Which insurance principle ensures that individuals receive compensation only to the extent of their loss?

The principle of indemnity is fundamental in insurance, ensuring that a policyholder is compensated for their loss without profit. This principle is designed to restore the insured to the financial position they were in prior to the loss, preventing any unjust enrichment. Under indemnity, the policyholder must demonstrate the extent of their loss to receive an appropriate payout, which aligns with the concept of fairness and equity in insurance practices.

For instance, if someone suffers damage to their property, indemnity ensures that they receive compensation that accurately reflects the monetary amount necessary to repair or replace what was lost, not more. This principle maintains the integrity and purpose of insurance, which is to protect against financial loss rather than providing a means to gain financially from unfortunate events.

The other concepts, such as insurable interest, subrogation, and contribution, play different roles in the insurance process. For example, insurable interest ensures that the policyholder has a legitimate stake in the item insured, subrogation allows the insurer to pursue a third party responsible for a loss after they have compensated the insured, and contribution applies when multiple policies cover the same risk, ensuring that no insured receives more than their loss from multiple polices. Each of these principles supports the insurance system but does not