The fundamental principle that the insurance indemnity cannot exceed the loss actually suffered, aiming to restore the policyholder to their prior position without enriching them.
The indemnity principle is the cardinal rule of property and casualty insurance, according to which the indemnity paid by the insurer can never exceed the loss actually suffered by the policyholder, measured at the date of the loss. This principle fulfils two complementary functions. On the one hand, it protects the moral character of insurance by preventing the contract from becoming a means of enriching oneself through the occurrence of a loss, which would eliminate the aleatory nature of the contract and create moral hazard. On the other hand, it defines the measure of the insurer's obligation, which is confined to restoring the policyholder's patrimony. In practice, this principle implies the requirement of an insurable interest, that is, the policyholder must have an economic interest in the preservation of the insured subject matter, as well as the proportionality rule in cases of under-insurance. It underlies mechanisms such as subrogation, which allows the insurer who has indemnified to claim against the responsible third party up to the amount of its payment. Parametric insurance puts this principle to the test, because it pays a predefined amount regardless of the actual loss, which may produce over-indemnification or under-indemnification. This tension has led some jurisdictions to characterize parametric products as financial derivatives rather than insurance in the classical sense, with significant regulatory consequences.
An entrepreneur owning a warehouse worth 500,000 euros declares it for 300,000 euros in his fire policy to reduce his premium. After a partial loss of 200,000 euros, the insurer applies the proportionality rule derived from the indemnity principle, noting that the policyholder covers only 60 per cent of the real value. It pays only 120,000 euros, that is, 60 per cent of the damage, leaving the policyholder to bear 80,000 euros of the loss. This example illustrates why the indemnity principle is accompanied in practice by a requirement to declare the insured value accurately.
principe d'indemnisation, indemnity principle, indemnisation au réel, réparation intégrale