Which policy principle requires that an insurer pay no more than the actual loss sustained?

• A. Indemnity
• B. Subrogation
• C. Waiver
• D. Consideration

Answer: (A)

Indemnity is the principle that the insurer should restore the insured to the financial position they had before the loss, paying no more than the actual loss sustained. This prevents anyone from profiting from a claim and keeps the payout tied to the real damage, subject to policy limits and deductibles. In practice, the payout reflects the loss amount, possibly adjusted by policy terms (actual cash value, replacement cost, or agreed value) and restricted by limits and applicable deductibles.

Subrogation involves the insurer stepping into the insured’s shoes to pursue recovery from a third party after paying the claim. Waiver is the voluntary relinquishment of a known right. Consideration is the exchange of value that forms the contract (such as the premium in exchange for coverage).