What does the principle of indemnity refer to in insurance contracts?

The principle of indemnity in insurance contracts is focused on the concept of restoring the insured to the financial position they occupied immediately before the loss occurred, rather than allowing them to profit from their insurance coverage. This principle ensures that compensation received does not exceed the actual financial loss incurred, which maintains fairness and prevents any potential gain from the loss event.

By adhering to this principle, insurance aims to provide the insured with a true representation of their pre-loss condition. This helps to reinforce the purpose of insurance as a risk management tool designed to offer protection against unforeseen events, rather than serving as a means of financial windfall. In practice, this principle plays a crucial role in how claims are evaluated and settled within insurance policies, ensuring that claim payments correspond to the actual value of the loss sustained.