Registered Insurance Brokers of Ontario (RIBO) Practice Exam

What ensures that the insured is compensated fairly after a loss?

1. Policy Exclusions

2. Indemnity Principle

3. Liability Coverage

4. Subrogation Rights

The correct answer is: Indemnity Principle

The principle of indemnity is fundamental in insurance, ensuring that an insured party is compensated fairly after a loss. It is designed to restore the insured to the financial position they were in before the loss occurred, without allowing them to profit from the situation. This principle prevents overcompensation and ensures that the compensation reflects the actual loss incurred by the insured. For example, if an individual insures property valued at $100,000 and suffers a loss of $40,000, the indemnity principle guarantees that they can claim up to that amount to repair or replace their property, thus maintaining their pre-loss financial state. In contrast, policy exclusions outline conditions or circumstances under which coverage does not apply, which can limit an insured's recovery. Liability coverage refers to insurance that protects against claims resulting from injuries and damage to people or property, but does not directly address the fair compensation of the insured. Subrogation rights allow insurers to pursue recovery from a third party responsible for the loss, but again, this does not directly contribute to ensuring that the insured is compensated fairly.