Principle of Indemnity

Definition - What does Principle of Indemnity mean?

The principle of indemnity is a defining aspect of insurance, and it states that an insurance policy shall not provide compensation to the policyholder that exceeds their economic loss. This limits the benefit to an amount that restores the policyholder to the same financial state as the one prior to the loss.

Insuranceopedia explains Principle of Indemnity

The principle of indemnity is a central, regulatory principle in insurance that applies to most policies, except personal accident, life insurance, and other similar policies. This basic tenet of insurance ensures the policyholder receives an amount in benefits equivalent to their actual losses so they do not make a profit from it. Because of this, it is linked to another central insurance principle, that of insurable interest, as the policyholder cannot receive a sum that goes beyond their insurable interest.

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