California Real Estate Practice Exam

If a home were properly insured with fire insurance to indemnify the owner, he could expect to:

1. always gain

2. gain, but never lose

3. lose, but definitely not gain

4. neither gain nor lose

The correct answer is: always gain

Indemnity in insurance refers to compensating the insured for their loss without allowing them to profit from the insurance claim. In the context of fire insurance for a home, the purpose is to restore the homeowner to their financial position prior to the loss, but not to provide a profit or gain. When a property is fully insured for its current value, should a fire occur, the homeowner would receive a payout that covers the cost of damages or the value of the home lost, thus protecting them from loss. However, the aspect of profit or gain from insurance goes against the fundamental principle of indemnity. If an insurance payout leads to a net financial gain, that suggests over-insurance or taking advantage of the situation, which is not the intended function of insurance. Thus, the correct answer is that the homeowner could neither gain nor lose financially from the insurance, as the aim is to replace the lost value rather than enhance it. Understanding this principle is crucial in concepts taught in real estate practice, as it underlines the importance of appropriate coverage and ethical considerations in the use of insurance.