How is the measure of indemnity calculated for a printing machine insured on an indemnity basis?

When determining the measure of indemnity for an asset like a printing machine insured on an indemnity basis, the concept fundamentally revolves around restoring the insured to their financial position prior to the loss, without allowing them to profit from the claim.

Choosing the approach of calculating the cost of a new replacement less an amount for wear and tear is aligned with the principle of indemnity. This reflects the reality that assets typically depreciate over time due to usage and age. Thus, when calculating indemnity, it is essential to consider the new replacement cost to provide a fair assessment of what it would cost to replace the old machine with a new one. However, adjusting this figure for wear and tear ensures that the payout reflects the actual value of the machine at the time of the loss.

This is significant because if the measure of indemnity were simply based on the cost of a new replacement without considering wear and tear, it would lead to an overvaluation of the asset. Similarly, using the original purchase price disregards how depreciation affects the value of the machine over time. Therefore, the chosen method captures both the replacement value and the reality of depreciation, adhering to the obligations of indemnity insurance.