South Carolina Personal Lines Practice Exam

What provision states that the insured may only be compensated for the amount lost?

1. Indemnity

2. Subrogation

3. Fair market value

4. Proximate cause

The correct answer is: Indemnity

The concept of indemnity is fundamental in insurance, reflecting the principle that an insured party should be restored to their financial position prior to the loss without making a profit from the insurance coverage they hold. This means that the insured will receive payment or compensation that equates to the actual loss suffered, ensuring that they are not overcompensated. Indemnity acts as a safeguard against moral hazard, where individuals might otherwise be incentivized to take risks knowing they could gain from a loss. By adhering to this principle, insurance works to maintain fairness and integrity within the system, providing only for actual damages and losses incurred rather than offering a financial windfall. The other concepts, such as subrogation, fair market value, and proximate cause, serve different functions in the realm of insurance and do not encapsulate the core idea of compensating the insured solely for their direct losses like indemnity does.