Doctrine of Indemnity in Marine Insurance

A contact of marine insurance is an agreement whereby the insurer undertakes to indemnify the assured in the manner and the extent agreed upon.

The contract of marine insurance is of indemnity. Under no circumstances an insured is allowed to make a profit out of a claim. In the absence of the principle of indemnity it was possible to make a profit.

The insurer agrees to indemnify the assured only in the manner and only to the extent agreed upon. Marine insurance fails to provide complete indemnity due to large and varied nature of the marine voyage.

The basis of indemnity is always a cash basis as underwriter cannot replace the lost ship and cargoes and the basis of indemnification is the value of the subject-matter.

This value may be either the insured or insurable value. If the value of the subject matter is determined at the time of taking the policy, it is called ‘Insured Value’. When loss arises the indemnity will be measured in the proportion that the assured sum bears to the insured value.

In fixing the insured value, the cost of transportation and anticipated profits are added to original value so that in case of loss .the insured can recover not only the cost of goods or properties but a certain percentage of profit also.

The insured value is called agreed value because it has been agreed between the insurer and the insured at the time of contract and is regarded as sacrosanct and binding on both parties to the contract.

In marine insurance, it has been customary for the insurer and the assured to agree on the value of the insured subject-matter at the time of proposal. Having, agreed of the value or basis of valuation, neither party to the contract can raise objection after loss.

On the ground that the value is too high or too low unless it appears that a fraudulent evaluation has been imposed on either party.

Insured value is not justified in fire insurance due to moral hazard as the property remains within the approach of the assured, while the subject- matter is movable from one place to another in case of marine insurance and the assured value is fully justified there.

Moreover, in marine insurance, the assured value removes all complications of valuation at the time of loss.

Technically sneaking the doctrine of indemnity applies where the value of subject-matter is determined at the time of loss. In other words, where the market price of the loss is paid, this doctrine has been precisely applied.

Where the value for the goods has not been fixed in the beginning but is left to be determined at the time of loss, the measurement is based on the insurable value of the goods.

However, in marine insurance insurable value is not common because no profit is allowed in estimating the insurable value.

Again if the insurable value happens to be more than the assured sum, the assured would be proportionately uninsured. On the other hand, if it is lower than the assured sum, the underwriter would be liable for a return of premium of the difference.

There are two exceptions of the doctrine of indemnity in marine insurance.

Profits Allowed

Actually the doctrine says that the market price of the loss should be indemnified and no profit should be permitted, but in marine insurance a certain profit margin is also permitted.

Insured Value

The doctrine of indemnity is based on the insurable value, whereas the marine insurance is mostly based on insured value. The purpose of the valuation is to predetermine the worth of insured.