What does indemnity aim to do?

What does indemnity aim to do?

• A. Provide profit to the insured
• B. Restore the insured to the pre-loss financial position
• C. Increase the policy limit after a loss
• D. Pay more than the loss amount

Answer: (B)

Indemnity means compensating the insured so that their financial position after a loss is restored to what it was before the loss. The payout should reflect the actual damage or cost to repair or replace, up to the policy limits, and not exceed the insured’s true loss. This principle ensures no profit comes from a claim—the aim is to put the insured back where they started, not better off. That’s why paying more than the loss or automatically increasing the policy limit after a claim aren’t the goals of indemnity. The settlement may be based on actual cash value or replacement cost depending on the policy terms, but the core idea remains: restore the pre-loss financial position, without creating a gain for the insured.

Indemnity means compensating the insured so that their financial position after a loss is restored to what it was before the loss. The payout should reflect the actual damage or cost to repair or replace, up to the policy limits, and not exceed the insured’s true loss. This principle ensures no profit comes from a claim—the aim is to put the insured back where they started, not better off.

That’s why paying more than the loss or automatically increasing the policy limit after a claim aren’t the goals of indemnity. The settlement may be based on actual cash value or replacement cost depending on the policy terms, but the core idea remains: restore the pre-loss financial position, without creating a gain for the insured.