Principles of Risk Management and Insurance, 13th Edition

Principle of Indemnity

The principle of indemnity is one of the most important principles in insurance. The principle of indemnity states that the insurer agrees to pay no more than the actual amount of the loss; stated differently, the insured should not profit from a loss. Most property and casualty insurance contracts are contracts of indemnity. If a covered loss occurs, the insurer should not pay more than the actual amount of the loss. A contract of indemnity does not mean that all covered losses are always paid in full. Because of deductibles, dollar limits on the amount paid, and other contractual provisions, the amount paid is often less than the actual loss.

The principle of indemnity has two fundamental purposes. The first purpose is ...