What does the term 'indemnity' in insurance refer to?

Indemnity in insurance refers specifically to the concept of reimbursement for actual losses incurred by the policyholder. The principle ensures that the insured party is restored to their financial position prior to the loss, without allowing for profit from the situation. This means that the payout from an insurance policy will equate to the value of the actual damages suffered, rather than providing excess funds or a higher payout than what was lost.

The focus of indemnity is central to the insurance industry, as it underscores the idea of insurance being a means of risk management rather than a way to generate profit. This principle prevents moral hazard, where an insured party might take excessive risks due to the safety net of their coverage. Thus, through indemnity, insurers aim to provide support that aligns strictly with the financial impact of the insured event.