Insurable losses are ideally independent and non-catastrophic, meaning that the losses do not happen all at once and individual losses are not severe enough to bankrupt the insurer. In case of any loss or casualty, the asset owner must attempt to keep loss to a minimum, as if the asset was not insured. When a company insures an individual entity, there are basic legal requirements and regulations. Several commonly cited legal principles of insurance include: insurers may prefer to limit their exposure to a loss from a single event to some small portion of their capital base. To "indemnify" means to make whole again, or to be reinstated to the position that one was in, to the extent possible, prior to the happening of a specified event or peril.
The insurance company indemnifies, or compensates, the insured in the case of certain losses only up to the insured's interest. The concept requires that the insured have a "stake" in the loss or damage to the life or property insured. What that "stake" is will be determined by the kind of insurance involved and the nature of the property ownership or relationship between the persons. If the Insured has a "reimbursement" policy, the insured can be required to pay for a loss and then be "reimbursed" by the insurance carrier for the loss and out of pocket costs including, with the permission of the insurer, claim expenses. The requirement of an insurable interest is what distinguishes insurance from gambling. Benefit insurance as it is stated in the study books of The Chartered Insurance Institute, the insurance company does not have the right of recovery from the party who caused the injury and is to compensate the Insured regardless of the fact that Insured had already sued the negligent party for the damages.
The insurance company acquires legal rights to pursue recoveries on behalf of the insured; for example, the insurer may sue those liable for the insured's loss. The Insurers can waive their subrogation rights by using the special clauses. Insurers which have similar obligations to the insured contribute in the indemnification, according to some method. The insured typically must directly suffer from the loss. Insurable interest must exist whether property insurance or insurance on a person is involved. The insured and the insurer are bound by a good faith bond of honesty and fairness. Accordingly, life insurance is generally not considered to be indemnity insurance, but rather "contingent" insurance. Material facts must be disclosed.
The cause of loss must be covered under the insuring agreement of the policy, and the dominant cause must not be excluded. Under a "pay on behalf" policy, the insurance carrier would defend and pay a claim on behalf of the insured who would not be out of pocket for anything. Most modern liability insurance is written on the basis of "pay on behalf" language which enables the insurance carrier to manage and control the claim. From an insured's standpoint, the result is usually the same: the insurer pays the loss and claims expenses. Under an "indemnification" policy, the insurance carrier can generally either "reimburse" or "pay on behalf of", whichever is more beneficial to it and the insured in the claim handling process.