What is the fundamental requirement of the principle of indemnity?

The fundamental requirement of the principle of indemnity is to restore the insured to their financial position prior to the loss. This principle is a cornerstone of insurance, emphasizing that the insured should not profit from the insurance claim but rather be compensated to the extent that they were before the loss occurred. This ensures fairness in the insurance process by preventing individuals from receiving more than what they lost, which could, in turn, lead to moral hazard—where the insured may take unnecessary risks because they are covered by insurance.

Restoring the insured to their original financial status helps maintain the integrity of the insurance system, promoting responsible behavior among policyholders. By focusing on restoration rather than profit, the principle of indemnity balances the needs of both the insurer and the insured, ensuring that claims are paid out in a just and equitable manner.