Washington State Insurance Practice Exam

What does the principle of indemnity seek to do in insurance terms?

1. Allow policyholders to profit from losses

2. Cover as many types of risks as possible

3. Reimburse insured parties to their pre-loss position

4. Transfer risk to secondary insurers

The correct answer is: Reimburse insured parties to their pre-loss position

The principle of indemnity in insurance seeks to reimburse the insured party to their pre-loss position. This means that the purpose of insurance is not to allow the policyholder to profit from a loss but rather to make them whole again after experiencing a covered loss. It's about restoring the insured to the same financial position they were in before the loss occurred. This principle helps prevent moral hazards and ensures that insurance is not used as a means for financial gain but rather as a way to mitigate risk and provide financial protection. Options A, B, and D are incorrect because they do not align with the fundamental concept of indemnity in insurance.