What does indemnity refer to in insurance terms?

Indemnity in insurance refers to the principle that aims to restore the insured to the financial position they were in prior to a loss, without allowing them to profit from the situation. This means that the payment made to the policyholder is intended to match the actual amount lost due to the covered event. By doing so, indemnity ensures that the insured receives compensation for their legitimate losses while preventing any enrichment beyond their original state.

The concept emphasizes that payments should be proportional to the damage or loss sustained, ensuring fairness and consistency in claims handling. This principle is essential in maintaining the integrity of the insurance system and ensuring that funds are distributed appropriately in line with the insured's actual needs.