Understanding the principle of compensation – Insurance as an agreement between two parties related to losses in unexpected events. Having insurance is an important thing for every person to have, in order to reduce the impact of losses on unexpected events in the future.
In insurance, there are various kinds of terms and principles that insurance owners must know. Like the principle of indemnity that must be understood and understood. Come on, let’s see an explanation of the principle of compensation, Matobers.
Understanding the Principle of Compensation
According to the Financial Services Authority (OJK) the principle of compensation can be interpreted as a principle which states that the insured only gets compensation for the real losses he has suffered.
It is recorded in the Criminal Code articles 252, 253 and emphasized in article 278 which states that there is a mechanism whereby the insurer will replace financial losses (compensation) experienced by the insured as before the loss occurred.
Based on the principle of indemnity ( principle of indemnity ) it has been designed to place the position of a person or an insured party so that they can return their finances before the loss they experience.
The link between the principle of compensation and the existence of an interest that must be accounted for ( insurable interest ) because there is something that is insured ( subject matter of insurance ).
As in the principle of general insurance, for example a person suffers a loss of 60 million, the insurance company will only be responsible for paying a claim for a loss of 60 million. Even though the maximum sum insured from the insurance company is 120 million.
All insurance contracts are indemnity, except for personal accident and life insurance as life or limb cannot be financially valued. By law, these two types of insurance are not included in the scope of the principle of compensation.
The theory is that any insurance owned by a customer can request claims of any amount in an amount that is exactly the same as all the sum assured contained in all of these policies. However, legally apart from having to follow the principle of compensation, the insurance company will always monitor and check to avoid possible violations or misappropriation of claims.
Application of the Principle of Compensation
The principle of compensation can only be applied to property or profession, but not to the person. To protect the risk when the breadwinner dies, the insurance used is life insurance.
In its application, there are methods and systems or principles of compensation, this aims to avoid various misunderstandings and problems when the compensation process occurs. Because there are so many insurance products that are marketed to the public, it is necessary to accommodate or transfer the risks faced.
Be it health insurance, property insurance and other insurance products. For example, the principle of indemnity health insurance/compensation principle is an intention to reimburse for service costs incurred. Or there is also the term professional indemnity insurance. Professional indemnity insurance Indonesia is professional liability insurance, which provides protection for professional workers in the face of lawsuits or violations of the duties of insurance agents while carrying out their profession in the country.
All insurance contracts are indemnity contracts, except for life and personal accident insurance. Because life or limb cannot be valued in terms of money. Legally these two types of insurance are not included in the scope of the principle of compensation.
In theory, each policy owned by a customer can be claimed for any amount in accordance with all the sum insured listed in all of these policies.
But legally, apart from having to follow the principle of compensation, the insurance company will also always supervise and check to prevent the possibility of fraud or misappropriation of insurance claims.
Maybe Matobers has a question, why does insurance have an indemnity principle? This is because the insurance is a guarantee, so every insurance company must take the position of being responsible for compensation, if anything happens.
Because it refers to Article 253 of the Criminal Code, conveying that the insured/client covers the amount insured for an item that is greater than the value of the item itself. So, the compensation received is only as big as the loss suffered. Meanwhile, in Article 352 of the Criminal Code it is stated that the insured cannot also hold a second coverage.
Basically, indemnity applies to reimbursement of damages. Based on this, the principle of indemnity does not apply when it comes to offering life insurance. Because in the principle of life and health insurance, the insurer’s achievement is to pay an amount that has been determined in the indemnity agreement and contract.
The principle of indemnity does not apply to life insurance because the human soul cannot be valued by money. Because after all, it is difficult to get a reference value to calculate the value of a person’s soul/life itself. Therefore, this principle can actually be applied to goods or property insurance.
Example of Compensation Application
- Insurance companies provide limited home fire damages to the part of the house that was actually damaged by the fire. If the value of the damage is IDR 100,000,000, then the insurance will provide a replacement of IDR 100,000,000, even though the maximum coverage value stated in the policy reaches IDR 500,000,000.
- The insurance company provides compensation for a lost car with a maximum value according to the coverage.
- Not only goods, indemnity insurance can also be applied to protect the profession of someone who, for example, is at risk of facing a client’s lawsuit for violation of professional duties. The indemnity provided includes the costs of legal defense or the provision of damages wages or compensation costs for legal decisions.
How to Provide Compensation
Providing compensation in the form of cash debt is one of the most common ways to do this. The cash value given is equivalent to the loss received by the insured.
Another way of compensation is to repair damaged goods components with a limit up to the purchase price of the goods. In addition, there is another way of compensation, namely by making repairs 2 times during the coverage period with the same coverage value as the coverage in the policy.
Compensation Method
Then, what kind of compensation methods are applied? Of course, in practice, each insurance company has different compensation methods. The insurance company as the insurer will indemnify using a method that is in accordance with the policies and stated in the policy or the agreement itself.
There are several methods that can be applied by insurance companies in compensating. Usually this method has been stated in the policy, these methods include:
a. Cash
Cash payments are the easiest and most expected method by policyholders. In awarding compensation, this method is usually the most commonly used.
The insurance company will provide a certain amount of cash to insured customers as compensation for losses that befell them. Of course, in accordance with the agreed value and stated in the policy or contract agreement.
b. Repair
This method is used for accident insurance or vehicle insurance. This method is usually also carried out by insurance companies that cover vehicles, usually also have lower costs. Vehicle insurance companies work with trusted repair shops to repair the insured’s vehicle.
The insurance company will send the vehicle to be repaired to a trusted repair shop that has collaborated with the insurance company. Usually damage repairs are carried out on the insured’s vehicle with a record that the damage that occurs can still be repaired. The value or amount of repairs is not more than 75% of the total cost.
c. Replacement
Compensation is usually for damage to the insured goods, it can be replaced with new goods in much better condition. Settlement of claims with reimbursement is also carried out by insurance companies, such as reimbursement insurance companies.
At a minimum, the condition is the same as before the item was damaged or a loss occurred. Reimbursement is also made within a time limit of no more than 12 months after the loss occurred. The insurance company will repair or build the damaged property/machinery. Damage occurs usually as a result of an event or disaster.
For example in home properties. Homeowners who pay insurance premiums with a house guarantee will get compensation if they suffer damage due to an accident, for example a fire or natural disaster. If the house is damaged, the insurance company will repair it as before. If the house cannot be repaired, the insurance company will reimburse it for the same value as the house itself.
d. Recovery
The recovery method is usually used in property cases, so the insured is usually in the form of a building or machine. In this recovery method, the insurance company repairs or builds property or machinery that is damaged due to an unexpected disaster.
Damaged houses or buildings will be rebuilt to make it look better. The cost of this construction will be the responsibility of the insurance company. Even though getting compensation, Matobers needs to know that in property insurance, the price insured must be in accordance with the healthy price of the loss experienced.
If it is below a healthy price, it will result in a pro-rata compensation or split equally. So, you have to pay attention to this as carefully as possible so as not to compound the loss.
Compensation Clause in the Principle of Indemnity / Compensation
Compensation contracts or clauses are a consequence of an agreement in purchasing insurance. This agreement regulates the amount, value and costs for future compensation.
The clause itself is still related to the agreement or contract itself. Causal or special provisions in an agreement, have a broad or limited nature. The indemnity clause itself has a standard in insurance agreements.
In simple terms, Matobers can understand the compensation clause is the scope or extent of dependence on this special agreement. Such as the term of compensation and legal payment value. An example is indemnity car insurance.
Compensation that must be compensated is based on a mutual agreement contained in the agreement or contract between individuals and businesses, clauses can also be applied on a wider scale, such as between businesses and governments or business relationships that occur between the two countries themselves.
Factors Limiting the Principle of Compensation
There are several things that become the limit itself. The factors that limit the principle of compensation are as follows:
1. Sum Insured (Insured Money Value)
Sum insured is the highest limit of the insurance company’s liability for the value of the loss experienced by the insured or the insured object. The term for this factor is the maximum liability of the insurer.
2. Limits
Limit is an English word which when translated means the limit itself. In this case, the limit becomes a certain limit that is the responsibility of the insurance company in the event of a loss that occurs.
For example, if liability insurance is at IDR 20,000,000, the insured suffers a loss of IDR 50,000,000. So, the insurance company’s liability is stuck at IDR 20,000,000 because this figure is the limit itself.
3. Deductibles
The deductible is known as own risk , which is a certain amount that must be paid by the policyholder/agreement in the event of a claim. This limitation occurs in vehicle insurance, if the client wants to get maximum protection benefits, this activity must be carried out which is also the limit itself.
4. Average–Under Insured
This is under-price coverage, this is a limitation in the principle of compensation. The context occurs in property insurance. For example, a building that is insured is only Rp. 500,000,000. So, the insurance company will provide compensation for the amount insured.
Factors That Can Increase Compensation on Insurance
In addition to the limiting factors, there are also factors that can increase the cost of paying compensation in insurance. There are several factors that can affect the amount of compensation payments, namely as follows:
1. Reinstatement
Insurance coverage that occurs is based on the value of recovery, when a loss occurs, compensation is made in the amount of the loss experienced without being reduced by wear & tear or depression. Even up to the maximum value of the sum insured.
2. Agreed Additional Cost
This factor occurs in the context of property insurance such as building fire insurance. In fire insurance, the insured often incurs additional costs due to damage to the insured object due to fire. The insurance company as the guarantor must also replace the additional costs incurred.
3. Valued Policy (Price Agreement)
The value of the insured goods has been set at a price and reached an agreement between the insured and the insurer. However, this value may turn out to be greater than the actual value at the time the loss occurs. If so, all the risks that occur must be borne by the insurance company as the insurer itself.
4. New for Old (New Replaces the Old)
The insured will receive compensation without being reduced or taken into account by the elements of wear & tear . That means, the insured will receive a payment of compensation that is greater than the calculation of compensation based on the principle of compensation that is applied.
Closing
Well, that’s about the understanding of the principle of compensation , examples and factors. Know the principle of compensation that must be understood before registering with an insurance company. The principle of compensation can provide a little picture for those of us who are interested in making insurance, make sure to choose a trusted insurance company, Matobers. I hope this article inspires you!