What is the Difference Between Limit of Indemnity and Sum Insured?

When purchasing insurance, you’ll often come across the terms “limit of indemnity” and “sum insured.” These sound quite similar, but there are some key differences between the two that are important to understand.

Sum Insured

The sum insured is the maximum amount the insurance company will pay for a covered loss under a policy. It sets the limit on how much the insurer will pay out in the event of a claim.

Sums insured are commonly used for first-party insurance policies that cover direct damage to the policyholder’s own assets and property. For example:

• Home insurance – The sum insured will be the rebuilding cost of the home.

• Car insurance – The sum insured will be the current market value of the vehicle.

• Business property insurance – The sum insured will match the value of the office contents.

So in essence, the sum insured is matched to the value of the insured property or assets. It caps the payout up to the stated amount.

Limit of Indemnity

The limit of indemnity is the maximum the insurance company will pay under a liability policy. This provides third-party coverage to protect the policyholder from claims made against them by others for injury or damage. For example:

• Public liability insurance – This covers injury to third parties caused by the business. The limit of indemnity caps the payout per claim.

• Professional indemnity – This covers claims against professionals for negligence. The limit defines total coverage.

• Directors and officers liability – This covers legal claims against company directors and officers over their decisions. The limit applies per policy period.

So the limit of indemnity deals with third-party claims, while the sum insured covers first-party losses. Limits of indemnity are also not tied to a specific property value.

Key Differences

Some other key differences between the two terms:

• A sum insured is matched to a defined asset value. A limit of indemnity is not tied to a precise loss amount.

• Sums insured apply per loss event. Limits of indemnity may apply per claim, per year, or per policy period regardless of number of claims.

• Sums insured are used in property, auto, and Casualty policies. Limits of indemnity apply to liability policies.

• Exceeding the sum insured results in underinsurance. Hitting the limit of indemnity does not mean underinsurance.