The legal principle that prevents an insured from recovering more than the actual loss is known as:

The principle of indemnity is fundamental in insurance, ensuring that the insured party is compensated for their loss but does not profit from it. This principle maintains that insurance is meant to restore individuals to their pre-loss financial position, preventing any financial gain beyond the actual loss incurred. For example, if a homeowner suffers damage to their property, indemnity dictates that they can only recover funds equivalent to the cost of repairs or the value of the property damaged, not more.

This principle is crucial for the integrity of the insurance system, as it prevents fraudulent claims and ensures fairness across all policyholders. By adhering to the principle of indemnity, insurers can keep premiums manageable and ensure that they are able to cover claims for all policyholders effectively.