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Saturday, August 9, 2014

The Principle of Indemnity and “Indemnification Aliunde”

Have you heard of the term ‘aliunde’ and do you know of any possible circumstance, where the Insurer need not effect settlement even where there is a loss caused by the operation of a peril  during the currency of the policy !!!

The Insurance Policy is a contract between the Insurer and the Insured.  The Standard Fire & Special Perils Policy [as most other policies are] is worded -  ::  ‘in consideration of the Insured having paid to the Insurer, the full premium, the Insurer agrees subject to the conditions and exclusions contained that if after the payment of the premium, the property insured be destroyed or damaged by any of the perils specified, during the period of insurance – the Insurers shall pay to the Insured the value of the property at the time of happening of destruction or the amount of such damage or at its option reinstate or replace such property or any part thereof. 

Insurance like any other agreement would exist only when both the parties to contact have a common intention.  The process known as ‘indemnity’ is the payment of just compensation for the loss or damage by the Insurer and upon payment the possible rights of the Insurer are  :
1)    the right of contribution from his fellow-insurers where the policy is subjected to coinsurance
2)    right of recovery from the Reinsurers, which is independent of the primary insurance contract
3)    right of subrogation – from the other parties responsible for the loss as a natural legal response – stepping into the shoes of the insured and enjoying whatever legal right existed for the insured
4)     right to repayment of the sum paid by the Insurer

very commonly in Motor Insurance [and in all branches covering burglary] –  in respect of losses  arising out burglary/ theft – the Insurer will effect settlement under the condition that upon discovery of the subject matter, the entire amount will have to be repaid to the Insurer and if there are any partial damages / losses, the Insurers would consider settlement after due process of loss assessment.  Again a better and stricter interpretation of the rule of indemnity…….

The no. 1 of the foregoing is Coinsurance recovery and 2 is reinsurance recovery – both of which will not affect the Insured.  The third is the right of subrogation wherein the rights and remedies of the insured are exercised by the Insurer – an equitable doctrine.   Without subrogation, perhaps the Insured could receive more than the amount of loss from different sources.  This would succeed payment of the loss by the Insurer. 

Now cometh the somewhat unheard principle of   “indemnification aliunde”  :

Under  Law – Aliunde would mean – from another place ;  evidence given aliunde, as, when a will contains an ambiguity, in some cases, in order to ascertain the meaning of the testator, evidence aliunde will be received.  Aliunde is Latin for "from another place" and is related to the word "alibi" (Latin for "elsewhere"). The Latin word for "whence" (from where) is unde and together with alius becomes aliunde - from another source, or place. 

In Insurance Law, ‘indemnification aliunde’ would mean that the Insurers have the right to credit [right of recovery of the amount paid] if the insured's loss is made good aliunde.  Strictly, the underlying principle of indemnity is to place the policy holder back in the same position and not allow making a profit out of the insured loss.    The general rule of law is that when a loss occurs – anything which reduces or diminishes the loss, the indemnifier is bound to pay.

Contractually, the Insurers are to make good the loss of the policy holder [subject of course to the insuring terms and conditions] and if the loss is otherwise made good, the Insurers are not liable, as the Insured has no monetary loss.   Though the concept could sound far-fetched, here is an example

-         in a policy covering a building, the property was acquired by a purchaser.  Before the settlement, the building was destroyed by fire.  The purchaser still pays the original purchase price which he contracted upon.  Here it was held that the property owner was not prejudiced by the fire damage as he in anyway received the full consideration for the property from his incumbent buyer.  There were no expenses incurred on reinstatement nor did the value diminish. The contract of Insurance is to make good the loss and if the loss is made good aliunde, the Insurers should not be called upon to effect any payment, even though there apparently were damages caused by an insured peril.  

In another complex example, the owner of a house insures his property and rents it out.  Under the rental agreement, there is a clause that specified losses are to be made good by the occupant.  There was a loss to the property arising out of fire and a claim preferred by the owner on his Insurer – whilst the claim is otherwise tenable, the tenant reimburses the houseowner by virtue of the rental agreement.  Here the Insurers of the landlord would not be further liable and if they had effected payment already, are entitled to recovery.  It makes little difference as to whether the payment aliunde is voluntary or through legal liability.   If the indemnification aliunde is not  complete, the insured can, however, claim the balance from the  insurer.  

One of the essential ingredient of this is ‘policy holder receiving complete indemnity’ – otherwise, he would still be eligible for getting indemnified by the Insurer to the full extent of his loss.

The principles of Insurance are simple, sound and straight forward !!!!

Double Indemnity is a 1944 American film noir, directed by Billy Wilder. The screenplay was based on James M. Cain's 1943 novella of the same name, which originally appeared as an eight-part serial in Liberty magazine.  The film stars Fred MacMurray as an insurance salesman, Barbara Stanwyck as a provocative housewife who wishes her husband were dead, and Edward G. Robinson as a claims adjuster whose job is to find phony claims. The term "double indemnity" refers to a clause in certain life insurance policies that doubles the payout in cases when death is caused by certain accidental means.

Regards – S. Sampathkumar.

~ article made in 2011...

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