What does indemnity refer to in the context of insurance?

Indemnity refers to the principle that an insurance policy provides compensation to the insured for their actual loss, but does not allow for profit from that loss. This concept is essential in insurance because it aims to restore the insured to their original financial position before the loss occurred, without providing any financial gain beyond the loss itself.

In practical terms, this means that when a claim is made, the insured will be compensated up to the amount of their loss, but they will not receive more than what they lost. This principle helps to prevent moral hazard, where an insured party might otherwise take unnecessary risks if they know they can profit from making a claim. Indemnity underscores the idea that insurance is meant for protection against loss, not a vehicle for profit.