Understanding Insurance Contracts
Principle of Indemnity – Protection against loss and/or damages. The insurance company is bound by contract to pay when a covered event occurs. The goal is to help an insured regain financial position. In some indemnity contracts, the amount payable is limited to actual economic loss. Other contracts may limit or not pay at all if the actual loss is less than a certain amount. Auto insurance is a good example. Assume a contract with $1000 deductible. In the event of a claim, you would be responsible for the first $1000 and the insurance company would pay after that. If the loss is equal to or less that $1000, you would have to cover the entire amount.