Under the indemnity principle, the amount paid on a claim is determined by which factor?

• A. Insurable interest
• B. Replacement cost
• C. Policy limit
• D. Appraised value

Answer: (A)

Under indemnity, you’re paid only for the actual loss you suffer, not for any profit or more than your financial stake in the property. The key factor that governs how much can be recovered is insurable interest—the amount you stand to lose if the loss occurs. This interest sets the maximum you can recover; you can’t collect more than your stake, and you can’t recover if you have no insurable interest. Of course, the payout is also limited by the policy’s limit and the way the loss is valued (actual cash value or replacement cost), but the fundamental idea is that the payment is constrained by your insurable interest relative to the loss. For example, if you have a $60,000 loss and your insurable interest covers at least $60,000, you’d receive up to the loss amount (subject to policy terms). If your insurable interest is only $50,000, you can’t recover more than that, even if the loss were greater. This highlights why insurable interest is the determining factor under indemnity.