Principle of Indemnity
The insurance principle that restores an insured to approximately the same financial position held before a covered loss, without allowing a profit from the loss.
What does Principle of Indemnity mean in insurance?
Indemnity is central to most property and casualty contracts. Claim payments are limited by the amount of loss, the policy limit, deductibles, and applicable valuation provisions. Life insurance is generally not treated as a contract of indemnity because a person's life cannot be assigned an exact dollar value.
Exam-ready definition
Insurance should make the insured financially whole after a loss, but not better off than before it.
Example
If covered property worth $8,000 is destroyed, indemnity does not permit a $12,000 profit merely because the policy limit is higher.
Common misconception
Indemnity does not always mean receiving replacement cost; the policy may settle at actual cash value or another stated valuation method.
Sample insurance exam question
Which principle prevents an insured from profiting from a covered property loss?
Show answer
The principle of indemnity.
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