What does the principle of indemnity state?

The principle of indemnity is fundamental in insurance and asserts that an insured individual should be restored to their original financial position prior to a loss, but without profiting from the insurance payout. This principle ensures that insurance serves as a protection mechanism rather than a means for individuals to profit from losses incurred.

By aiming to return the insured to the same condition they were in before the loss occurred, the principle helps maintain fairness and equity in the insurance process. It prohibits the insured from receiving more than the actual loss suffered, effectively preventing insurance from being used as a profit-making tool. This ensures that the compensation is aligned with the actual financial damage endured rather than providing an unearned benefit.

In contrast, the other choices do not accurately capture the intent of the principle of indemnity. A deductible refers to an amount that the insured must pay out of pocket before insurance coverage kicks in, which is not related to the concept of restoring the insured’s original financial state. Receiving a cash payment doesn’t inherently align with restoring one’s condition; it must also reflect the actual loss incurred. Lastly, claiming compensation for future losses is not addressed by the principle of indemnity, which focuses specifically on past losses.