According to the International Risk Management Institute, the “principle of indemnity” is defined as:
“A defining characteristic of insurance, providing that a loss payment will replace what is lost, putting the insured back to where it was financially prior to the loss without rewarding or penalizing the insured for its loss.”
In other words, the insurance coverage should put the insured party back on a level playing ground, neither any better nor any worse off than before. The insurance company is indemnified from any action that would give the insured more than the compensation required to make things right.
When it comes to homeowners insurance, the idea of indemnity is generally upheld, unless there is specific options or language in the policy that say otherwise. These exceptions generally have to do with the concept of depreciation – when something loses value over time.
Depreciation has more of a direct impact in the insured when it comes to car insurance than it does for homeowners. A car that several years old has depreciated in value, and unless the insured carries a “new car replacement” rider on their policy, the insurance company will not necessarily make a payout large enough to replace a depreciated but drivable vehicle.
Just like a car loses a chunk of its sticker price in value the minute it drives off the lot, your home may also depreciate with time. However, although your roof may be five years old when a hurricane rips it loose, the insurance company will pay for a new roof as they are obliged to do via the term “replacement cost”. Practically speaking, it’s the only option. However, they are not required to upgrade you from a standard shingle roof to Spanish tile just because the rest of your neighborhood has switched over; they still have indemnity from that kind of demand.
The term “replacement cost” is not defined under the definitions of most standard homeowners insurance policies. According to Adjusters International, “Words not defined within the policy are interpreted by their ordinary, plain and usual meaning. Courts have ruled that policy language should be interpreted in the manner that an average person would understand it.”
Since damaged property can most often only be replaced with new, one might feel that an insured actually benefits by getting
About Olympus Insurance Company
Headquartered in Palm Beach Gardens, FL and founded in 2007, Olympus Insurance Company specializes in Florida property insurance. Through its independent agency force, Olympus insures $45 billion worth of residential and investment property including homes, condos, rental property, and valuable personal property. The company also writes flood insurance and umbrella policies. Coverage for individual risks up to $5 million in total insured value is provided on one of the most comprehensive coverage forms in the industry.
For more information, visit olympusinsurance.com.