Property & Casualty Insurance Exam (National Portion)Property and Casualty Insurance BasicsMedium
A policyholder's commercial auto policy states that the insurer will pay for damages for which the insured is legally liable, up to the policy limits. This fundamental principle, aiming to restore the insured to their pre-loss financial condition without allowing them to profit from the loss, is known as the principle of:
- AAdhesion
- BSubrogation
- CUtmost Good Faith
- DIndemnity
Show answer & explanationAnswer & explanation
Correct answer: D. Indemnity
The principle of indemnity states that the insured should be restored to the same financial condition they were in prior to the loss, without profiting from it. This prevents unjust enrichment and ensures insurance acts as a reimbursement for actual losses.
Why the other options are wrong
- A. Adhesion means the insured must accept the policy as written by the insurer.
- B. Subrogation allows the insurer to pursue a third party responsible for a loss.
- C. Utmost Good Faith requires honesty and full disclosure from both parties.
Principle of Indemnity
A fundamental principle of insurance that states the insured should be restored to the same financial position they were in immediately prior to the loss, without profiting from the loss.
- Prevents unjust enrichment
- Restores to pre-loss condition
- Core of property and casualty insurance
- Often limited by policy limits and deductibles
Memory trick: INDEMNITY makes you WHOLE, SUBROGATION chases the CULPRIT, ADHESION means STICK, GOOD FAITH means TRUST.