What does the "Principle of Indemnity" primarily seek to prevent?

The "Principle of Indemnity" primarily seeks to prevent overinsurance and potential windfalls. This principle is fundamental to insurance and ensures that a policyholder is compensated for their loss without receiving a profit from the insurance payout. It is designed to restore the insured to the financial position they were in prior to the loss, neither gaining nor losing as a result of the insurance claim.

For example, if an individual has a property valued at $100,000 and suffers a loss of that amount, the insurance policy should provide compensation up to that limit. However, if the individual were to have a policy worth $150,000 and then make a claim for the full value of the loss, they would stand to gain a profit, which contradicts the principle of indemnity. By preventing such situations, the principle helps maintain the integrity of insurance and ensures that it serves its true purpose of risk management rather than profit-making.