The insurance principle that prevents the insured from profiting from a loss is the principle of indemnity. It generally aims to restore the policyholder to approximately the same financial position held immediately before the covered loss, not leave the person better off.
For example, if a covered fire causes $20,000 in damage, a property policy is intended to pay the valid repair or replacement loss subject to its limits, deductible, exclusions, and valuation method. The insured normally cannot collect more than the economic loss simply because a claim occurred. This rule helps distinguish insurance from a wager and reduces incentives to cause or exaggerate damage.
Indemnity is most closely associated with property and liability insurance, while life insurance is usually treated differently because a human life cannot be valued precisely in the same way. Insurable interest supports the legitimacy of the policy, utmost good faith concerns disclosure and honesty, and subrogation lets an insurer pursue a responsible third party after paying a claim.