Knowing the Term Indemnity in Insurance

The basic function of insurance is to compensate for financial losses arising from the occurrence of insured risks.  For example, in health insurance.  When the insured is sick and undergoes outpatient or hospitalization, the costs incurred for treatment or treatment will be reimbursed or covered by the insurance company.  In the process of reimbursement of  the costs, namely to determine the costs borne or replaced, usually deploys the principle of indemnity.

What exactly is the term indemnity?  The word indemnity is defined as "protection or security againts damage or loss againts legal responsibility".  From this terminology, the idea that can be abstracted from indemnity is protection and security (protection and security).  Based on this idea, indemnity can be interpreted as a mechanism by which the insurer provides financial reimbursement in order to place or return the insured to the same financial position after a loss.  A simple example is that A has a car with good condition without damage  to the body.  Then, A insures his car for the risk of damage from collisions.  In the coverage period, car A suffered a collision that resulted in a dented front bumper and a broken lamp. For the damage, the insurance will reimburse the cost of repairs until the condition of car A returns to the previous state as before the collision.

The view that indemnity is a form of compensation is exactly also conveyed by Hakmi Bett.  In the dictionary "Castellain v. Prestion (1883)" in England, Hakmi Bett explained that the insurance contract contained in a fire policy or marine policy is an indemnity contract or only indemnity. In relation to the insurance contract as an indemnity contract, Bett implicitly states that the indemnity that the insured is entitled to receive should not be less, nor higher than a full indemnity.

 However, the definition of indemnity is not static and absolute. In the practice of insurance, indemnity is also developed and modified to suit contemporary needs.  The existence of this modification allows the form or amount of compensation can be lower/ smaller than full indemnity.  On the other hand, the form or amount of compensation can also be higher than full indemnity.

 In this modification of indemnity, we must consider the principle of insurable interest (interests that can be accounted for).  The reason is basically the financial interest of the insured is attached to the object of coverage that is actually insured.  So if a claim occurs, the payment made by the insurance company to the insured must not exceed the amount of the insured's financial interest.

In Indonesia, not all insurance contracts can apply the principle of indemnity.  In the Commercial Law Article 246 and Law No. 2 of 1992 Article 1 it is stated that contacts with insurance except life insurance contracts are contracts for indemnity.  The reason is because the soul and limbs of a person cannot be measured by money. So, what is the insurance closure?  In covering insurance for one's life and risk of personal accident, the insurer must be careful regarding the determination of the insured amount or the price of coverage.  For life insurance, the amount of coverage for a person's life is limited according to the insured's ability to pay premiums. As for personal accident insurance, the amount of coverage must be adjusted to the normal income of the person concerned.

INDEMNITY METHOD

When a valid claim arises relating to the loss or damage of the object of coverage, the insurance company or insurer may use at least 4 (four) methods of indemnity:

a. Cash Payment

Cash payment (cash payment) is the most frequent method and generally used by insurers because basically an insurance contract is a contract to pay with money.  The payment method is by cash, checks, and billet, and usually applies for fire, marine, and life insurance.

b. Repair

Based on this method, repair work is carried out by workshops or workshops that have been appointed/authorized by the insurer. This method is widely used by insurers for motor vehicle insurance claims.  Usually the insurer provides workshop facilities for vehicle repair.

c. Replacement

Based on this method, the insurer replaces the insured goods that have become total loss with other item(s) of the same type; usually for eyeglass insurance, jewelry, and new cars.

If the policy does not specifically give the right to the insurer to be able to choose a replacement method, then the use of this method by the insurer can only be done after obtaining approval from the insured party.  For example, an airplane policy gives the insurer the right to choose (option).

d. Reinstatement

The insurer recovers the insured property in the condition shortly before the loss.  If there is a total loss, indemnity is done by rebuilding while if there is a partial loss, repair is done.

MEASURE OF INDEMNITY

The size of the indemnity or measure of indemnity depends much on the nature of the type of insurance product.   In general insurance applies the unliquidated damages, i.e. the size of the claim to be claimed is not known in advance.  Meanwhile, for life insurance, liquidated damages apply, namely the amount of money that will be given is already defined previously.  As for the determination of the amount of compensation for 4 (four) types of insurance products, namely property insurance, machines (machineries), stock in trade at factories, and marine insurance is as follows:

a. Property Insurance

To measure the indemnity of   property insurance is a component of construction (buildings), the cost of repair or the cost of rebuilding (the cost of reconstruction), reduced by wear and tear element, due to the age factor of that building or parts of that building.  Another element that becomes a reduction is betterment/repair/progress on certain parts of the building. Take for example, initially one building is equipped with 5 (five) pieces of air conditioning (AC) with the capacity of 1 Paard Kracht (PK) of each, and when the building is destroyed and rebuilt, the damaged 5 (five) old ACs are to be replaced with 5 (five) new ACs, with a higher PK of each.

Measuring indemnity for property insurance is not only from the cost but also from the price at the time of loss and the premise. If the price rises during the period of coverage, then the indemnity reimbursement also rises with the maximum condition or maximum amount of coverage.

b. Machines (machineries)

For machines (machineries) that experience loss or damage, the amount of indemnity is the cost of repair or the cost of replacement (the price of the new engine), reduced by the element of wear and tear due to the age factor of the machine that suffered damage or loss. If a second-hand machine such as the one that suffered a loss or damage is available or it can be purchased in the market, the amount of indemnity is the price of the second hand machine  sold in the market plus the cost of carriage and installation costs.

c. Stock in Trade at Factories

Stock in trade at factories can include raw materials, semi-finished goods (work in progress), and finished goods (finished stock).  The value of indemnity in the stock in trade at the plant is not about what is damaged or the stock destroyed, but on   the cost of replacing the stock to the scene with conditions such as shortly before the loss occurred.

For other stocks (work in progress and finished stock), the amount of indemnity in the event of loss or damage to the stock is the price/cost of raw materials and the cost of labor and other costs needed to produce finished goods or stocks, with the prices that apply on the day of the loss, until it becomes a half-finished or finished goods.

d. Marine Insurance

  Marine hull insurance (insurance on ships) and marine cargo insurance (insurance for goods transported by ship) are usually closed under a "valued policy" which is a policy that lists the "agreed value" of the ship or goods insured from the closure of insurance on goods transported by ship.  The insured in certain things is allowed to add a certain amount, as profit, to the value of the insured goods, in this case then the agreed value of the goods is included in profit.

In terms of total loss of ships or goods, usually the indemnity is the agreed value of the ship or goods.

MODIFICATION OF INDEMNITY

Modification of indemnity is usually done in 2 (two) forms.

Firstly, to limit the payment of indemnity the insurers impose on policies related to the following provisions:

a. The Sum Insured

The sum insured listed in the policy is the maximum amount that can be obtained by the insured on the policy in question, in addition to being the basis for the calculation of premiums.

b. Average

The provisions or clauses of average in the policy are related to losses or damages greater/higher than the sum insured listed in the policy (or referred to as under insurance). In such cases the insured is only entitled to receive indemnity according to the following formula:

Sum insured x Loss

       Value at risk

c. Excess or Deductible

Excess or deductible is an amount portion of the amount of a claim that has been approved by the insured to be borne by the insured in each event/accident (any one accident) or in each claim (each and every claim).  So for example, in the event of the value of losses borne by insurance is IDR 100 million while the total loss experienced is IDR 120 million, so the excess paid by the insured is IDR 20 million.

d. Limits

Often policies set limits on payment of indemnity in the event of loss or damage to certain items that are part of all insured goods or property.

Secondly, modification of indemnity that can increase the indemnity payments can be done based on the following things:

1. Reinstatement

On the basis of an agreement between the insured and the insurer, a building can be closed for the amount of reinstatement costs. On the reinstatement policy, the insurer stated that it agreed to pay the entire cost of recovery back, at the time the recovery is made. With the approval of such an insurer, the indemnity payment to the insured will include the entire cost of the restoration of the building (the full cost of the reinstatement), without being cut off the wear and tear element, or the payment of indemnity will be a payment on the basis of indemnity plus the element of wear and tear.

2. New for Old

The contents of a residential house that is insured under a household insurance policy are usually closed with new for old conditions, which is the same as the reinstatement conditions for the building as stated above. Under such policy, the insurer is declared to agree to pay the entire cost of recovery (the full cost of the reinstatement) of the contents of the house if the contents of the house are destroyed in the coverage period, without cutting the wear and tear element eventhough at the time the recovery process the age of the property has reached several years. With such method, indemnity payments will include payments on the basis of indemnity plus wear and tear element.

3. Valued Policies

As explained above, these valued policies are usually applied to the cover of marine insurance on ships and cargo.  In this type of policy is listed agreed value of the ship or cargo insured. The value of the ship or goods/cargo is based on an agreement between the insurer and the insured (agreed value).  Even if there is a loss on the object of coverage, the value may be viewed higher than the actual value, it will not be questioned because there has been an overvaluation carried out by the insured deliberately to take advantage of the insurance.

By using a valued policy then in the case of ships or cargo under such insurance cover that becomes total loss due to a guaranteed peril/risk, the insured is entitled to an indemnity of the agreed value listed in the policy. This means that when the object of coverage is experiencing a total loss and the value of the object is coincidentally lower than the agreed value listed in the policy, the insured receives an indemnity payment greater than the actual one.