What does the Principal of Indemnity state?

The Principle of Indemnity is a fundamental concept in insurance that aims to restore the insured to the financial position they occupied before the loss occurred. This principle ensures that the insured does not profit from an insurance claim, which would be contrary to the purpose of insurance. Instead, the goal is to compensate for the actual loss suffered, allowing the insured to recover from the specific financial setback without gaining more than what was lost.

This principle helps maintain equity within the insurance system by preventing over-compensation, which could encourage fraudulent claims. When a claim is made, the insurer evaluates the loss and determines the amount necessary to make the insured whole, thereby reflecting the fair market value of the loss rather than providing an amount that exceeds the damage incurred. In this way, the Principle of Indemnity serves to create fairness and stability within the insurance ecosystem.