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Secrets of Insurance: The Principle of Indemnity

Insurance companies rarely pay what they actually owe. To the contrary, what they pay is the least amount they can convince and leverage you to take -- even if that amount is not enough to make you whole.

The most fundamental principle of insurance is the Principle of Indemnity. Sounds legalistic; it's not. It simply means that the role of insurance is to put the policyholder in the same financial position he or she enjoyed before an accident, injury, or occurrence. In other words, you're not supposed to get rich from insurance or make a profit -- but you are supposed to be made whole.

The insurance industry presumes that the Principle of Indemnity serves two purposes: to avoid insureds profiting from their insurance and reducing moral hazard (in the insurance industry, moral hazard occurs when policyholders take more risks knowing their insurers will protect them against losses.)

So, the principle is broadly directed to what policyholders should receive by way of compensation after an accident, injury, or loss occurrence to discourage a profit motive. Yet the principle can also be directed to what the claim adjuster should pay to discourage a savings motive. In other words, if the broad goal is to ensure that policyholders are made whole without profiting, it has to be said the goal is also to ensure that claim adjusters make the policyholder whole.

When backed to the wall, claim adjusters have to agree that this is their obligation, because the principle is read into every insurance contract, much the same as the duty of good faith and fair dealing. But the psychology of claim adjusting tends toward the adversarial; you, the policyholder, are not someone they strive to restore to what you were before a loss, you are the opponent. And as the opponent, the goal of any claim department is to minimize what you're paid -- that's the win.

The secret of the principle is the obligation of a claim adjuster to restore, repair, or replace your property to what it was before a loss. And if you're injured in an accident? In the world of claim adjusting, the principle cannot apply to personal injuries, because one cannot quantify the value of an injury or human life. But in the world of good faith claim handling, it absolutely does.

Remember, an insurance claim adjuster is not your friend. He or she is a trained negotiator in the business of paying you less than you are owed -- after all, no one gets promoted for paying what they actually owe. Remember the Principle of Indemnity on your next insurance claim. It applies to you, and it applies to the insurance company. It is your contractual right to be made whole. Don't accept anything less.

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