Question

The principle of indemnity requires that:

A) a person is entitled to compensation only to the extent that financial loss has been suffered
B) insured cannot indemnify himself from both the insurance company and a negligent third part for the same claim
C) The insured must be subject to emotional or financial hardship resulting from the loss
D) The insured and insurer must both be forthcoming will all relevant facts about the insured risk and coverage provided for that risk

Answer 1

The principle of indemnity in insurance means that an insured person is only entitled to compensation that corresponds to the actual extent of their financial loss. This prevents moral hazard and maintains a balance in the insurance system by equating the premiums paid to the average benefits received.

Step-by-step explanation:

The principle of indemnity in insurance is a fundamental concept that ensures an insured person can only be compensated for the extent of their financial loss, which means that A) a person is entitled to compensation only to the extent that financial loss has been suffered is the correct interpretation of the principle. This is a key element in avoiding what is known as moral hazard, where the presence of insurance might lead to less caution because the risks are covered by the policy. Insurance is essentially a method of protecting a person from financial loss, with policyholders making regular payments to an insurance entity, which in turn provides reimbursement for losses covered by the policy. This system operates effectively when both parties adhere to the principle of indemnity, ensuring a balance between premiums paid and the benefits received, which also ties into the idea of an actuarially fair insurance policy.