What does the term "indemnity" refer to in insurance terms?

The term "indemnity" in insurance refers specifically to the principle of providing compensation for loss or damage suffered by the insured. This principle is foundational to insurance contracts, as it ensures that the insured is financially protected against certain risks, restoring them to the position they were in prior to the loss. The aim of indemnity is not to provide a profit to the policyholder but rather to make them whole again, which is crucial for the functioning of insurance as a risk management tool.

By focusing on the actual losses incurred, indemnity promotes fairness among policyholders and helps to prevent moral hazard, where individuals might otherwise have an incentive to create losses to benefit from their insurance. This principle is a core concept in many types of insurance, including property and liability insurance.

The other options do not capture the essence of indemnity. While the notion of profit can be related to insurance, it does not define indemnity. Disclosure of facts and limits on coverage amounts are relevant to insurance contracts but are separate from the specific definition and purpose of indemnity.