When can a claim be validly reduced according to indemnity principles?

A claim can be validly reduced according to indemnity principles when the insured has voluntarily chosen to under-insure their property or coverage. Indemnity principles are designed to ensure that a policyholder is compensated fairly for their loss without profiting from their insurance claim. If an insured selects a sum insured that is lower than the actual value of their property, they are essentially accepting a reduced level of coverage. In the event of a claim, the compensation would therefore be calculated based on this lower insured amount, leading to a reduction in the payout.

This principle promotes responsible behavior among policyholders, encouraging them to accurately assess and insure their properties to avoid the consequences of under-insurance. If a claim arises, the compensation will align with the amount for which the policies were written, adhering to the principle that insurance is meant to restore the insured to their previous financial position rather than to provide a profit.