What is the principle of indemnity in insurance?

The principle of indemnity in insurance is fundamentally about restoring the insured to their pre-loss financial position after a loss occurs. This principle aims to ensure that the insured does not profit from a loss, but instead is compensated for the exact amount of their loss or damage. It reflects the idea that insurance is intended to provide a form of financial recovery rather than a financial gain.

This principle helps maintain fairness within the insurance system, as it prevents individuals from claiming more than what they have lost, avoiding situations where a policyholder might be tempted to exaggerate losses or engage in fraudulent behavior. It also reinforces that insurance is not a vehicle for wealth accumulation or gain, but rather a means of protection against financial hardships resulting from unforeseen events.

In the context of the other options, providing coverage for catastrophic losses (the first choice) is too narrow and doesn't encapsulate the broader concept of indemnity. Preventing overinsurance of high-value properties (the third choice) is a related topic concerning valuation and policy limits, but does not directly define indemnity itself. Limiting the liability of the insurer (the fourth choice) is more about the insurer's obligations and responsibilities rather than the effect on the insured and their losses. Therefore, the chosen answer accurately captures the essence