Which principle ensures that an insured cannot profit from insurance and the payout does not exceed the loss?

• A. Utmost good faith
• B. Valued policy
• C. Principle of indemnity
• D. Binder

Answer: (C)

The principle of indemnity ensures you cannot profit from an insurance claim; the payout is limited to the actual financial loss you suffer, aiming to restore you to your pre-loss position. This means the insurer pays an amount that corresponds to what was lost, not more, and the amount can be adjusted by factors like actual cash value or replacement cost, subject to policy terms, deductibles, and any coinsurance. This prevents windfalls and ensures the insured isn’t compensated beyond the loss.

Utmost good faith refers to honest disclosure in the application and claims process, a valued policy pays a pre-set amount regardless of actual loss, and a binder is a temporary insurance contract.