Question

The principle of indemnity asserts that an insurer will only compensate the insured to the extent the insured has suffered an actual financial loss. In other words, the insured cannot make a profit from insurance. True or False?

Answer 1

The principle of indemnity in insurance prevents the insured from making a profit from insurance and ensures that they are compensated for their actual financial loss.

Step-by-step explanation:

The principle of indemnity in insurance is the idea that an insurer will only compensate the insured for their actual financial loss, without allowing them to make a profit from the insurance. This principle ensures that insurance is used to restore the insured to their pre-loss financial condition, rather than providing them with a windfall.

For example, let's say you have a car that is insured for $10,000. If your car is completely destroyed in an accident, the insurer will only compensate you for the actual value of the car at the time of the accident, taking into account factors such as depreciation. If the car is determined to be worth $8,000 at the time of the accident, you would receive $8,000 in compensation, not the full $10,000.

This principle of indemnity prevents people from intentionally causing damage to their insured property or engaging in fraudulent activities to receive a larger payout from the insurer. It ensures that insurance remains a tool to financially protect individuals and businesses from unexpected losses, rather than a means to profit from unfortunate events.