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 policyholders are compensated for their losses but only up to the amount of the actual loss sustained. This principle is designed to prevent the insured from profiting from their insurance claim, essentially maintaining the notion that insurance is meant to restore a person to the financial position they were in prior to the loss, without granting them any additional monetary benefit.

For example, if a homeowner has their property damaged and files a claim, the indemnity principle ensures they only receive compensation for the repair costs, not more than that, regardless of the policy limits. This principle aims to discourage moral hazard, where a person might engage in risky behavior because they know they have insurance coverage.

The other options relate to different aspects of insurance. Insurable interest requires that a policyholder have a legitimate interest in the safety and preservation of the insured property; subrogation is the right of an insurer to pursue a third party responsible for a loss after compensating the insured; and contribution pertains to how insurers share costs when there are multiple policies covering the same risk. Each of these principles plays a role in the insurance framework but does not specifically address the compensation limitations that indemnity does.