Texas General Lines — Life, Accident, Health and HMOGeneral InsuranceEasy
A client is reviewing different types of insurance policies and is particularly interested in understanding the fundamental principle that ensures an insured person does not profit from a loss. Which of the following principles best describes this concept?
- AAdhesion
- BIndemnity
- CAleatory
- DUtmost Good Faith
Show answer & explanationAnswer & explanation
Correct answer: B. Indemnity
The principle of indemnity ensures that an insured person is restored to their financial condition prior to a loss, without profiting from the loss itself. This prevents moral hazard and excessive claims.
Why the other options are wrong
- A. Adhesion refers to a contract offered on a 'take-it-or-leave-it' basis, where one party has little power to negotiate terms.
- C. Aleatory refers to a contract where the values exchanged are unequal and depend on an uncertain future event.
- D. Utmost Good Faith requires all parties to an insurance contract to deal honestly and openly with each other.
Principle of Indemnity
A fundamental principle of insurance stating that the insured should be restored to the same financial position they were in before the loss, without making a profit from the loss.
- Prevents the insured from profiting from a loss.
- Restores the insured to their prior financial state.
- Common in property and casualty insurance, adapted for life and health.
Memory trick: Always remember, insurance aims to restore, not to make you more.