Which principle states that when a loss occurs, an insured should be restored to the approximate financial condition they were in before the loss?

• A. Indemnity
• B. Utmost Good Faith
• C. Subrogation
• D. Insurable Interest

Answer: (A)

Indemnity is the principle that guides how losses are settled: the goal is to return the insured to roughly the same financial position they were in before the loss. The payout should reflect the actual loss suffered, up to the policy limits and subject to deductibles, and it should not create a profit for the insured. This concept helps control moral hazard and keeps insurance from rewarding a gain from a claim.

Utmost good faith refers to honest and full disclosure when entering the contract. Subrogation is the insurer’s right to recover paid claims from a third party responsible for the loss. Insurable interest requires the insured to have a financial stake in the subject of the insurance at the time of loss.