What is indemnity in insurance?

Indemnity in insurance refers specifically to a payment in compensation for a covered loss. The fundamental principle of indemnity is to restore the policyholder to the financial position they were in prior to the loss, without allowing them to profit from the insurance claim. This concept ensures that the insured is compensated for their actual loss, which is central to most insurance contracts.

When a claim is made under an indemnity-type policy, the insurer evaluates the loss and provides payment accordingly, ensuring that the insured receives monetary compensation for specific damages or expenses incurred. This principle is vital for maintaining fairness in the insurance system and preventing moral hazard, where individuals might engage in riskier behavior if they could profit from their insurance.

In contrast, options related to insurance coverage types or claim rejection clauses do not accurately encapsulate the definition of indemnity, and an adjustment rate for premiums does not connect with the compensation aspect of insurance losses. Hence, the understanding of indemnity is vital for anyone studying the insurance domain.