There is a common reasoning behind every kind of insurance we buy. We all expect a loss to occur. But there are some people who assume that they can make some profit from loss. Unfortunately, they cannot be more wrong in their assumptions.

Insurance is based on the principle of indemnity. This principle states that any insured person may not profit his loss. We are able to submit a claim to the insurance company when we have experienced a loss. The insurance company will compensate us only to the scope of the loss. Now how does this apply in reality?

Example 1

A curious incident happened with my neighbour Mr Raj. He was driving in heavy traffic coming back from work, when all of a sudden, the car in front of him brakes for a lady running across the road. Unfortunately Mr Raj was too close to the car and hits the car's rear badly. Now Mr Raj naturally has third party insurance and agreed to the blame for the car's damage. But when his insurance company got the claim from the hit car, it showed re-work jobs even to the front of the car. Apparently the driver thought he could use the incident to get his whole car in shape. This is where the law of indemnity comes to force. The insurance company only reimbursed him for the repairs done on his car's rear. Basically they compensated him for only the actual loss his car suffered from the accident.

Example 2

Another similar accident occurred with one of my friends. Her story was even more bizarre. Her car hit the car in front and caused a dent in the bumper. However she agreed to pay for the repairs with her third party insurance. Now this driver had his own insurance as well and decided to claim from this accident. He put a claim in his own insurance company for his loss. Now he assumed that he would get paid twice and pocket a profit from the accident. Unfortunately insurance companies talk to each other. His company contacted my friend's insurance company to seek payment for damages when their client was negligent. So the driver was not paid twice. You cannot claim insurance and seek third party insurance for the same loss. You can file for either one. Here again the principle of indemnity is being used. Insurance companies compensate you only for the loss and their aim is to bring you back to the state before the loss.

Conclusion

It does not matter how much insurance coverage you have. The amount you can claim is limited to the actual value of the loss. The exception is life, because we cannot define a value on life. In all other scenarios, insurance is arranged to return us to the financial position we were at before the loss occurred. The claim pay-out will only compensate for the loss amount.

Written By: Deepak Yohannan

The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal

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