What is the principle of 'indemnity' in insurance?

The principle of 'indemnity' in insurance is fundamentally about ensuring that an insured party is compensated for their loss, restoring them to the financial position they were in prior to the loss occurring. This principle is central to the functioning of insurance as it avoids providing an opportunity for the insured to profit from a loss, which would be contrary to the purpose of insurance.

Under this principle, payment is made based on the actual loss incurred, not exceeding the amount of the loss. This ensures that the insured is made whole without experiencing a financial gain. By adhering to the principle of indemnity, insurance ensures fairness in the system, discouraging any incentive for fraudulent claims or over-insurance.

The other options misinterpret the nature of indemnity: allowing profit from insurance is against the principle, as is providing payments regardless of a loss or requiring the insured to cover costs without reimbursement, which contradicts the fundamental purpose of indemnification.