California Life and Health Insurance Practice Exam

Restoring an insured to the same condition as before a loss is an example of which principle?

1. Subrogation

2. Indemnity

3. Utmost good faith

4. Insurable interest

The correct answer is: Indemnity

The concept of restoring an insured to the same condition as before a loss is fundamentally linked to the principle of indemnity. This principle is central to insurance, as it ensures that the insured does not profit from a loss but is instead made whole again, reflecting their financial position prior to the loss occurring. Indemnity works by compensating the insured for their actual loss, which means that the payout from the insurance policy will equal the value of the loss incurred, rather than allowing for any additional profit. This approach is essential in maintaining fairness and preventing moral hazard, which refers to the idea that individuals may take greater risks if they know they are covered by insurance. In contrast, the other principles listed serve different roles within insurance. Subrogation involves the insurer's right to pursue a third party for recovery after paying a claim. Utmost good faith requires both parties to act honestly and disclose relevant information, while insurable interest necessitates that the insured has a legitimate interest in the subject matter of the insurance. Each principle is important in its own right, but for the specific context of restoring an insured to their pre-loss condition, indemnity is the most relevant principle.