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Illustrate the difference between the insurance principles 'Insurable Interest' and 'Indemnity' - Leaving Cert Business - Question 7 - 2010
Question 7
Illustrate the difference between the insurance principles 'Insurable Interest' and 'Indemnity'. (a) Insurable interest is: (b) Indemnity is:
Worked Solution & Example Answer:Illustrate the difference between the insurance principles 'Insurable Interest' and 'Indemnity' - Leaving Cert Business - Question 7 - 2010
Step 1
Insurable interest is:
Answer
Insurable interest refers to the principle that the policyholder must benefit from the continued existence of the object being insured and suffer from its loss. This interest is often quantifiable in monetary terms.
For example, every individual has an insurable interest in their personal possessions, such as their house. However, it is important to note that your next-door neighbor would not have an insurable interest in your house, as they do not stand to gain or lose financially from it.
Step 2
Indemnity is:
Answer
Indemnity is the principle whereby an insurer compensates the insured for a loss, ensuring that the insured is restored to the same financial position as they were before the loss occurred, without allowing for profit.
For instance, consider a scenario where a 3-year-old child is insured for €15,000, but the market value of the insured item is €100,000. If an accident occurs, the insurance company will write off the loss at €100,000. The maximum compensation for the loss suffered would accordingly be capped at €100,000, reflecting the value of the loss rather than the sum insured.