Insurance as an Investment Tool: The Role and Relevance Ofprinciple of Indemnity

Introduction

Investment is one of the benefits cited for insurance policies. However, the principle of indemnity (exemplified by contracts of indemnity) ensures that the insured does not benefit or make profit. If insurance is a risk transfer mechanism then the insured must only be restored to the state in which they were before the occurrence of the incidence. No more, no less. If the potential insured can afford the premium charged by different insurers this principle prevents such persons from gaining by claiming separate sum assureds from the insurers, if the amount will be over the event insured.

The question is that if insurance is viewed as a protective investment then it is only fair that such an investor is allowed to claim an amount commensurate with the premiums paid. Affordability of premium should be the limiting factor. This write seeks to question the relevance of the principle of indemnity (and its corollaries of contribution and subrogation) in relation to insurance

Insurance of Indemnity

A contract of insurance classified as a contract of indemnity is one in which "the assured, in case of a loss against which the policy has been insured, shall be paid the actual amount of loss not exceeding the amount of the policy". For example, in case of marine and fire insurances the insurer undertakes to indemnify the insured for loss or damage resulting from specified perils. In case of loss the insured can recover from the insurer the actual amount of loss, not exceeding the amount of policy. Periasamy (2005)

The Role of the Principle of Indemnity

"Indemnity, for the purposes of insurance contracts, may be looked on as the exact financial compensation sufficient to place the insured in the same financial position after a loss as he immediately enjoyed before it occurred". (MITC (2011))

Castellain v Preston (1883) emphasis the importance of indemnity:

'The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely that the contract of insurance contained in marine or fire policy a contract of indemnity and of indemnity only.......and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured of obtaining a full indemnity or which gives the assured more than full indemnity, that proposition must certainly be wrong.'

This ruling seemed to have 'blocked all access routes 'to making a case for an insured gaining higher than the financial reward (indemnity) for the loss. Therein lays the danger. Can we for sure encourage people to partake in the business of insurance if they are made to feel that they have nothing to gain monetary wise beside restoration to original loss? It is the position of this principle that regardless of the amount of premium paid and the number of insurance companies paid, if the "total sum insured exceeds the value of the subject matter" then a mechanism to ensure that the insured only gets up to the monetary value of the subject matter must be implemented.

Two important terms evoked (over insurance and double insurance) and two important corollaries (subrogation and contribution) to the principle of indemnity are discussed below. These support and ensure that indemnity is carried out.

Over Insurance

When the amount for which the subject matter is insured is more than its actual value it is called over insurance. It must be noted that the only criterion is the amount of insurance. It can even be with one insurer alone. Lord Mansfield stated thus (on over insurance):

"in the case of over insurance, the different sets of policies are considered as making but one insurance, and are good to the extent of the value of the effects put in risk; the assured can recover on the different policies, and recover from those he so sued, to the full extent of his loss, supposing it to be covered by the policy on which he effects sue, leaving the underwriters on the policy to recover a ratable sum by way of contribution from the underwriters of the other policy"

For example, where a merchant, the value of whose interest is $22,001, first effected a policy on his interest at Liverpool for $17,001, and then without fraud another policy on the same interest at London for $22,001, he is allowed to recover the whole amount in the London policy, and the London underwriters are allowed to recover a ratable amount by way of contribution from the Liverpool underwriters. Periasamy (2005)

Double Insurance

Double insurance implies "that the subject matter in question is insured with two or more insurers and the total sum insured exceeds the actual value of the subject matter." This means that the subject matter must be insured with different insurers. For example, if the building of A is worth $200,000 and A insures with Y for $140,000 and with X for $150,000 it is treated as double insurance because the value of all the policies exceed the actual value of the premises. 'A' cannot recover more than the amount of actual loss. If loss occurs, the insurer can claim in such order as he chooses (till his total loss is made up).

The common law position relating to double insurance has been codified by section 76 of the Insurance Contracts Act 1984 (Cth) (ICA), which states:

(1) When two or more insurers are liable under separate contracts of general insurance to the same insured in respect of the same loss, the insured is, subject to subsection (2), entitled immediately to recover from any one or more of those insurers such amount as will, or such amounts as will in the aggregate, indemnify the insured fully in respect of the loss.

(2) Nothing in subsection (1) entitles an insured:

(a) to recover from an insurer an amount that exceeds the sum insured under the contract between the insured and that insurer; or

(b) to recover an amount that exceeds, or amounts that in the aggregate exceed, the amount of the loss.

(3) Nothing in this section prejudices the rights of an insurer or insurers from whom the insured recovers an amount or amounts in accordance with this section to contribution from any other insurer liable in respect of the same loss.'

Contribution

The doctrine of contribution states that "in case of double insurance, all insurers must share the burden of payment in proportion to the amount assured by each. If an insurer