The Meaning of Indemnity, Cover Note And Contribution in Insurance

Apart from life and personal assurance policies, all insurance policies are contracts of indemnity. Indemnity as a basic principle of insurance means the restoration of the insured to the same financial position he was before the loss. This meaning is accordance with the basic concept of insurance which is to compensate the unfortunate for the loss he has sustained and not to profit him from the misfortune. A simplified definition of indemnity is “the exact financial compensation” and this may therefore justify why contracts of life and personal accident are not regarded as contract of indemnity.

This is true because no amount of financial compensation can pay adequately for the life of health of person. For this reasons life and personal accidents policies are regarded as benefits policies.

The principle of indemnity is very important and also intricate of all the principle of insurance. Lack of understanding of it is the cause of public distrust of insurance business especially when their total loss claims on an insured item only receive less than the expected payment. While the public expect to be bettered after the occurrence of an insured event, indemnity principle only provides for a restoration to the exact position immediately before the loss. To public, the application of this principle makes the insuring public victims of sharp practices on the part of the insurers.

Contribution

The term contribution is defined in all insurance as the right of an insurer who has paid under a policy to call upon other insurers equally or otherwise liable for the same loss to contribute to the payment. It arises where a person insures the same item and the same risk with more than one company. Where the risk occurs on the item insured, then, it is expected that all the insurance company with whom the items was insured should contribute to the loss in proportion to the sum insured with them. Contribution as a legal doctrine had its origin from the English courts of equity were it first developed as a means of ensuring the equitable distribution of liability among joint debtors or joint wrong doers.

There is legal barrier to prevent a person from insuring an item with more than one insurance company for the same risk. “A person can willingly insure his property with two different insurance companies if, for example, his banker refuses to accept the policy of his first insurer as adequate to cover the property being given as security for loan”. However, the law forbids (as explained under the principles of indemnity) the insured person from recovering more than his actual loss. The law insists that the sum total of recoveries under all policies must not exceed his actual financial loss.

Cover Notes:

Cover notesare documents used by insurers to provide temporary cover to the insured while the insurer works out further details of the risk to decide whether to accept the proposal or not. Cover notes are used because of the time lag before a proposal is accepted. The time lag may be caused by administrative difficulties or the need to carry out through investigation by the insurer. Cover notes are used as a proof of purchase of insurance before policy is issued and as evidence that a contract of insurance is in force. They are used extensively in several classes of insurance such as motor and fire. It is of particular importance in motor insurance because they provide evidence to the importance in motor insurance because they provide evidence to the police that the bearer complies with the statutory requirements until such a time when the policy and the insurance certificate will be issued.

Cover notes are usually issued for a limited period such as 14days or a month and could be renewed only once for another 30days. Although a cover note represents a provisional acceptance of risk, it however, binds the insurer as if the policy has been issued. This means that if a cover note is issued and it subsequently turns out that the insurer is not prepared to accept the risk, he will still be liable for the claim that may arise if the risk occurred within the period the cover note is enforce.