Under indemnity principles, which factor determines the amount payable on a claim?

Under indemnity principles, which factor determines the amount payable on a claim?

• A. Policy premium
• B. Deductible amount
• C. Insurable interest
• D. Moral hazard

Answer: (C)

Under indemnity, the payment is limited to restoring the insured to their preloss financial position, not providing a profit. The factor that sets the maximum the insurer will pay is the insured’s financial stake in the property at the time of loss—this is insurable interest. If your interest in the insured property is smaller than the loss, or if you have no legitimate interest, you cannot recover more than that interest, even if the loss is larger. This keeps the payout in line with the actual economic stake. Other elements affect the amount in other ways but do not determine the upper limit. The premium is the price paid for coverage, not the payout. The deductible reduces the amount paid to the insured rather than setting the cap. Moral hazard concerns how behavior might change after insurance and does not set the payout.

Under indemnity, the payment is limited to restoring the insured to their preloss financial position, not providing a profit. The factor that sets the maximum the insurer will pay is the insured’s financial stake in the property at the time of loss—this is insurable interest. If your interest in the insured property is smaller than the loss, or if you have no legitimate interest, you cannot recover more than that interest, even if the loss is larger. This keeps the payout in line with the actual economic stake.

Other elements affect the amount in other ways but do not determine the upper limit. The premium is the price paid for coverage, not the payout. The deductible reduces the amount paid to the insured rather than setting the cap. Moral hazard concerns how behavior might change after insurance and does not set the payout.