General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
The principle of indemnity holds that the insured should be:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Indemnity means the insured is compensated for the actual financial loss suffered — made whole, but never enriched. The purpose of insurance is to restore, not to profit. In medical expense coverage this appears as payment of covered charges up to policy limits, and in disability income as scheduled benefits designed to replace income without creating a financial incentive to remain disabled.
Why the other options are wrong
- B) Profiting from a covered loss would create a moral hazard and turn insurance into a lottery; indemnity forbids it.
- C) Benefits are tied to covered charges and policy limits; paying the full face amount regardless of actual cost would overpay the loss.
- D) Benefits respond to the actual loss; paying regardless of the loss amount violates the indemnity concept.
Memory hook
Indemnity = make whole, not make rich. Insurance restores your position; it does not upgrade it.