Insurance policies, except for life and personal accidents, are subject to the principle of indemnity. Marine insurance policies are also contracts of indemnity. The principle of signing the contract in utmost good faith is important in marine insurance.
Why do only narrow definitions of indemnity apply to Insurance?
However, as per the standard definition of the Indian Contract Act, 1872, only a narrow interpretation of indemnity applies to insurance. As per the law, any indemnity document covers risk or loss arising due to human conduct, self or third party. If we go by this general definition, then any loss to the insured defined due to natural reason like fire, may not qualify as a contract of indemnity.
Why is Marine Insurance a contract of indemnity?
Going by its definition, a marine insurance policy aims to reduce the financial loss occurring to an insured’s property during maritime transport. It covers any loss or damage suffered by the insured cargo due to accidents and mishaps that might happen. The insurer is legally committed to provide financial indemnity arising out of accidents as well.
The insurer is liable to pay to the value of loss agreed upon; only when it is proven that the proximate cause of the peril is insured. Therefore, the principal of indemnity does apply to marine insurance.
In simple words, a marine insurance contract can be defined as a legal agreement in which the insurer gives a formal undertaking to indemnify the insured against the loss agreed upon. The insurer will indemnify the insured to the extent specified in the insurance contract.
The extent of indemnity or insurance coverage is subject to the following conditions.
- The onus of proving the event lies on the insured
- The financial indemnity is subject to the extent to be borne by the insurer and the market value of the property
- Financial indemnity is provided only for insured proximate causes
The Measure of Indemnity
Measure of indemnity can be defined as follows:
- Cost of repair vs. Sum Insured: Cost of repair of the insured ship or cargo is payable only up to the sum insured. After applying natural deductibles; i.e. compulsory deductible, depreciation, etc.
- Indemnity is based on the percentage of loss; i.e. if loss is 100% indemnity is also 100%, but when the loss is 40% indemnity also reduces to 40% of sum insured (or insured value).
Basis of Indemnity
Basis of indemnity is defined by adhering to the Principle of Indemnity by the insurer, and it can be any of the following:
- Repair cost along with related expenses on dismantling, transportation and reestablishing the damaged equipment.
- If the repair/recovery cost is more than the cost of equipment/cargo the insurer pays the cost of replacement (up to the sum insured).
- In case the cargo or object of insurance is destroyed the insurer will bear the cost of replacing the object with another similar model, design, and capacity, subject to the sum insured.
- In case of ships and used goods, reasonable depreciation is applied based on their functional life.
Case on Indemnity in Marine Policy
Emmerson Lines faced a beaching of one of its vessels carrying goods belonging to five different exporters. The containers on the ship belong to the shipping company and not to the exporters, who are only responsible for packing their shipment in the manner they deem fit for long voyages.
The loss for Emmerson is estimated to be USD 400,000, and the exporters after salvage stand to lose about USD 20,000, USD 50,000, USD 700,000, USD 550,000, and USD 80,000.
The loss of containers is not added to the total loss of any party as they have been recovered, but the cargo inside such containers has been lost. The liability of the insurer to the exporters stands only up to the cost of lost goods plus 10 – 20% of the profit loss.
For Emmerson Lines, the loss payable by the hull insurer stands at the expense of recovery and repair of the ship which is USD 400,000.
The Repairable Damage
The exporter encountering a loss of USD 700,000 had been exporting 5 high capacity machines (each costing USD 200,000) for automobile manufacturing. Out of five:
- Two of the machines had been damaged beyond repair and had to be replaced (cost of replacement USD 400,000),
- Two other machines were damaged but could be repaired for USD 150,000 and USD 70,000
- Cost of recovering these machines was USD 50,000 and
- Transporting to the nearest harbor and storage cost was USD 30,000 for all repairable and recovered machines.