INDEMNITY

Indemnity is basically when one party promises to save the other party from loss caused from
the conduct of the promisor himself or by conduct of any other party.1 A contract of
indemnity is where one party, the indemnifier, promises to indemnify another party, the
indemnified, for a consideration called premium, against losses that might happen as a result
of the perils or events against which insurance is taken.

According to the case of per Brett LJ Castellain vs Preston, all contracts pertaining to fire or
marine are contracts of indemnity and indemnity only, which means that in the event of a
loss, the assured receives a full indemnity and will never be entitled to more.

The characteristics of the contract of indemnity are:

 The assured is not permitted to make profit in the transaction. For example, if he/she
recovers some amount from selling the damaged good or asset, he/she has to account
this to the insurance company.
 The insurer pays compensation only for an actual damage or loss.
 The principle of subrogation is applied. For example, if the insured suffers loss that a
third party is responsible for and the insurer pays for the loss, the insurer gets the right
to claim from the third party.
 The principle of reinstatement is applied whereby the insurer has the option to
reinstate the insured property rather than paying money.
 The principle of contribution is applied so that if the insured takes more than one
policy, the two policies will contribute to indemnify him/her so that he does not
recover from both policies the full amount.

METHODS OF INDEMNITY

1. Cash payment
This is the most common way by which the insurer makes good to the insured for the
loss occasioned by the peril insured against through cash payment. The amount of
cash payment should be proportional to the amount of loss incurred by the insured.

1
William Benecke, A Treatise on the Principles of Indemnity in Marine Insurance, Bottomry and Respondentia
and on their Practical Application in Effecting those Contracts, and in the Adjustment of All Claims Arising out of
Them for the Use of Underwriters, Merchants and Lawyers (Baldwin, Cradock and Joy,1824) 498.
 Under the Insurance Act, the amount is calculated in the currency of Kenya unless the
parties to the policy have agreed otherwise.2
2. Repairs
Takes place when the insurer consents to restore the insured item to its original state
that it was, to the best of their ability, at the time of its destruction. Under the
insurance cover, if the subject matter is damaged or destroyed, the insurance company
will cover the expenses for its restoration.
3. Replacement
Occurs when the insurer agrees to replace a lost or destroyed item with a new one or
another which is as practically possible of the condition as that which was lost or
destroyed. This is usually subject to the premium and one cannot recover beyond the
premium.
4. Reinstatement
In reinstatement, usually no depreciation is deducted. It is the replacement of the
existing asset with a new asset of the same type, utility and capacity. The insurer here
will have least financial strain.3 However such an obligation to reinstate may be by
express agreement in the policy or under statute.
At common law, the insurer can elect to reinstate but if he makes such an election, he
must, give notice to the insured and the insured must agree to reinstatement. Insurer is
then bound to restore the property to its original position. Where there exists
impossibility to reinstate before the insurer has made the election, for example the
planning permission is rejected, the insurer is only bound to reimburse the insured for
the actual amount of loss.4

MEASURE OF INDEMNITY
A policy of indemnity puts one to original financial position where he/she was prior to
the loss occurring. In the case of a valued policy, the measure of indemnity is the
value fixed by the policy which is the amount agreed with the insurers, whilst in the
case of an unvalued policy, the measure of indemnity is the insurable value. In a
valued policy, less documentation is needed because the insured amount is
2
Insurance Act, Section 79
3
Robert Merkin ed., Insurance Law: An Introduction (CRC Press, 2014) 204.
4
Anderson vs Commercial Union (1885) 55 LJOB 140.
predetermined and need not to be proven in the event of a loss. On the other hand, an
unvalued policy may require more documentation to establish the value of the
property, including invoices and other evidence of ownership and value. Therefore a
valid policy provides a guaranteed amount of compensation in the event of a total loss
whereas an unvalued policy requires the insured to prove the value of the loss or
damaged property.