What does indemnity refer to in an insurance context?

Indemnity in an insurance context refers specifically to the principle of reimbursement in case of a loss. This principle is foundational to how many insurance policies operate, as it ensures that the insured is compensated for the actual financial loss they have incurred, without allowing for any profit from that loss. The goal of indemnity is to restore the insured party to the financial position they were in prior to the loss, not to reward them beyond that.

The concept also inherently limits the insurer's liability to the value of the loss that occurred, preventing the insured from collecting more than what they lost. This is why indemnity is sometimes interpreted as a means to avoid moral hazard, where an insured party might otherwise take unnecessary risks knowing they would be compensated regardless of their actions. Therefore, reimbursement in cases of loss is a fundamental aspect of how indemnity functions within the insurance framework.