What is the Principle of Indemnity in insurance?

The Principle of Indemnity is a fundamental concept in insurance that ensures the insured is restored to the financial position they were in prior to a loss, without allowing them to profit from that loss. This principle is designed to prevent individuals from receiving more than the actual damage or loss they have suffered, which could lead to moral hazard—where policyholders might intentionally cause damage to their property in order to collect an insurance payout.

By ensuring that compensation is based strictly on the amount of the loss, this principle maintains fairness and encourages responsible behavior among policyholders. The focus is on replacing or repairing the lost or damaged property, rather than providing a financial windfall. This means that the insured does not come out ahead financially, but rather is made whole again, which is the primary goal of indemnity in insurance policies.