In insurance terminology, what does "makes whole" refer to?

"Make whole" is a fundamental principle in insurance that aims to restore the insured party to the same financial condition they were in prior to a loss, without allowing them to profit from the insurance claim. This concept emphasizes the need to return the insured to their previous state, covering the actual losses sustained as a result of an insured event.

When the insurance policy works by the "make whole" principle, the objective is to ensure that the compensation received is equitable and corresponds to the loss experienced. Thus, the insured does not receive a financial windfall; rather, they are compensated for their losses to ensure their financial position is restored. This is crucial in maintaining the integrity of the insurance system, as it prevents moral hazard where someone might take excessive risks if they stand to gain financially from an insurance payout.

The other options do not align with this principle: providing more than the actual losses undermines the purpose of insurance by creating a potential profit from a claim, while paying for additional damages not covered would imply going beyond the agreed terms of the policy. Offering compensation without regard for actual loss would contradict the foundational principle of indemnity that guides insurance practices.