Alabama Insurance Adjuster Practice Exam

What principle does Greg violate by ordering a $3,200 trombone while his insurance pays for a $400 trombone?

1. Insurable Interest

2. Indemnity

3. Subrogation

4. Utmost Good Faith

The correct answer is: Indemnity

The principle that is violated in this scenario is the principle of indemnity. Indemnity aims to prevent the insured from profiting from a loss and ensures that they are compensated only for their actual loss. By ordering a $3,200 trombone while the insurance policy only covers a $400 trombone, Greg is seeking a financial gain well beyond the actual loss he would incur, which is contrary to the principle of indemnity. The idea is that insurance should restore the insured to the financial position they were in before the loss, not allow for a profit from it. This principle is fundamental in insurance contracts, as it maintains fairness and discourages fraudulent claims based on exaggerated losses or unnecessary expenses that do not reflect the actual need as determined by the policy coverage. In this case, Greg’s action indicates a potential misuse of the insurance coverage intended to protect against actual losses.