Principle of Indemnity (Indemnitätsprinzip)
The principle of indemnity holds that the insurance benefit must not place the policyholder in a financially better position than if the loss had not occurred, in order to prevent unjust enrichment through the occurrence of a claim.
Concept
The principle of indemnity is a fundamental principle of indemnity insurance, under which the insurance benefit serves solely to compensate for the economic loss actually suffered and must not, as a result, place the policyholder in a financially better position than if the insured event had not occurred. It serves to avoid perverse incentives that could arise from enrichment through the occurrence of a claim.
Distinction from Sum Insurance
The principle of indemnity applies without limitation to indemnity insurance (e.g., property, liability, and marine insurance), where the benefit is always limited to the specific loss. In sum insurance (e.g., life insurance and certain accident insurance), by contrast, the principle does not apply, since a fixed sum agreed in advance is paid regardless of the actual economic loss.
Practical Consequences
The principle of indemnity gives rise to central insurance law concepts, including the prohibition of double compensation in cases of multiple insurance, the transfer of claims against third parties to the insurer (recourse/subrogation), and the application of the underinsurance rule, under which an insufficient sum insured leads to a proportional reduction in benefits in the event of a claim.