To understand insurance one must first grasp the principle of indemnity.Â The theory is applied to insured losses and seeks to provide fair compensation.Â Fair compensation to parties, the insured and the insurance company is required.Â Resolving most losses is unambiguous.Â Others test the service skills of the insurance agency and require both the insurance company and the insured to commit to the principle of indemnity.
A cornerstone for insurance, the principle of indemnity requires that an insured may not be compensated more than there economic loss. The insured cannot profit from a loss. If losses became a way for policyholders to generate profits, then insurance companies would become subject to adverse selection. This in the quickly cause insurance premiums for all property and casualty policies to rise.