The objective of the principle is to place the insured, as far as possible, in the same financial position after a loss, as that occupied by him, immediately before the loss.
In simple words, the principle of indemnity means the insured is indemnified only to the extent of his loss, no profit or undue benefit is extended. The indemnity is subject to the sum insured and other terms of the policy. The sum insured can be fixed on the basis of Reinstatement Value or Market Value.
The term ‘Market value’ means, for insurance purposes, the present cost of construction of similar buildings, after deducting depreciation based on age, usage, maintenance etc.
Similarly for plant and machinery, market value is arrived at by deducting suitable depreciation for age, usage, wear and tear etc, from the current replacement costs. In all the cases, depreciation refers to the actual intrinsic physical depreciation and not those used for accounting purposes.
Extracts from “Guide for Fire Consequential Loss Insurance (IC-57)” by Dr. Rakesh Agarwal. Copyright of Sashi Publications, Kolkata www.sashipublications.com and www.bimabazaar.com
