What is Indemnity?

I am a big fan of Outlook Money, b’coz they explain most of the things in simple terms. If you ever took an insurance you might have came across a word “indemnity”. Most of the us either ignore it or say “What the damn is Indemnity?” and chances are that even your insurance agent is not aware of the meaning.

Outlook Money, explains it in simple words, here is how :

• This applies to non-life insurance policies
• Say, you bought a car insurance. The car costs you Rs 5.5 Lakhs
• The insurance policy will say that it will cover loss due to damages or theft.
• Does that mean that you will get Rs 5.5 Lakhs if the car is stolen at some later date (say after 3 years)

If this would be true, every car owner would be buying a car and either making sure the car gets stolen :) or damage it themselves. Here comes indemnity rule to save the insurance company. What this concept says that

“Compensation paid by insurance company will never be greater than the value of the loss at that time”

Essentially it makes sure that whoever insured the car will never get monetary benefit out of it. Hence the  insurance company is only liable to pay for the value of the car at the time of loss (post depreciation and wear/tear). Interesting !!