Insurance Basics, Insurance Facts, Principle of Indemnity
Principle of Indemnity Diagram
So what is insurance. Insurance is defined as protection against a financial loss. Insurance is here to protect us against the common risks we face on a daily basis.
Risk is defined as a chance of loss. There are two types of risk; pure risk and speculative risk. Pure risk is insurable, however speculative risk is not. Gambling is a good example of speculative risk. With speculative risk you have a chance for gain. Insurance companies will only cover you for pure risks. You can learn more about the four basic ways we treat risk here
Peril is the word insurance companies use which is defined as cause of loss. For collision coverage, insurance will not pay you for hail damage done to your vehicle. Under collision this is an uncovered peril. If you happen to have comprehensive coverage you would be covered. Comprehensive coverage is an “other than collision” type of coverage. Hazards are what increase the chance of a Peril happening. Read more on hazards here.
Being familiar with Named Perils is extremely important and purchasing homeowners or dwelling insurance. Although some of the forms are all risk, the less expensive policies are always Named Peril Policies. Named Peril Policies will only pay for named perils. All risk policies will cover all causes of loss except those excluded on the exclusions section of the contract. Read these carefully so you know exactly how much protection you’re buying.
Principle of indemnity states: You cannot profit from your insurance. With property insurance the insurance company will pay for either your loss or your policy limit whichever of these two is less. This principle also states that your insurance will make you whole again. I like to see pictures as I’m reading so I added a simple “Principal of Indemnity” diagram above.
With property insurance, Applicants must have a personal interest in the property that they insure. Personal interest must be proven at time of application and at time of loss. You cannot profit from insurance. The purpose of insurance is to make you whole again. You know I had just a little diagram that shows someone’s financial loss being made whole again. You’ll notice that the 3rd circle does not get larger; although many Insured will try for a larger outcome.