What concept upholds the principle of indemnity in insurance?

The concept that upholds the principle of indemnity in insurance is insurable interest. Indemnity is a fundamental principle in insurance that ensures a policyholder is compensated for their loss without profiting from it. Insurable interest refers to the requirement that the policyholder must have a legitimate interest in the subject matter of the insurance; in other words, they must stand to suffer a financial loss if that subject were to be damaged or lost. This connection ensures that insurance can only serve as a mechanism for recovery of actual losses incurred, thereby maintaining the integrity of the indemnity principle.

For instance, if someone has an insurable interest in their property, they are directly affected by any losses to that property, which justifies their claim under the insurance policy. This alignment ensures that the insured does not benefit beyond the extent of their actual financial loss or gain profit from their insurance, which is a key tenet of the indemnity principle.

In contrast, policy limits establish the maximum amount that can be paid in the event of a loss, rather than supporting the concept of indemnity directly. Risk assessment involves analyzing the risk associated with insuring a particular individual or entity, and while it is important for underwriting, it does not directly uphold the principle of indemn