Principle of Indemnity states that the insured shall be compensated appropriately for the losses caused to the goods by the insurer, only to the extent that the insurer does not make a profit out of the loss that occurred.
In other words, principle of indemnity deals with the premise that in the event of a loss, the insurer must put the insured to the position in which he was before the loss occurred. This means that the insurer shall receive any compensation that is neither more nor less than the actual loss that has taken place.
The limit of the compensation is always subject to the sum insured and the terms and conditions that govern the policy.
Principle of Indemnity is applicable in case of fire insurance and marine insurance contracts.
Functions of Principle of Indemnity
Following are the functions of Principle of Indemnity:
1. It should compensate the insured (victim) in such a way that the insured is placed in a situation where they were before the event of loss that occurred.
2. The compensation that is received by the insured should not in any circumstances result in increasing the asset of the insured as the whole purpose of the insurance policy is not to serve as a source of profit for the insured.
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