What is Indemnity?
Continuing our series on insurance policies, we talked about a second factor called “indemnity”. But with regards to auto insurance, what is indemnity?
Indemnity is the principle that if you purchase car insurance and your vehicle is damaged or stolen, you will be put into the same financial position that you were in before the loss. You should not profit from your loss by receiving more than the actual amount of the loss and neither should you receive less than the actual amount of the loss. But how do insurance companies determine how much one’s loss is?
Insurance companies use what is called the “actual cash value” of the property at the time of the loss to determine how much to give to the insured. For example if you bought your car 10 years ago brand new, your insurer will not give you back what you paid 10 years ago for it, they will instead give you what the vehicle costs after depreciation taking into account the vehicle’s condition particularly the mileage. Auto insurance companies have been able to standardized how much they pay out based on the depreciation rates listed in Kelly’s Blue Book.
Therefore a principle component of the insurance contract is for the insurance company to indemnify you -the insured.
