What does the term "indemnity" refer to in an insurance policy?

The term "indemnity" in an insurance policy refers specifically to the principle of compensating the insured for losses incurred. This principle is foundational to many types of insurance agreements and ensures that the insured is restored to their financial position before the loss occurred, without allowing them to profit from the claim. The core idea is that the insurer will cover the actual amount of the loss, up to the limits of the policy, thus alleviating the financial burden experienced by the insured due to unforeseen events.

The essence of indemnity highlights the nature of insurance as a risk management tool aimed at protecting individuals and businesses from significant financial losses. By adhering to this principle, insurers maintain fairness and prevent moral hazard, where the insured might be tempted to take undue risks knowing they would be compensated regardless of their actions.