The principle  of indemnity requires that when a loss arises  under an insurance policy, the loss must be made good in such a manner that financially the insured is neither better off nor worse off as the result of the loss. The object of this principle is to place the insured after a loss in the same pecuniary position as far as possible as he occupied immediately before the loss.
The effect of this principle is to prevent the insured from making a profit out of a loss. Motor Insurance contracts are contracts of indemnity. The principle is applied to this insurance as under:
Total Loss – In total loss of the vehicle, insurers pay the market value of the vehicle at the time of loss or the sum insured whichever is less. For total loss, market value determined by an independent surveyor will be the basis.
For extensive damage which ultimately makes the repair uneconomical may be considered for total loss to be derived by the independent surveyor. In such cases, the insured, if wishes can retain the salvage and net amount can be disbursed towards total settlement.
Partial Loss – In partial loss to the vehicle, the cost of repairs is paid, but if old parts are replaced by new, a suitable depreciation is charged on the cost of new parts. However in case of motor cycles and private cars no such depreciation is applied. Insurers also reserve the option to repair or replace the vehicle or pay in cash.
Basis of Indemnity will be to the extent lost/suffered in terms of replacement value for the parts to be replaced in case of partial accidental damage with associated labour to be assessed by an Independent Surveyor keeping policy terms and conditions in view. The Insurance Act provides that the losses less than Rs. 20,000/- can be assessed by in-house surveyors.
Third Party Liability – Policy indemnifies the actual damages awarded subject to the limits of liability, if any, specified in the policy. Policy also indemnifies actual legal costs.
Motor insurance policies are indemnity policies. That’s just a technical way of saying that they just compensate the insured for an amount up to financial loss that he has suffered on the vehicle, and no more. IDV is the maximum amount that insured can claim under a motor insurance policy to compensate for any loss arising from theft or accident.
So, if the policyholder suffers total loss in an accident of his 3-year-old car that is worth Rs 4 lakhs at the time of the accident, under no circumstances will he be compensated for more than 4 lakhs.
Extracts from “  Guide for Motor insurance (IC-72)” by Dr. Rakesh Agarwal. Copyright of Sashi Publications, kolkata www.sashipublications.com and www.bimabazaar.com
