Basis of Indemnity
The policy wording will incorporate a definition of Indemnity under the title “Basis of Indemnity”. The way indemnity is calculated will vary depending upon what is insured. For example:
The normal basis for buildings is the cost of repair or reinstatement. Adjustment may be necessary to compensate for “betterment”. This betterment can arise in two ways:
Ø additions or improvements may be made during the rebuilding; and
Ø the original structure may have deteriorated, so that rebuilding will give new for old.
Allowances for additions and improvements are deducted and where rebuilding gives new for old the insured may have to contribute to the cost.
Where repair of machinery is possible, the basis of indemnity is the cost of restoring it to its previous condition. If the machinery is damaged beyond economic repair, the fairest recompense is the cost of replacing it by second-hand machinery of the same age, type, capacity and condition. To do this is often not practicable, however, and then new machinery must be bought. Deduction may then have to be made because (a) the original machinery is not now manufactured and replacement will have to be by better machinery; or (b) replacement can be by the same type of machinery but must be new for old and depreciation must be taken into account.
Retailers’ Stock in Trade
For this the indemnity is based on the wholesale price paid by the insured, not the selling price, since the latter includes profit. Deduction may have to be made for depreciation of stock through age.
Manufactured goods – indemnity is usually based on cost of production immediately before the fire. This includes materials, labour and factory overhead expenses, but excludes profit. If the total exceeds the market value of the goods, however, market value is the true indemnity.
Partly manufactured stock (unfinished goods) – the basis is the cost of raw materials and manufacture incurred up to the time the goods were destroyed.
Summarized from many sources
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