What is the primary intent behind the principle of indemnity in insurance?

The principle of indemnity is fundamentally aimed at ensuring that an insured individual or entity is compensated solely for the actual losses incurred due to an insured risk. This principle operates on the premise that insurance is intended to restore the policyholder to the financial position they were in prior to the loss, but not to allow them to profit from the situation. By limiting compensation to the actual losses, the principle helps maintain the integrity of the insurance system and prevents financial gain from misfortune, which could lead to moral hazard or fraudulent claims.

The focus on providing compensation for actual losses ensures that the insured can recover the amount needed to cover their loss without being overcompensated. This is essential for maintaining fair and sustainable insurance practices, as it aligns with the fundamental purpose of insurance: to provide financial protection against risks while preventing unjust enrichment.