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.