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(A) (i) Differentiate between indemnity and insurable interest - Leaving Cert Business - Question 5 - 2006
Question 5
(A) (i) Differentiate between indemnity and insurable interest. Illustrate your answer. (ii) Distinguish between insurance for a household and for a business.
Worked Solution & Example Answer:(A) (i) Differentiate between indemnity and insurable interest - Leaving Cert Business - Question 5 - 2006
Step 1
Differentiate between indemnity and insurable interest. Illustrate your answer.
Answer
Indemnity refers to a principle of insurance where the insured is compensated for actual losses incurred, ensuring that there is no profit from the insurance. This principle highlights that the compensation received cannot exceed the loss sustained, thus maintaining the financial status of the insured prior to the loss occurrence.
Insurable interest, on the other hand, is a requirement that the insured must have a stake in the subject matter of the insurance policy. It implies that the insured would suffer a financial loss if the insured object were damaged or lost. For instance, a car owner has an insurable interest in their vehicle because they would incur a loss due to theft or damage.
To illustrate these concepts:
- If a person buys a house worth $200,000 and insures it, they can only claim up to that amount in case of a disaster (indemnity).
- If they are merely a bystander with no financial stake in the property, they cannot insure that house (insurable interest).
Step 2
Distinguish between insurance for a household and for a business.
Answer
Insurance for a household typically involves more personal policies, focusing on the domestic environment and the protection of personal assets. Some common household insurance policies include:
- Homeowners insurance, covering damage to the home and personal property.
- Renter’s insurance, for tenants covering personal belongings.
- Auto insurance for personal vehicles.
- Health insurance for family members.
In contrast, insurance for a business is generally more complex, as it encompasses various risks associated with running a business. Business insurance typically involves:
- General liability insurance to protect against lawsuits.
- Property insurance to cover physical assets.
- Workers’ compensation for employee injuries.
- Professional liability insurance for services offered.
- Business interruption insurance to cover loss of income due to unforeseen circumstances.
The key differences lie in the scale of the operation and specific risks addressed in the insurance policies.