Which insurance principle is supported by the formula for calculating the liability of the insurer?

The principle that is supported by the formula for calculating the liability of the insurer is the Pro Rata Condition of Average. This principle is essential in insurance as it ensures that the insured does not profit from a loss but is compensated fairly based on their level of coverage in relation to the total value at risk.

This principle operates under the notion that if property is underinsured, the insurer's liability is reduced proportionately. The formula considers the sum insured and the actual value of the property at risk to determine the reimbursement amount. Thus, it reflects the insured's stake in the risk.

In the context of the condition of average, when the total insured value is less than the actual value, any loss will be compensated on a proportional basis. This prevents the insured from being overcompensated for losses, which aligns with the fundamental insurance principles of indemnity and returning the insured to their original financial position without profit.

Understanding this principle is crucial as it promotes fairness in insurance transactions and ensures that insurers can manage risks effectively while upholding their obligations to policyholders.