Distinguish between the principle of insurable interest and the principle of indemnity.

Question

Accepted Answer

Insurable interest and indemnity are both essential principles of insurance, but they operate at different stages of the contract.

| Basis | Insurable interest | Indemnity |
|---|---|---|
| What it decides | Whether a valid insurance contract can exist at all | How much compensation is payable |
| Nature | The insured must have a genuine financial stake in the subject matter | Compensation restores the pre-loss position, no more, no less |
| When it must exist | At least at the time the policy is taken (and, for general insurance, also at the time of loss) | Applied at the time a claim is settled |
| Consequence if absent | The contract is void, being treated as a mere wager | The insured would either be under-compensated or over-compensated, undermining the principle |
| Applicability to life insurance | Required, but only at the time the policy is taken | Not strictly applicable, since life cannot be precisely valued — a sum assured is paid instead | …

Q.Distinguish between the principle of insurable interest and the principle of indemnity.

Concept understanding — Meaning, Nature and Principles of Insurance

Basis	Insurable interest	Indemnity
What it decides	Whether a valid insurance contract can exist at all	How much compensation is payable
Nature	The insured must have a genuine financial stake in the subject matter	Compensation restores the pre-loss position, no more, no less
When it must exist	At least at the time the policy is taken (and, for general insurance, also at the time of loss)	Applied at the time a claim is settled
Consequence if absent	The contract is void, being treated as a mere wager	The insured would either be under-compensated or over-compensated, undermining the principle
Applicability to life insurance	Required, but only at the time the policy is taken	Not strictly applicable, since life cannot be precisely valued — a sum assured is paid instead

Q.Distinguish between the principle of insurable interest and the principle of indemnity.

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