Indemnity
Indemnity is the principle that insurance should restore you to the financial position you were in immediately before a loss — no better, no worse. It is the foundational rule of property and liability insurance, and explains why claim payouts are often lower than the original purchase price of a lost item.
Actual cash value vs replacement cost
Most standard indemnity policies pay the actual cash value (ACV) of a loss — the item's market value at the time of the claim, after accounting for age, condition, and depreciation. This can be significantly lower than the original purchase price or the cost of buying a new equivalent today.
Example: a television purchased for £900 three years ago might have an actual cash value of £300–£400. An indemnity-basis policy pays £300–£400. A replacement cost policy pays the cost of a comparable new television today — which could be £700.
For high-value possessions — electronics, clothing, jewellery, and furniture — the difference between ACV and replacement cost cover is material. Check which basis your policy uses, and whether you can upgrade to replacement cost. The policy's insuring agreement section will specify this.
How depreciation affects claims
Insurers calculate ACV using either a depreciation schedule or market comparisons. Depreciation varies by item type:
For high-value single items — particularly jewellery, art, and cameras — scheduling them individually on the policy at an agreed value avoids depreciation disputes. A scheduled item is paid at the agreed value, not ACV.
Indemnity and your sum insured
The indemnity principle interacts with your policy limit (sum insured) to create a potential under-insurance problem. If your contents are worth £25,000 but your sum insured is £15,000, you are under-insured. In some policies, under-insurance triggers an "average clause" — the insurer pays only a proportional share of any claim, not the full loss up to the deductible.
To avoid this, use the home contents inventory tool to calculate the replacement cost of your possessions before choosing a sum insured.
Indemnity FAQ
Frequently asked questions
- Unless your policy is written on a 'new for old' or replacement cost basis, the insurer will pay the item's actual cash value — what it was worth at the time of loss, accounting for depreciation. A three-year-old laptop that cost £1,200 new might be worth £400 as a used item. To avoid this gap, look for policies that specify replacement cost cover rather than actual cash value, particularly for electronics and clothing.
- Standard indemnity pays actual cash value (market value minus depreciation). Replacement cost cover pays the cost to buy a new equivalent item, without deducting for age or wear. Replacement cost policies carry a higher premium but remove the depreciation gap. Home contents policies often offer replacement cost as a standard or optional feature.
- Life insurance operates on a different basis — it is a benefit contract, not an indemnity contract. Because the financial value of a life cannot be precisely measured, life policies pay a pre-agreed sum assured regardless of the precise economic loss. Similarly, critical illness and income protection policies pay fixed benefits rather than measured losses.
- No — for indemnity-based policies (property, liability, motor), insurers are prevented from paying more than the actual loss. Paying more than the loss would create a financial incentive to cause damage, which is considered against public policy. This is why the insurer will investigate the value of a loss rather than simply accepting a figure you provide.