Indemnity and Insurable Value : The insurance contract is in the nature of indemnity. The literal meaning of indemnity is protection against loss or making good the loss. The object of an insurance contract is to place the insured, after a loss, in the same relative position in which he would have stood had no loss occurred. In other words, an insured can-claim only that much that he has suffered (or lost). If cargo has been damaged by 10 percent of the assured value, the insured will be paid only that much amount, even though he has paid premium on the total insured value. But it must also be understood that the indemnity undertaking of the insurance company is only a "commercial" indemnity. The insurance company will place the assured in the same. "financial" position as he was before the loss. Since the insurance companies cannot undertake to reinstate or replace cargo in the event of a loss, they pay a sum of money, agreed in advance, between the insured and the insurer, called "insurable value". Insurable value is calculated with reference to the "market value" of the insured goods to which is added an agreed percentage to cover general overheads as well as to provide a margin of profit on the transaction. From this range, an indemnity in insurance does not cover either a gambling loss or a sentimental loss (if tangible loss). Consequently, over-insurance i.e., insurance more than the market value plus a certain percentage is not the principle of cargo insurance.
In practice, the amount of loss payable is based on the c.i.f. value of goods to which is added an agreed percentage. According to prevailing practice in India, maximum insurable value for export cargo is equal to c.i.f. plus 15 percent. Generally, the percentage added to c.i.f. value is ten. It is customary in the insurance business to issue "duty" policies to cover duty payable on the imported goods. In such cases, claims are payable either on the basis of actual duty paid or on the basis of the sum insured, whichever is less. Thus, the sum payable cannot exceed the actual loss of the duty amount paid by the insured. It is also implied that the sum insured in the "Duty" policy would not include any percentage to cover general overheads and the margin of profit.