What does indemnity in insurance refer to?

Indemnity in insurance refers to the principle that seeks to restore the insured to the same financial position they were in before a loss occurred. This means that, in the event of a claim, the insurance policy will cover the costs associated with the loss, up to the limits of the policy, thereby fulfilling the purpose of insurance—providing financial protection without allowing the insured to profit from the loss.

This principle helps ensure fairness in the claims process, as it prevents the insured from receiving an amount greater than what they lost. The idea is to make the insured whole again by compensating for their losses, rather than providing a windfall.

Understanding indemnity is crucial for those in insurance, as it forms the foundation for how claims are handled and the calculations that are made when determining payouts. Other aspects of the insurance process, such as calculating premiums or investigating claims, are separate from the concept of indemnity itself, emphasizing the focus on restoration rather than profit.