To “indemnify” is to have something reinstated to the position that it was in before the occurrence of a specified event or incident. Life insurance is not typically considered to be indemnity insurance but rather “contingent” insurance. From the insurance buyer’s perspective, the result is usually the same: the insurer covers the loss and claims expenses.
In the case that the insured party has a “reimbursement” policy, the insured may be required to pay for the losses and then be “reimbursed” by the insurance company later for both the loss and other costs, such as claim expenses. In the case of a “pay on behalf” policy, the insurance company shall defend and pay a claim for losses or damages on behalf of the insured, who will not have to shoulder any payments.
Most modern insurance policies are written based on “pay on behalf,” which allows the insurance company to manage and control the claim. Under an indemnification policy, the insurance company may typically either “reimburse” or “pay on behalf of” the insured entity, whichever they deem more beneficial to both parties in the claim handling process.
An entity that seeks to transfer risk is the ‘insured’ party; once said, the ‘insurer assumes the risk,’ that is, the insurance company, through a contract or the ‘insurance policy.’
Generally, an insurance policy includes at least the following:
- identification of involved parties
- the premium
- the period of coverage
- the specific loss event to be covered
- the amount of the coverage
The insured is, therefore, ‘indemnified’ against the loss covered in the insurance policy.
When the insured entity experiences a loss for a specified peril, the coverage entitles the policyholder to submit a claim against the insurance company for the covered amount of the loss specified in the contract or policy.
The premium is the insured’s fee to the insurance company for the latter assuming the risk of loss. The premiums paid by the insured entities are used by the insurance company to fund accounts reserved for later payment of claims and overhead costs.
As long as an insurer maintains enough reserved funds set aside for anticipated losses, the remaining margin is its profit.
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