What key principle in insurance ensures that the insured is compensated only for the actual loss?

The principle that ensures the insured is compensated only for their actual loss is known as indemnification. This principle is foundational in insurance, serving to restore the insured to the financial position they were in immediately before the loss occurred, without allowing them to profit from the situation. Indemnification is crucial in maintaining fairness within the insurance system, as it prevents individuals from claiming more than their loss and potentially exploiting the insurance coverage for gain.

In practice, this means that if an insured party suffers a loss, the insurance company will assess the extent of that loss and provide compensation accordingly, up to the limits of the policy. This helps maintain the original intent of insurance, which is to provide protection against risk but not to serve as a means of profit.

This principle is distinct from concepts like subrogation, which involves the insurance company stepping into the shoes of the insured to recover losses from third parties, or prorata liability, which deals with the proportional share of a claim among multiple insurers. Universal coverage refers to a different concept altogether, focusing on broad insurance coverage rather than the principle of compensating for loss.