Bryce owns a $50,000 lake cabin that he has insured for $40,000. He sustains a $5,000 covered loss. According to the principle of indemnity, how much will his insurer pay?
View Answer and Explanation
Under the principle of indemnity, a person should not profit from his loss or collect more than the actual cash value of a loss. The insured should be restored to approximately the same financial position as existed before the loss. In the example, Bryce's loss is $5,000, and he is limited to a $5,000 recovery.
Reference: 2.3.1 in the License Exam Manual.