Which insurance principle states that if a policy allows for greater compensation than the loss incurred, the insured may only receive benefits for the amount lost?

The principle of indemnity is foundational in insurance, ensuring that the insured party is compensated only for their actual loss and is not able to profit from an insurance claim. This principle serves to prevent moral hazard, which could occur if policyholders felt incentivized to exaggerate or fabricate losses due to an insurance policy providing benefits exceeding the actual loss.

Under the indemnity principle, once a loss is confirmed, the insurance payout is limited to the amount of the financial loss incurred. This principle is encapsulated in various types of insurance, particularly property insurance, where ensuring compensation matches the actual economic loss helps maintain fairness in the insurance process and avoids unjust enrichment of the insured.

While the other concepts like subrogation, risk transfer, and insurance pooling play significant roles in how insurance operates, they do not directly address the issue of limiting payouts to actual losses. Subrogation pertains to the insurer’s right to recover costs from third parties responsible for a loss, risk transfer involves transferring the financial risk of loss to an insurance company, and insurance pooling relates to the gathering of premiums from multiple insureds to spread the risk of losses. These principles support the overall insurance framework but do not encapsulate the central idea behind indemnity.