Property and Casualty Insurance Practice Exam

What principle states that an individual should be restored to their approximate financial condition before a loss?

1. Principle of Subrogation

2. Principle of Indemnity

3. Principle of Insurable Interest

4. Principle of Risk Management

The correct answer is: Principle of Indemnity

The principle that states an individual should be restored to their approximate financial condition before a loss is known as the Principle of Indemnity. This principle is foundational in property and casualty insurance, ensuring that the insured is compensated fairly for their loss without allowing them to profit from the insurance payout. Essentially, indemnity aims to put the insured back in the same financial position they were in prior to the loss occurring, discouraging any incentive to cause a loss intentionally. In contrast, the concept of subrogation involves the insurer's right to pursue a third party responsible for the loss after compensating the insured, aiming to recover the amount paid to the insured. Insurable interest refers to the requirement that the insured has a stake or financial interest in the subject of the insurance policy. Finally, risk management encompasses strategies to manage risk exposure and minimize potential losses, but it does not specifically address the restoration of financial condition post-loss. Each of these concepts plays a role in the structure of insurance, but only the Principle of Indemnity directly addresses the restoration to pre-loss financial status.