To understand insurance one must first grasp the principle of indemnity.¬† The theory is applied to insured losses and seeks to provide fair compensation.¬† Fair compensation to parties, the insured and the insurance company is required.¬† Resolving most losses is unambiguous.¬† 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.