What does "indemnity" mean in insurance terms?

Indemnity in insurance refers to the principle that aims to restore an insured party to the financial position they were in prior to a loss. This concept safeguards policyholders by ensuring they do not profit from an insurance claim or suffer financially due to an unforeseen event. The key idea is that any compensation provided through a claim should cover the actual loss incurred, enabling the insured to recover adequately without gaining undue advantage.

This principle ensures fairness and confers a sense of security to individuals and businesses, allowing them to carry on with less fear of financial disruption from covered losses. Indemnification can involve payments for property loss, bodily injury, or other damages that are specified in the insurance contract. So, when considering the choices, the restoration of financial stability to the state before the loss aligns perfectly with the core meaning of indemnity.