The principle of indemnity – The backbone of claims adjusting

The principle of indemnity is a fundamental concept in property insurance that refers to the idea that an insured party should be made whole or restored to the same financial position they were in before a loss occurred. In other words, the purpose of indemnity is to compensate an insured party for actual financial losses sustained as a result of an insured event, rather than to provide a windfall or profit.

When a loss occurs and a claim is made, the insurance company will assess the damage and determine the cost of repair or replacement of the damaged property. The insurer will then pay the policyholder an amount equal to the cost of repair or replacement, up to the policy limits. The idea behind this is that the policyholder will be able to repair or replace the damaged property and be in the same financial position they were in before the loss occurred.

It’s worth noting that the principle of indemnity applies to both first-party insurance, which covers losses sustained by the policyholder, and third-party insurance, which covers losses sustained by a third party for which the policyholder is liable. The goal in both cases is to compensate the insured party for actual financial losses and not to provide any gain.

In practice, however, the principle of indemnity can be challenging to apply. The cost of repair or replacement may be difficult to determine, particularly in the case of older or unique properties. In addition, the principle of indemnity may not always be followed if the policyholder has underinsured their property or if the policy contains exclusions or limitations that affect the amount of coverage provided.

It is important to make sure you understand the principle of indemnity when purchasing a property insurance policy, and to make sure that the policy provides adequate coverage for your specific needs. It is also essential to review your policy annually, to keep up with any changes in your property’s value and make sure you are adequately insured.

In a nutshell, the insurance company and their policyholder enter into a contract of adhesion, commonly known as an insurance policy. In this contract/insurance policy the insurance company promises the policyholder that if he or she suffer a loss and the loss is found to have been a result of a covered peril, they will make the policyholder financially whole. Being made whole is a multifaceted and complex idea.
For example: Jane and Jack suffer water damage to their home. ACME Insurance determines that the cause of loss is a covered peril and sends out one of their preferred vendors, Insurance Friendly Construction, to Jack and Jill’s home to write an estimate of repair. When Jack and Jill receive a copy of the repair estimate that was written by ACME Insurance’s preferred vendor, Insurance Friendly Construction, they notice that Insurance Friendly Construction is re-installing damaged kitchen cabinets, doing a patch repair of their hardwood floors, and only painting part of the walls in rooms that were damaged. ACME Insurance states that they only owe to repair “Direct Physical Damage”. Jack and Jill are real estate agents and realize that if repairs are allowed to continue as directed by ACME Insurance and their vendor Insurance Friendly Construction, the following things will be true:

1. 1. The cabinets were bought brand new and installed at the time of purchase. They were not repaired prior to being installed. ACME Insurance now wants to install repaired cabinets. This is not what Jack and Jill had before they filed a claim for water damage.
   2. The flooring patch, will be noticeable despite sanding and finishing the entire floor. They had a floor with a uniform appearance before their loss. This will decrease the value of the home if they decide to sell it in the future.
   3. Painting only part of the walls will leave an uneven appearance in the rooms that were damaged by the water event. As with the hardwood flooring, this will lead to a decrease in the value of the home.

The inform ACME Insurance about this and explain to them that their home, which is their largest investment, will be of less value if repairs are performed in the manner that they are proposing. Acme Insurance says that there is no coverage to do it any other way. “We don’t owe for that”.

This is an all-too-common scenario. If you think the insurance company is cutting corners and devaluing your property in the course of doing so, give Property Claim Advocates a call. We are happy to discuss your claim with you and give you unbiased advice free from solicitation.

Written by Bernie Williams and distributed by the Property Claim Adjustment Team at Claim Adjusters Network, LLC dba: Property Claim Advocates Mr. Williams is a Founding Partner of Claim Adjusters Network and a C.A.N University Master Trained Public Adjuster course instructor. Mr. Williams has been involved in the insurance industry for more than 20 years.