How is indemnity defined in insurance?

Indemnity in insurance refers to the principle that a policyholder is entitled to compensation that is equal to the loss they have suffered, ensuring that they do not profit from the loss but are returned to their financial position prior to the incident. This concept is fundamental to insurance policies, as it emphasizes the objective of restoring a policyholder to the state they were in before the loss occurred.

The essence of indemnity is to provide a monetary equivalent that aligns with the actual loss experienced, without allowing for any windfall gain. This ensures fairness in the insurance transaction and maintains the integrity of the insurance system. By focusing on compensating only for the actual loss incurred, it prevents moral hazard, where a person might take undue risks if they know they will be fully compensated beyond their losses.

In other contexts, while financial assistance for recovery or services to prevent further loss can play a role in an insurance framework, they don't encapsulate the precise definition of indemnity, which is strictly concerned with compensating for losses suffered.