Principles of Indemnity The Concept of Being Put Back Into the Same Financial Position as Existed Before the Insured Loss OccurredIndemnification is Compensation as Reimbursement

A fundamental principle to the law applicable to insurance matters is the requirement that insurance coverage concept of indemnification, meaning that (subject to an adequate amount of insurance) a person should be put back into the same financial position as existed before the loss of the insured object. 

The principle of indemnity was confirmed by the Court of Appeal in the matter of Gore Mutual Insurance Company v. Carlin, 2018 ONCA 628 at paragraph 21 where it was said, " ... a contract of insurance is a contract of indemnity; it is not a vehicle for turning misadventure into profit.  ...  ".  Expanding further, the Court of Appeal in Gore said at paragraph 29:

[29]  Contracts of insurance are to be interpreted in a manner that results in neither a windfall to the insurer nor an unanticipated recovery to the insured: Brisette Estate v. Westbury Life Insurance Co., 1992 CanLII 32 (SCC), [1992] 3 S.C.R.  87, at pp.  92-93.  In the present case, the motion judge’s decision goes beyond an unanticipated recovery to grant a windfall that is wholly unconnected to the recovery of any loss.  The policy provides only for indemnification for a loss suffered.

Simply stated, if an object, such as a bicycle, was worth $1,000 a split second before the bicycle was stolen or lost due to another peril covered by an active and applicable insurance policy, then the person who suffered the loss of the bicycle should receive $1,000 in compensation for the bicycle whereas receiving $1,000 as exactly the amount that the bicycle was worth "indemnifies" the person by putting the person back into the exact same financial position as existed at the time the bicycle was stolen resulting in the $1,000 loss.

Historically, insurance law principles mandated that the quantum of payout on coverage of an insured loss be strictly limited to the amount required to provide indemnification.  The purpose of restricting coverage payouts to an amount equivalent to the indemnification amount was intended to discourage fraudulent claims whereas, with 'dollar-for-dollar' indemnification and therefore without opportunity for profit or gain, an insured person would be without any advantage to suffer an insured loss.  Simply said, if a person were to lose the $1,000 bicycle mentioned in the example above, and was stood only to receive indemnification in the $1,000 amount, then the loss of the bicycle would be without any potential benefit; and accordingly, the person carrying insurance on the bicycle would be without any motive, being a profit, should a loss of the bicycle occur.

The principle of indemnity is such a basic fundamental to the concept of insurance that such is stated within the definition to the very word of "insurance" per the Insurance ActR.S.O.  1990, c.  I.8 which reads:

“insurance” means the undertaking by one person to indemnify another person against loss or liability for loss in respect of a certain risk or peril to which the object of the insurance may be exposed, or to pay a sum of money or other thing of value upon the happening of a certain event, and includes life insurance; (“assurance”)

Exceptions to Principle of Indemnity

Many modern insurance policies provide exceptions to the principle of indemnity.  These insurance policies include various forms of first party property insurance, such as the contents 'replacement' coverage within the insurance policy commonly purchased by a homeowner.  With replacement cost coverage, the insured may receive a 'new for old' betterment when an insured object suffers an insured peril.

For example, a homeowner may own, and insure, contents consisting of outdated furniture from the 1970's that is virtually worthless to sell; however, following a total loss by fire (or another insured peril), the replacement cost coverage permits the homeowner to purchase new furniture to replace the old (financially worthless) furniture and thereby to receive a 'gain' that presents as an over-indemnification.

Another example would be the depreciation waiver that is commonly offered by automobile insurers via the endorsement known as the OPCF#43 - Depreciation Waiver whereas a buyer of an automobile may purchase the depreciation waiver and be protected, financially, against a reduction for depreciation for a period of time (commonly two years) should the purchased automobile suffer a total loss.  Whereas an automobile initially purchased for $50,000 may suffer a total loss, and being after a period of time and usage may be worth considerably less than the $50,000 initial purchase price, applying the principle of indemnity would result in compensation equivalent to the value of the automobile at the time of the loss; however, with the depreciation waiver, the purchaser of the automobile would receive the initial $50,000 purchase price; and accordingly, be placed into a financial position that is improved from the financial position that actually existed moments before the automobile became a total loss.     

Summary Comment

The principle of indemnity is a concept intended to minimize insurance fraud for profit whereas, when insurance coverage provides only for indemnification, the loss of an insured object is financially compensated with the exact sum (as best as the exact sum can be calculated) that the object was worth a moment before the loss occurred.

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