

Benefit

The benefit of indemnity insurance was, and is, the fact that your losses don't limit your compensation within the context of the contract you've purchased. For example, if you suffer a loss of $4,000, your insurance policy pays $4,000 to cover this loss. If you suffer a loss of $10,000, however, your policy will also cover this amount. This ensures that you receive an amount of money necessary to make you whole. In other words, you are restored, financially, to the position you were in prior to experiencing the loss.

Disadvantage

Some indemnity policies specify a maximum coverage amount. While the coverage will cover your losses, regardless of the dollar amount involved, the coverage is contextual. It only pays for the loss specified in the contract and it only pays a benefit up to the maximum benefit specified in the policy. So, if a policy specifies a maximum coverage of $100,000, then you are limited to this dollar amount. If your loss is $4,000, it will still pay the $4,000. If the loss is $50,000, it will also pay this amount. However, anything over $100,000 is not covered. If you've failed to fully insure the value of whatever you're insuring, you won't get the compensation you might need or are expecting.

Contrast

Indemnity insurance differs from valued contracts. Valued insurance policies pay a specific sum, regardless of the loss incurred. An example of this is life insurance. Life insurance pays the sum of money specified by the insurance contract, rather than the cost for funeral or whatever the beneficiaries wish to spend the money on.

References

• "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004
• "Life Insurance"; Kenneth Black Jr. and Harold D. Skipper Jr.; 1994