Indemnity is the core promise of insurance: to restore you to the same financial position you were in just before a loss—no better, no worse. You shouldn't profit from a claim, and you shouldn't be left short either. Most property and casualty insurance is built on this principle of indemnity, which is why claim payments are tied to your actual loss rather than a fixed jackpot.

Why it matters

The principle of indemnity discourages people from intentionally causing losses to cash in, and it keeps insurance functioning as protection rather than a betting game. It's the reason an insurer pays what your damaged property was actually worth—not whatever number you'd like.

A simple example

A kitchen fire destroys a five-year-old refrigerator. Indemnity means your insurer pays roughly what that used fridge was worth at the time of the fire (its depreciated value), not the price of a brand-new luxury model. You're made whole for what you lost—not handed an upgrade.

Don't confuse it with…

A few related ideas hang off indemnity:

• Insurable interest ensures you can only insure something you'd genuinely lose from—supporting indemnity.
• Replacement cost policies modify strict indemnity by paying to replace items new, without subtracting depreciation. They're a deliberate exception.
• Valued policies and life insurance also depart from pure indemnity (life insurance pays a set face amount, since a human life has no "market value").

On the exam

Remember the catchphrase: indemnity means made whole, but no gain. Know that deductibles, coinsurance, and policy limits are tools that support indemnity, and that replacement cost and life insurance are common exceptions to the strict principle. Expect questions asking you to identify when an insured is being "indemnified" versus profiting.