PSI Ohio Insurance Practice Exam

An insurance policy intended to restore the insured to the same financial status as before the loss is known as what type of contract?

1. Loss contract

2. Indemnity contract

3. Liability contract

4. Property contract

The correct answer is: Indemnity contract

The answer is an indemnity contract. This type of insurance policy is specifically designed to restore the insured to their original financial position prior to a loss, ensuring that they neither gain nor lose financially due to the occurrence of the event covered by the insurance. Indemnity is a fundamental principle in insurance, which promotes fairness and equity in adjusting claims. The goal is to cover only the actual losses incurred, not to allow the insured to profit from their insurance. This prevents moral hazard, where an individual might take actions that increase the likelihood of loss due to being insured. The other types of contracts mentioned do not serve the same purpose. Loss contracts aren't a formal category in insurance terminology, liability contracts deal specifically with legal responsibilities for damages to another party, and property contracts focus primarily on insuring against damage or loss to tangible assets. Thus, the emphasis on restoring financial status aligns perfectly with the definition of an indemnity contract.