By TKay Nthebe
A question that frequently comes up in various financial education workshops I am invited to facilitate is ‘How can I protect myself and avoid a financial loss?’ As we continue this series to better understand insurance principles, this week’s article discusses the principle of indemnity.
As explained in the article ‘What should I know about insurance?’ I highlighted the difference between short and long-term insurance contracts. Short-term insurance contracts are for a period of a year, renewable, while long-term insurance contracts are for a longer period than a year. With short-term contracts, also referred to as indemnity insurance, the insurer promises to indemnifythe client. What does this mean?
What is indemnity insurance?
Meet Thabiso, who owns a house in Motse Mocha, Mafeteng. Thabiso is worried about the financial loss he might suffer should the heavy rains damage his house, and he decides to take out a house insurance policy. With indemnity insurance, an insurer like Alliance General Insurance Company undertakes to pay Thabiso (the insured) a certain sum of money should his house be damaged, restoring or indemnifying him to the same position he was in before the damage caused by the heavy rains. Depending on the situation and terms and conditions, the insurer can repair, reinstate, replace, or reimburse Thabiso for the loss.
Indemnity insurance covers objects such as property (house, car, house content or valuables), loss of income or liability due to damaging other people’s property – also referred to as patrimonial loss. As discussed in the article ‘What is an insurable interest and why is it important?’ insurable interest must exist at the time of loss.
What is non-indemnity or capital insurance?
In long-term insurance contracts such as a funeral or life cover policy, also referred to as non-indemnity insurance, the insurer undertakes to pay a pre-determined amount to the insured e.g., LSL30 000 when the event insured against happens. The insured event can be loss of life, loss of a limb or disability, where an insurable interest must exist when the insurance policy is taken out.
Meet Matšeliso, who takes out a life cover policy that covers a temporary or permanent disability. After a terrible accident, Matšeliso’s leg and arm must, unfortunately, be amputated, leading to the loss of her limbs – referred to as non-patrimonial loss.
Unlike indemnity insurance discussed above, the insurer cannot replace Matšeliso’s leg, like they would with Thabiso’s house. Instead, Matšeliso will receive a disability benefits pay-out that is pre-determined e.g., LSL150 000 when the event insured against happened (terms and conditions apply). This capital amount can help Matšeliso make lifestyle changes and improve her life after the accident but unfortunately cannot restore her leg.
Because insurance principles can sometimes be difficult to understand, I hope that these articles will empower you to ask your insurance brokers questions and have deeper conversations regarding your policies. Insurance, if done well, can help Basotho protect its valuables and live better lives. For more information remember to visit www.alliance.co.ls