Which principle states that an insured must be restored to their financial position before a loss?

The principle that states an insured must be restored to their financial position before a loss is known as indemnity. This principle is fundamental in insurance, ensuring that the insured does not profit from a loss but is compensated for the actual financial loss incurred. The goal of indemnity is to put the insured back in the same financial position they were in prior to the loss, no better and no worse. This principle prevents any form of profit from insurance claims and encourages responsible behavior among policyholders.

This contrasts with other concepts such as contribution, which concerns how insurers share the burden of loss in cases where multiple policies cover the same risk. Insurable interest relates to the requirement that the insured must have a legitimate interest in the property or life insured, ensuring that they would suffer a financial loss if the insured event occurs. Subrogation enables the insurer to pursue recovery from third parties responsible for the loss after compensating the insured. Each of these principles serves a distinct purpose within the insurance framework, while indemnity specifically addresses the restoration of the insured's financial position.