What does indemnity refer to in insurance terms?

Indemnity in insurance refers to the principle of restoring the policyholder to their original financial condition before a loss occurred. This concept is fundamental to insurance as it ensures that the insured does not profit from a loss but instead is made whole again. The primary objective is to reimburse the policyholder for their actual financial loss, as opposed to providing any additional benefits or profit from the insurance claim.

For example, if a person suffers a loss due to a covered event, such as damage to their property, indemnity works to ensure that they receive compensation equivalent to the value of the damage, allowing them to repair or replace the lost items. This approach upholds fairness and aligns with the core purpose of insurance, which is risk management and loss mitigation, rather than providing profit.

Understanding this principle also helps differentiate it from other insurance concepts, such as providing a financial gain after a loss or the legal enforceability of a contract, which do not align with the essence of indemnity. The failure to disclose information on an application pertains to issues of honesty and integrity in the application process, which is distinct from the concept of indemnity itself.