What is the purpose of indemnity in an insurance context?

Indemnity is a fundamental principle in insurance designed to restore the insured party to their pre-loss position following a covered event. This principle ensures that the insured does not profit from an insurance claim but instead receives compensation that reflects the actual loss incurred. The primary aim is to make the insured whole again, allowing them to recover from the financial impact of the loss without experiencing a net financial gain or loss from the situation.

In the context of insurance, this means that if a policyholder suffers a loss, the insurer compensates them for the amount of that loss, subject to the terms of the insurance policy. The method of achieving this is through payment for repairs, replacements, or compensations related to the lost item or damage, aligning with the objective of keeping the insured's financial situation stable while addressing the specific incident.

This principle directly opposes the idea of enhancement of wealth or providing additional financial gain, which would conflict with the concept of indemnification. Calculating future risks is an important aspect of insurance underwriting and pricing but does not directly pertain to the purpose of indemnity itself. Thus, the correct understanding of indemnity clearly emphasizes restoring the insured to the position they were in prior to the loss, rather than facilitating profit or loss calculations.