What is indemnity in insurance?

Indemnity in insurance refers to the principle of restoring the insured to the financial position they were in before a loss occurred. This concept is crucial because it ensures that the insured does not profit from the insurance claim, but rather receives compensation that reflects their actual loss.

When a loss occurs, the indemnity principle dictates that the insurer will pay out an amount that compensates for the loss without exceeding the value of the original loss. This is critical for maintaining fairness within the insurance system, as it prevents policyholders from gaining more than they are entitled to, thus supporting the integrity of insurance operations.

While other aspects of insurance, such as the amount paid for an event or the cost of premiums, are related to the overall process and structure of insurance, they do not encapsulate the core idea of indemnity itself. Insurance against natural disasters represents a type of coverage but does not define indemnity or its principles.