Property & Casualty Insurance Exam (National Portion)Property and Casualty Insurance BasicsHard
A policyholder's commercial auto policy states that the insurer will pay for damages for which the insured is legally responsible, up to the policy limits. This fundamental principle of casualty insurance, where the insurer steps in to pay on behalf of the insured when they are found liable, is known as:
- AUtmost Good Faith
- BInsurable Interest
- CIndemnity
- DAdhesion
Show answer & explanationAnswer & explanation
Correct answer: C. Indemnity
Indemnity is the principle that insurance should restore the insured to the financial position they were in before the loss, without allowing them to profit from the loss. In liability insurance, this means paying on behalf of the insured to cover their legal responsibility, thus making them 'whole' again by protecting their assets.
Why the other options are wrong
- A. Utmost Good Faith requires honesty and full disclosure from both parties in an insurance contract.
- B. Insurable Interest requires a financial stake in the insured property or person, present at the time of loss for P&C.
- D. Adhesion means the policy is drafted by the insurer, and the insured must accept it as is, with ambiguities interpreted in favor of the insured.
Principle of Indemnity
The core principle that insurance should restore the insured to the same financial position they were in immediately prior to the loss, without allowing them to profit from it.
- Prevents moral hazard (profiting from a loss).
- Applies to both property and casualty (liability) insurance.
- Achieved through various valuation methods and subrogation.
Memory trick: Principles: The 'Pillars' that 'Protect' the insurance contract.