UGC NET
UGC NET COACHING
UGC NET PREVIOUS PAPERS
UGC NET ADULT EDUCATION PREVIOUS YEAR PAPERS UGC NET PHYSICAL EDUCATION PREVIOUS YEAR PAPERS UGC NET RESEARCH APTITUDE PREVIOUS YEAR PAPERS UGC NET POLITICAL SCIENCE PREVIOUS YEAR PAPERS UGC NET PHILOSOPHY PREVIOUS YEAR PAPERS UGC NET LAW PREVIOUS YEAR PAPERS UGC NET MASS COMMUNICATION AND JOURNALISM PREVIOUS PAPERS UGC NET SANSKRIT TRADITIONAL SUBJECTS PREVIOUS YEAR PAPERS UGC NET PHYSICAL EDUCATION PREVIOUS YEAR PAPERS PAPERS UGC NET ISLAMIC STUDIES PREVIOUS YEAR PAPERS UGC NET INDIAN CULTURE PAPERS UGC NET REGIONAL LANGUAGE LITERATURE PREVIOUS YEAR PAPERS UGC NET FOLK LITERATURE PREVIOUS YEAR PAPERS UGC NET COMPARATIVE LITERATURE PREVIOUS YEAR PAPERS UGC NET PERFORMING ART PREVIOUS YEAR PAPERS UGC NET ARCHAEOLOGY PREVIOUS YEAR PAPERS UGC NET CRIMINOLOGY PREVIOUS YEAR PAPERS UGC NET GEOGRAPHY PREVIOUS YEAR PAPERS UGC NET ENVIRONMENTAL SCIENCES PREVIOUS YEAR PAPERS UGC NET WOMEN STUDIES PREVIOUS YEAR PAPERS UGC NET VISUAL ART PREVIOUS YEAR PAPERS UGC NET KONKANI PREVIOUS YEAR PAPERS UGC NET MUSEOLOGY PREVIOUS YEAR PAPERS UGC NET SOCIAL MEDICINE PREVIOUS YEAR PAPERS UGC NET INTERNATIONAL STUDIES PREVIOUS YEAR PAPERS UGC NET PRAKRIT PREVIOUS YEAR PAPERS UGC NET FORENSIC PREVIOUS YEAR PAPERS UGC NET PALI PREVIOUS YEAR PAPERS UGC NET KASHMIRI PREVIOUS YEAR PAPERS UGC NET TOURISM ADMINISTRATION PREVIOUS YEAR PAPERS UGC NET YOGA PREVIOUS YEAR PAPERS UGC NET ELECTRONIC SCIENCE PREVIOUS YEAR PAPERS UGC NET COMPUTER SCIENCE PREVIOUS YEAR PAPERS UGC NET HUMAN RIGHTS AND DUTIES PREVIOUS YEAR PAPERS UGC NET ECONOMICS PAPERS
UGC NET MOCK TEST
UGC NET SYLLABUS
UGC NET PAPER 1 SYLLABUS UGC NET ECONOMICS SYLLABUS UGC NET POLITICAL SCIENCE SYLLABUS UGC NET PHILOSOPHY SYLLABUS UGC NET PSYCHOLOGY SYLLABUS UGC NET SOCIOLOGY SYLLABUS UGC NET ANTHROPOLOGY SYLLABUS UGC NET COMMERCE SYLLABUS UGC NET ENGLISH SYLLABUS UGC NET POLITICAL SCIENCE SYLLABUS UGC NET MANAGEMENT SYLLABUS UGC NET HISTORY SYLLABUS UGC NET HINDI SYLLABUS UGC NET LAW SYLLABUS UGC NET GEOGRAPHY SYLLABUS UGC NET HOME SCIENCE SYLLABUS UGC NET SANSKRIT SYLLABUS UGC NET YOGA SYLLABUS UGC NET EDUCATION SYLLABUS UGC NET SOCIAL WORK SYLLABUS UGC NET ENVIRONMENTAL SCIENCES SYLLABUS UGC NET ELECTRONIC SCIENCE SYLLABUS UGC NET BENGALI SYLLABUS UGC NET PHYSICAL EDUCATION SYLLABUS UGC NET DEFENCE AND STRATEGIC STUDIES SYLLABUS UGC NET PUBLIC ADMINISTRATION SYLLABUS UGC NET MASS COMMUNICATION SYLLABUS UGC NET VISUAL ART SYLLABUS UGC NET FORENSIC SCIENCE SYLLABUS UGC NET URDU SYLLABUS UGC NET PUNJABI SYLLABUS UGC NET COMPUTER SCIENCE SYLLABUS UGC NET TELUGU SYLLABUS UGC NET POPULATION STUDIES SYLLABUS UGC NET MUSIC SYLLABUS UGC NET ARABIC SYLLABUS UGC NET MARATHI SYLLABUS UGC NET SOCIAL MEDICINE COMMUNITY HEALTH SYLLABUS UGC NET TAMIL SYLLABUS UGC NET TOURISM ADMINISTRATION SYLLABUS UGC NET GUJARATI SYLLABUS UGC NET INDIAN CULTURE SYLLABUS UGC NET ARCHAEOLOGY SYLLABUS UGC NET CRIMINOLOGY SYLLABUS UGC NET LINGUISTICS SYLLABUS UGC NET LIBRARY SCIENCE SYLLABUS UGC NET WOMEN STUDIES SYLLABUS UGC NET MAITHILI SYLLABUS UGC NET ORIYA SYLLABUS UGC NET CHINESE SYLLABUS UGC NET DOGRI SYLLABUS UGC NET NEPALI SYLLABUS UGC NET MANIPURI SYLLABUS UGC NET ASSAMESE SYLLABUS UGC NET FRENCH SYLLABUS UGC NET HUMAN RIGHTS AND DUTIES SYLLABUS UGC NET RAJASTHANI SYLLABUS UGC NET RUSSIAN SYLLABUS UGC NET SPANISH SYLLABUS UGC NET GERMAN SYLLABUS UGC NET JAPANESE SYLLABUS UGC NET ADULT EDUCATION SYLLABUS UGC NET BUDDHIST JAINA GANDHIAN AND PEACE STUDIES SYLLABUS UGC NET PERFORMING ART SYLLABUS UGC NET MUSEOLOGY SYLLABUS UGC NET TRIBAL AND REGIONAL LANGUAGE SYLLABUS UGC NET FOLK LITERATURE SYLLABUS UGC NET COMPARATIVE STUDY SYLLABUS UGC NET PERSIAN SYLLABUS UGC NET PALI SYLLABUS UGC NET KASHMIRI SYLLABUS UGC NET COMPARATIVE LITERATURE SYLLABUS UGC NET SANSKRIT TRADITIONAL SUBJECTS SYLLABUS UGC NET KONKANI SYLLABUS UGC NET INTERNATIONAL AND AREA STUDIES SYLLABUS UGC NET PRAKRIT SYLLABUS UGC NET BODO SYLLABUS UGC NET SINDHI SYLLABUS UGC NET ISLAMIC STUDIES SYLLABUS
UGC NET Notes
UGC NET Paper 1 Notes
UGC NET History Notes
UGC NET Commerce Notes
UGC NET Management Notes UGC NET Computer Notes UGC NET English Notes UGC NET Education Notes UGC NET Mass Communication Notes UGC NET Economics Notes UGC NET Electronic Science Notes UGC NET Environmental Science Notes UGC NET Law Notes UGC NET Political Science Notes UGC NET Psychology Notes UGC NET Sociology Notes UGC NET Geography Notes UGC NET Human Resource And Management Notes UGC NET Labour Welfare Notes UGC NET Teaching Aptitude Notes UGC NET Library Science Notes UGC NET Sanskrit Notes UGC NET Tourism Administration And Management Notes
UGC NET BOOKS
UGC NET PAPER 1 BOOKS UGC NET COMMERCE BOOKS UGC NET ENGLISH BOOKS UGC NET MANAGEMENT BOOKS UGC NET PAPER 2 BOOKS UGC NET ENVIRONMENTAL SCIENCE BOOKS UGC NET HISTORY BOOKS UGC NET POLITICAL SCIENCE BOOKS UGC NET EDUCATION BOOKS UGC NET ECONOMICS BOOKS UGC NET PSYCHOLOGY BOOKS UGC NET LAW BOOKS UGC NET SOCIOLOGY BOOKS UGC NET URDU BOOKS UGC NET PHYSICAL EDUCATION BOOKS UGC NET PHILOSOPHY BOOKS UGC NET COMPUTER SCIENCE BOOKS UGC NET GEOGRAPHY BOOKS UGC NET HOME SCIENCE BOOKS UGC NET ELECTRONIC SCIENCE BOOKS UGC NET SANSKRIT BOOKS UGC NET SOCIAL WORK BOOKS UGC NET MALAYALAM BOOKS UGC NET YOGA BOOKS UGC NET KANNADA BOOKS UGC NET MASS COMMUNICATION BOOKS UGC NET ODIA BOOKS UGC NET BENGALI BOOKS UGC NET POPULATION STUDIES BOOKS UGC NET ARCHAEOLOGY BOOKS UGC NET FRENCH BOOKS UGC NET MARATHI BOOKS UGC NET PUNJABI BOOKS UGC NET INDIAN CULTURE BOOKS UGC NET TOURISM ADMINISTRATION AND MANAGEMENT BOOKS UGC NET ANTHROPOLOGY BOOKS UGC NET TEACHING APTITUDE BOOKS UGC NET MUSIC BOOKS UGC NET LINGUISTICS BOOKS UGC NET LIBRARY SCIENCE BOOKS UGC NET PERFORMING ART BOOKS UGC NET FORENSIC SCIENCE BOOKS
UGC NET TIPS
UGC NET CITY-WISE COACHING

Principle of Indemnity - Definition, Functions, Importance, Etc.

Last Updated on Jun 12, 2025
Download As PDF
IMPORTANT LINKS

The principle of indemnity is a fundamental concept in insurance that governs the compensation provided to the policyholder in the event of a loss. Principle of indemnity is governing insurance which implies that an insurer is obliged to reinstate a policyholder to the original position after the loss.Thus, insurance is supposed to restore the insured to a financial position he held before the occurrence of the loss, thereby preventing the policyholder from profiting through the insurance contract. Among the core principles of indemnity in insurance, fairness and loss-based compensation stand out.

Principle of indemnity is one of the most important topics to be studied for the commerce related exams such as the UGC-NET Commerce Examination.

📚 Exclusive Free UGC NET Created by Our Experts
Subjects PDF Link
Download Free UGC NET Paper 1 Important Qs Important PDF Created by UGC NET Experts Download Link
Grab the Free UGC NET Commerce Important Qs used by UGC NET Students Download Link
Download Free UGC NET Political Science Important Qs Created by UGC NET Experts Download Link
Exclusive Free History Important Questions crafted by top mentors Download Link
Exclusive Free Geography Important Questions crafted by top mentors Download PDF
Download Free UGC NET Education Important Qs Created by UGC NET Experts Download PDF
Exclusive Free Sociology Important Questions crafted by top mentors Download PDF
Download Free UGC NET English Important Qs Created by UGC NET Experts Download PDF
Exclusive Free Economics Important Questions crafted by top mentors Download PDF
Download Free UGC NET Home Science Important Qs Created by UGC NET Experts Download PDF
Exclusive Free Psychology Important Questions crafted by top mentors Download PDF

In this article, the readers will be able to know about following:

  • Indemnity Meaning
  • Principle of Indemnity
  • Features of the Principle of Indemnity
  • Exceptions to the Principle of Indemnity
  • Principle of Indemnity Example
  • Principle of Indemnity vs Other Insurance Principles
  • Application of the Principle of Indemnity

Click Here to Download UGC NET Paper 1 Important Questions PDF

Indemnity Meaning

Indemnity refers to a legal or financial obligation to compensate another party for any loss, damage, or liability incurred. It is a form of protection or reimbursement against financial losses or adverse consequences. The party providing indemnity, often referred to as the indemnitor, agrees to make the other party, known as the indemnitee, whole by compensating them for specific losses or damages.

UGC NET/SET Course Online by SuperTeachers: Complete Study Material, Live Classes & More

Get UGC NET/SET SuperCoaching @ just

₹25999 ₹8749

Your Total Savings ₹17250
Explore SuperCoaching

Principle of Indemnity

The principle of indemnity has been a part of insurance practices since the early development of modern risk management. The principle of indemnity is a fundamental concept in insurance that governs the compensation provided to the policyholder in the event of a covered loss.The principle of indemnity ensures that the insured receives compensation only to the extent of the actual loss  This principle is based on the idea that the purpose of insurance is to indemnify, or compensate, the insured party for the actual financial loss suffered due to an insured event.Unlike the principle of utmost good faith, the principle of indemnity focuses solely on financial reimbursement The key elements of the principle of indemnity include:

  • Financial Restoration: The primary objective of indemnity is to restore the insured to the financial position they were in before the covered loss occurred. The insurance payout is intended to cover the actual economic loss suffered, preventing the insured from making a profit from the insurance contract.The principles of indemnity in insurance include no-profit compensation, factual loss verification, and coverage up to insured limits
  • No Overcompensation: The law disallows paying the insured anything more than the actual amount of loss. Also, the insurer needs to pay for anything beyond the financial damage endured by the insured.
  • Insurable Interest Requirement: The insured must possess an insurable interest over the insured matter to claim for indemnity. This guarantees that the insured possesses an insurable or legitimate financial interest in whatever property or person is being insured.
  • Practical Application in Property Insurance: The principle of indemnity is often evident in property insurance. In the case of property damage or loss, the insurer compensates the policyholder for the cost of repair, replacement, or the actual cash value of the property at the time of the loss.
  • Depreciation Considerations: When calculating indemnity for property insurance, depreciation may be taken into account. This reflects the reduction in the value of property over time, ensuring that the compensation aligns with the actual value at the time of the loss.
  • Prevention of Moral Hazard: The principle of indemnity helps prevent moral hazard by discouraging the insured from intentionally causing a loss to gain financially. The insured should have a genuine interest in protecting the insured property or person.The principles of indemnity in insurance stem from the idea of risk pooling and economic balance
  • Application in Different Types of Insurance: The principle of indemnity is applicable across various types of insurance, including property insurance, liability insurance, and health insurance. In each case, the goal is to provide compensation for actual losses without allowing for financial gain.

Features of the Principle of Indemnity

The features have been stated below.

  • Financial Restoration: The primary goal of the principle of indemnity is financial restoration. The primary objective is to restore the insured to the financial position they were in before the covered loss occurred.
  • No Financial Gain: A strict rule under the principle of indemnity in insurance is that the insured must not gain financially from the loss. The insured should not profit from the insurance contract. The compensation is limited to the actual loss suffered.
  • Insurable Interest: The principle of indemnity in insurance law requires that the policyholder has a legal or financial interest in the insured asset. The insured must have a valid insurable interest in the subject matter of the insurance for the principle to apply.
  • Compensation Limits: Compensation under the principle of indemnity is always limited. The compensation is limited to the amount of the actual loss or the policy limits, whichever is lower.
  • Depreciation Consideration: Especially relevant in property insurance, depreciation is factored into the claim to reflect the item's value at the time of loss. Depreciation may be taken into account, especially in property insurance, to reflect the actual value of the property at the time of the loss.

Exceptions to the Principle of Indemnity

The exceptions have been stated below.

  • Life Insurance: Life insurance is not strictly based on the principle of indemnity. The insurer pays a predetermined sum (the face amount) upon the death of the insured, regardless of the actual financial loss suffered.
  • Personal Accident Insurance: Similar to life insurance, personal accident insurance may pay a predetermined sum for specific injuries or events, deviating from the strict application of the principle of indemnity.
  • Valued Policies: Some policies, such as valued policies, specify a predetermined amount of compensation irrespective of the actual loss. These are exceptions to the principle of indemnity.
  • New-for-Old Policies: In certain policies, especially in marine insurance, "new-for-old" clauses may allow for the replacement of damaged or lost items with new ones, without considering depreciation.

Principle of Indemnity Example

Let's consider a property insurance example:

  • Scenario: A policyholder insures a building for its market value of $500,000. A covered event causes damage to the building.
  • Principle of Indemnity Application: The insurer, applying the principle of indemnity, assesses the actual loss. If the cost of repair is $50,000, the insured is indemnified for that amount. If the actual cash value of the damaged property is less due to depreciation, the indemnity may be adjusted accordingly.Under indemnity in insurance law, a person cannot claim more than their actual economic loss

Principle of Indemnity vs Other Insurance Principles

The difference has been stated below.

Aspect

Principle of Indemnity

Other Insurance Principles

Definition

Ensures the insured receives compensation equal to the actual loss suffered, preventing profit.

Include multiple legal doctrines like utmost good faith, insurable interest, contribution, subrogation, and proximate cause.

Application

Primarily applies to general insurance (e.g., health, motor, property).

Applies to all insurance types, including life and general insurance.

Profitability

No profit is allowed—only genuine financial loss is reimbursed.

Most principles focus on fairness, legitimacy, and ethical conduct rather than profit.

Policy Term Relevance

Claims are valid only for losses occurring during the policy period.

Policy term governs contract validity but may not follow indemnity (e.g., term life insurance).

Examples

Motor insurance reimbursing repair cost, not exceeding actual damage.

Life insurance pays a fixed sum on death regardless of actual financial loss.

Application of the Principle of Indemnity

The principle of indemnity in insurance applies primarily to property and general insurance policies. The application has been stated below.

  • Property Insurance: In cases of property damage or loss, the principle of indemnity is applied to compensate the insured for the actual financial loss suffered, considering factors like repair costs and depreciation.For example, if a house is partially damaged by fire, the insurer reimburses the repair costs—no more, no less—according to the principle of indemnity. This ensures that indemnity in insurance law protects both the insured and the insurer from unethical gain or fraud.
  • Liability Insurance: Insurance does not follow the rules of indemnity; however, the insured is reimbursed for the real losses suffered due to the covered liability claims under liability insurance. Even here, the principles of indemnity in insurance govern the compensation provisions of the policy. Hence, it will be ensured that only valid claims are indemnified by the insurer.
  • Health Insurance: In health insurance, the principle of indemnity is applied when reimbursing the insured for actual medical expenses incurred, up to the policy limits.The principle of indemnity in insurance law ensures that the policyholder does not profit from illness, but receives sufficient funds to recover physically and financially.
  • Motor Insurance: Following an accident, motor insurance applies the principle of indemnity by compensating the insured for the repair costs or the actual cash value of the damaged vehicle.Here, indemnity in insurance law ensures that the insured is restored to their pre-loss financial state, not beyond it.

Conclusion

The principle of indemnity serves as a cornerstone in insurance contracts, emphasizing the idea of restoring the insured to the financial state they were in before the occurrence of the insured event. While providing essential financial protection, this principle prevents the misuse of insurance as a tool for financial gain. This principle builds trust between insurers and policyholders and underlines the principles of indemnity in insurance as essential tools in maintaining financial stability during crises.

Principle of indemnity is a vital topic as per several competitive exams. It would help if you learned other similar topics with the Testbook App.

Major Takeaways for UGC NET Aspirants

 
  • The definition of indemnity is to reimburse a party for any losses or damages sustained, putting them back in their pre-loss financial situation.
  • Principle of Indemnity: This principle prevents insurance profit by guaranteeing that the insured is only paid out for actual losses.
  • The Principle of Indemnity's characteristics include financial restoration without gain, recompense equivalent to real loss, and its primary application to non-life insurance plans.
  • The Principle of Indemnity has several exceptions, such as life and personal accident insurance, because the loss cannot be quantified or replaced financially.
  • The indemnity principle For instance, the insurer pays ₹2 lakhs, not the entire insured amount, if a house covered for ₹10 lakhs sustains damage worth ₹2 lakhs.
  • Comparing the Indemnity Principle with Other Insurance Principles
  • Other principles, such as uttermost good faith, emphasize honesty and information in the insurance contract, whereas indemnity restricts compensation to real loss.
  • Application of the Principle of Indemnity: To guarantee that the insured is appropriately compensated for actual losses, the principle is implemented in general insurance plans such as fire, marine, and auto insurance.

More Articles for UGC NET Commerce Notes

Principle of Indemnity FAQs

The principle of indemnity in insurance ensures that the insured is compensated for the actual financial loss suffered, aiming to restore them to the pre-loss financial position without allowing for financial gain.

The principle of indemnity is closely linked to insurable interest. To claim indemnity, the insured must have a valid insurable interest in the subject matter of the insurance.

Depreciation is considered to ensure that the indemnity amount accurately reflects the actual value of the property at the time of the loss, preventing overcompensation.

No, the principle of indemnity prohibits the insured from profiting from the insurance contract. The aim is to provide compensation for the actual loss suffered, not to allow for financial gain.

In health insurance, the principle of indemnity is often seen in reimbursement policies where the insured is reimbursed for actual medical expenses incurred, up to the policy limits, without allowing for financial gain.

Report An Error