Indemnity Notes

Indemnity

Indemnity Principle

Concept of indemnification is linked to the notional value of the insured interest as defined by the policy and not necessarily to the actual value of the subject matter insured.

• Castellain v. Preston; ‘The insured, in an indemnity insurance, should be fully indemnified in respect of loss or damage to their interest, but never more than fully indemnified’ (Brett J).

Insurer’s Obligation to Indemnity = A contractual duty to make good the insured’s loss. So the insured should never receive anything other than is sufficient to make good their loss.

When are insurers obliged to pay out? Indemnity is due and payable when:

• For loss to tangible/ intangible property – On ascertainment of loss. Court must be satisfied as to the extent of the loss suffered. So adjustment of the sum can be problematic.

• Indemnity of liabilities when – 1) Actual liability is determined; and 2) Quantum of liability established. Then UWs have a reasonable period for determining the amount they will pay under the policy.

• Defined benefit – Pay value of the defined benefit once a trigger event has happened.

Consequences of Non-Payment of Indemnity

1^st obligation of insurers = Primary obligation under the insurance contract is to make good the insured’s loss.

2^nd obligation of insurers = If failure to perform the 1^st obligation, the insurer must pay damages for failing to make good the insured’s loss.

• Indemnity for Loss – For wrongful repudiation of the claim insurers must pay damages, but these can never be more than the loss the insured has suffered. No consequential loss. The insurer is privileged. There has been much criticism of this. For example, in Sprung the insured’s business went insolvent as was not paid a large insurance loss. The insurer was still only liable to pay the extent of that actual loss.

• Defined Benefit – For wrongful repudiation by the insurers, the insured has a debt claim with interest under The Late Payment of Commercial Debts (Interest) Act 1998. Also sue for damage and consequential loss under Hadley v. Baxendale.

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Rights Accruing to Insurers on Payment of Claims

• Payment of Indemnity in Event of a Total Loss – Immediate / automatic transfer of:

1. Transfer of rights in SM insured from the insured to the insurer: Insurer acquires right to take over what remains of the SM insured. Gives the insurer the right to exercise proprietary rights; does not immediately transfer the proprietary interest to the insurer. Insurer has right to control thing if desired, but may reject due to potential liabilities. E.g. Ship carrying chemicals is abandoned – insurer does not want responsibility.

2. Subrogation rights: Insurer can exercise rights of subrogation against 3^rd parties or against other assets which are held or accrue to the insured to recoup money in diminution of the loss paid by the UWs.

3. Contribution rights: In the event of double insurance, the insurer acquires contribution rights against any other insurer liable for the same loss.

• Payment of Indemnity for Partial Loss – (ii) and (iii) apply. For CTL, only once UWs have to accept a CTL as a total loss do they get transfer of proprietary rights. None here for partial loss.

E.g. There are 5 UWs. Insured claims CTL – 2 UWs with 20% each accept total loss. 3 UWs with 20% each accept as partial loss. So the insured owns 60% of SM insured and UWs A and B own 20%. They are tenants in common of the SM.

• Payment of Indemnity for Liability – (ii) and (iii) apply. Here no proprietary rights, but still subrogation and contribution. E.g. Insured is liable but only 50%. If someone else is 50% liable, UWs have a subrogated right in their insured’s right of contribution against the other party jointly liable in the same case.

• Payment of a Defined Benefit – Gives rise to a primary right (a debt claim) for payment of a sum of money, not making good loss, so creates a cause of action in debt.

Here there is no transfer of the SM insured. Insurers acquire no rights to SM in absence of express assignment.

There are no subrogation rights. Rights to sue the party who caused death attaches to personal representatives and beneficiaries at common law.

There are no contribution rights. Cannot be double insurance as each policy provides a discrete defined benefit.

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Right 1: Transfer of Rights in SM Insured

Automatic right to take over proprietary rights in the remaining insured property by payment of indemnity for a total loss.

• S.79(1) MIA: Insurer entitled to take over interest of the assured in whatever remains of the SM paid for.

= Insurer has a choice whether to exercise right or not in the entire residual SM, even if the SM insured as damaged has a higher value than the amount of the loss. This is a right, not an obligation.

Total loss?

• S.57 MIA (actual total loss), s.58 (missing ship) and s.60 (CTL).

• S.61 MIA: Insured has election for CTL or partial loss.

• S.62 MIA: Notice of abandonment essential for election as to total loss where CTL.

CTL? Effect of abandonment:

• S.63(1): Insured entitled to take over the interest of the assured in whatever may remain in the SM insured.

= Get a proprietary right over remaining SM. Same as total loss, except notice of abandonment required. Acceptance of notice is not acceptance of clean up obligations etc.

= Entitled to: 1) Property – actual thing...

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