Is there any difference between insurance contracts and indemnity contracts?

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Is there any difference between insurance contracts and indemnity contracts?

Insurance is an exciting subject of debate in public circles. From one's own life to expensive property, everything is insurable. However, one might wonder why people do not buy policies for a dilapidated property? After all the chances of a worn-down building getting further damaged are high and this could result in huge profits for the assured party. The answer to this question lies in the principle of indemnity.

What is indemnity?

The contract of indemnity guides insurance companies to ensure that the assured party remains neutral after the damaged property is covered under the policy. The term neutral here means that the party should neither be left better nor worse than the damaged state. For example, if an insured vehicle can be brought back to the earlier state by a repair shop, then the insurance company is free to pay for only the repair work. In this way, the indemnity principle takes into account depreciation as well as the salvage charges. However, this principle cannot be implemented on a life insurance policy cover. 

Where does the contract of indemnity operate?

Other than the life insurance, the contract of indemnity works on almost every policy cover. Often, individuals claim for the full price of the insured property. Such an amount can be claimed only if the individual was paying an additional amount of premium for such a guarantee. However, such claims are restricted to newly purchased vehicles. Other non-life insurance covers for marine vehicles, medical costs, rent purposes are also made on a similar contract of indemnity. The indemnity principle ensures the payment of full repair cost when the assured product has partially defected. On the contrary, if the product is fully damaged, then the depreciation rate and salvage charges are to be deducted. This is done to ensure that the assured party does not benefit from the policy cover. 

Why is life insurance not a contract of indemnity?

Human life is not a material product on which a specific rate of depreciation can be charged. On the occurrence of an incident, life insurance allows a lump sum amount payable to the relative of the deceased person. Health insurance covers one-time diseases like cancer and also operates in a similar manner. 

However, the principle of indemnity operates partially on life insurance. For example, the life insurance cover is usually calculated as 20 times the yearly income of the assured person. This amount is perceived as sufficient enough to help the individual's family stay afloat. In this way, the family is neither left in a better situation nor in worse circumstances. The "20 times" amount can be understood as the future income which was supposed to be earned by the deceased person.  

Reasons to buy life insurance

Even with the partial operation of the principle of indemnity, life insurance is a necessity of modern times due to the following reasons,

  1. To ensure a steady income for your loved one's in case of your untimely demise
  2. To make sure of adequate resources for your children in your absence
  3. To ensure constant income during health issues like Cancer
  4. To provide for financial emergencies at the time of a health crisis


Life insurance can provide a lot of financial support to emotionally unstable family members in difficult times. It is crucial to find a reliable policy partner to sponsor a smooth recovery plan. 


By Author: Medicare | 11 Jan 2022
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