Principle of Indemnity
The foundational insurance rule stating that compensation must only restore you to your exact pre-loss financial position without profit.
Actuarial & Contractual Mechanics
The Principle of Indemnity is the bedrock contractual rule governing property, casualty, liability, and motor insurance throughout US, UK, Commonwealth, and EU legal jurisdictions. The doctrine dictates that an insurance claim settlement should place the insured person in the exact financial standing they occupied immediately before the loss occurred—not one dollar richer and not one dollar poorer. Indemnity legally bars individuals from profiting from misfortune, eliminating moral hazard, arson-for-profit, and fraudulent claims. Life insurance and permanent disability contracts are exempt because human life cannot be assigned an exact cash value.
A kitchen fire causes $20,000 in smoke damage to a homeowner's 10-year-old cabinetry. Under an indemnity settlement based on <a href="/glossary/actual-cash-value/" class="article-link">Actual Cash Value</a>, the insurer pays the value of 10-year-old cabinets ($12,000), not the cost of brand-new luxury custom marble cabinets ($40,000), ensuring the insured does not net a $20,000 profit.
Misunderstanding indemnity causes policyholders to mistakenly believe they can purchase multiple policies from three different companies for the same house or car and collect triple compensation. In reality, insurance subrogation and contribution clauses strictly limit total payout to 100% of the actual financial loss.
Frequently Asked Questions About Principle of Indemnity
Clear definitions, policy implications, and related coverage calculators.