What is the primary goal of indemnity in insurance?

The primary goal of indemnity in insurance is to restore a person to their original economic position before a loss occurs. This principle is fundamental to the insurance concept, as it ensures that an insured individual is compensated for their loss without profiting from the situation. Indemnity is designed to prevent the insured from experiencing either undue financial gain or loss following a claim. The values assigned in the insurance policy are structured to reflect fair market value, allowing the insured to receive recompense that corresponds to their actual loss and bringing them back to a point of financial equilibrium prior to the adverse event.

Understanding indemnity is crucial in evaluating insurance policies, as it emphasizes that insurance is not a tool for wealth accumulation but a means of risk management and financial protection. This perspective aligns the interests of the insured and the insurer, as it encourages responsible behavior under the policy terms while maintaining the integrity of the insurance system.