What is the purpose of the principle of indemnity?

The principle of indemnity is fundamental in insurance as it ensures that the insured is compensated for their losses to the extent of their actual financial loss, without allowing them to profit from the insurance claim. This means that when a loss occurs, the goal is to return the insured to their previous financial state prior to the loss.

This principle prevents any potential windfall that could encourage dishonesty or fraud, as it makes it clear that receiving an insurance payout does not entitle one to gain more than what was lost. It strictly limits the compensation to the amount necessary to cover the loss or damage, fostering fairness in the insurance process. This principle thus maintains the integrity of the insurance system, ensuring it functions effectively for all policyholders.