Which of the following best describes the term 'indemnity' in insurance?

Indemnity in insurance refers to the principle of compensation that ensures a policyholder is made whole after experiencing a loss. This means that the payment received for a claim is limited to the actual losses incurred, rather than providing a financial windfall or exceeding the value of the loss.

The concept of indemnity is fundamental to insurance as it serves to prevent the policyholder from profiting from their loss. It ensures that they can recover costs associated with damage or loss, but do not receive more than what they actually lost. This principle helps maintain fairness and discourages fraudulent claims.

For example, if a homeowner experiences damage to their property resulting in a $10,000 loss, the insurance company will compensate them for that amount, assuming the claim is valid and covered by the policy. It would not pay out additional amounts beyond the actual loss, which aligns with the definition of indemnity.

This understanding underscores the importance of accurately assessing and documenting losses when submitting a claim to ensure that compensation reflects the actual financial impact of the loss experienced.