What is the main function of indemnity in insurance policies?

Indemnity is a fundamental principle in insurance that is designed to ensure that the insured is compensated for losses in a way that restores them to their pre-loss financial position, without resulting in a profit from the claim. This principle prevents the insured from being unduly enriched due to the loss—meaning that if a loss occurs, the compensation received should reflect the value of the loss suffered, no more and no less.

In the context of insurance, indemnity serves to maintain fairness and equity in the claims process. It ensures that individuals or businesses are made whole after an event that causes financial damage, whether it be through property damage, liability, or other covered losses. This approach underpins the integrity of the insurance system, assuring policyholders that their losses will be accurately assessed and compensated within the limits of their coverage.

The focus on restoring the policyholder rather than generating profit, providing legal protections, or encouraging multiple insurance purchases aligns perfectly with the principle of indemnity, making it crucial in the functioning of insurance contracts.