What is the purpose of the principle of indemnity?

The principle of indemnity is fundamentally designed to ensure that an insured party, in the event of a loss, does not receive a financial windfall or profit from their insurance claim. Instead, the goal is to restore the insured to the same financial position they were in prior to the loss, effectively making them whole but not better off than they were before the incident occurred.

This principle underlies most types of insurance contracts and is essential for maintaining the integrity of the insurance system, preventing fraudulent claims, and ensuring that insurance serves its intended purpose. By limiting the payout to the actual loss incurred, the principle of indemnity protects both the insurer and the insured from potential abuse of the insurance system, which might otherwise incentivize individuals to intentionally cause losses to gain financially.

Therefore, the purpose of the principle of indemnity aligns directly with preventing an insured from making a profit on a loss, solidifying its role as a cornerstone of insurance practices.