Indemnity
The insurance principle of restoring a policyholder to their financial position before a loss, without allowing profit from a claim.
What is Indemnity?
Indemnity is a foundational principle of insurance law stating that a policyholder should be restored to the same financial position they were in immediately before a covered loss occurred — no better and no worse. The indemnity principle prevents policyholders from profiting from insurance claims, which would create a moral hazard encouraging fraud and reckless behavior. In practice, indemnity shapes how claims are settled: actual cash value settlements (which account for depreciation) adhere more strictly to indemnity than replacement cost settlements. The term also refers to contractual indemnity provisions in which one party agrees to hold another harmless from specified claims or losses.
Example
A homeowner's three-year-old television worth $400 in current market value is stolen. Under an actual cash value policy governed by the indemnity principle, the insurer pays $400 — the current value — not the $700 it would cost to buy a new equivalent model. The homeowner is made whole for their loss but does not profit from the claim.
Source: National Association of Insurance Commissioners — Understanding Your Policy