Alabama Property and Casualty Practice Exam

What concept refers to the idea that a person cannot benefit from a loss?

1. Insurable interest

2. Subrogation

3. Indemnity

4. Risk retention

The correct answer is: Indemnity

The correct choice encompasses the principle of indemnity, which is central to insurance contracts. Indemnity ensures that a policyholder is compensated for their loss but does not receive a profit or benefit exceeding their actual loss. This principle is fundamental in preventing the insured from taking advantage of a loss, which might encourage moral hazard—where one's behavior may change when they no longer bear the financial consequences of an event. In practice, indemnity means that when a claim is made, the insurer will pay an amount that restores the insured to the same financial position they were in prior to the loss, but no more. This is essential in maintaining fairness and integrity within the insurance system, ensuring that individuals or entities do not profit from unfortunate events, such as damage or liability claims. While the other options relate to insurance concepts, they do not reflect the idea of preventing one from benefiting from a loss. Insurable interest pertains to having a stake in the property or life insured; subrogation refers to the insurer's right to pursue a third party for reimbursement after settling a claim; and risk retention involves assuming responsibility for certain risks rather than transferring them to an insurer.