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HMRC internal manual

General Insurance Manual

Legal basis of insurance: indemnity

Most contracts of general insurance are contracts of indemnity where the insurer agrees to compensate the insured for the loss that he may sustain when the event giving rise to the insurer’s liability occurs. A policy of indemnity is designed to place the insured in the same financial position as they would have been had the event not occurred. In the case of indemnity insurance the insurable interest is limited to the potential financial loss which may be suffered on the event happening.

It used to be said that there was a distinction between insurance, meaning insurance against a financial loss, and assurance, meaning the assurance of a fixed or minimum sum upon the occurrence of a specified event that is bound to occur. The text of the Act of 1601, however, shows that the term “assurance” was applied to what is manifestly indemnity insurance. More recently the distinction has faded further under the influence of the EU, where the official English texts of the relevant Directives consistently use the term “life insurance”. For most practical purposes therefore insurance and assurance can be treated as interchangeable terms. In the Taxes Acts, however, the term “assurance” is usually confined to life business.