What does indemnity in an insurance policy ensure?

Indemnity in an insurance policy ensures that the insured is compensated for a loss without resulting in a profit from the insurance claim. This principle is foundational in insurance contracts, as it seeks to restore the insured to their financial position prior to the loss, neither better off nor worse off. The aim is to prevent individuals from profiting from their insurance policies, which could lead to moral hazard, where the insured might take greater risks knowing that they would be compensated for losses.

In essence, indemnity maintains the principle of equity, whereby the insured is made whole again after experiencing a loss. Therefore, correct acknowledgment of this principle ensures that insurance serves its intended purpose without encouraging fraudulent practices. Thus, the correct understanding of indemnity is crucial for both insurance providers and policyholders in managing risks and losses appropriately.