In insurance, what is the principle of indemnity primarily designed to do?

The principle of indemnity is a fundamental concept in insurance that is designed to ensure that an insured individual is compensated for their actual loss, but does not receive a profit from their insurance claim. This principle aims to restore the insured to the financial position they were in prior to the loss occurring, thereby preventing any enrichment due to the insurance payout.

This principle supports the idea that insurance is meant to provide a safety net against financial ruin, rather than a source of income. By adhering to the principle of indemnity, insurance helps maintain fairness in the system, ensuring that individuals are not motivated to take unnecessary risks or create situations that could lead to a claim, since they can only be compensated for their actual losses. This critical balance helps sustain the overall integrity and functionality of the insurance industry.