What is the primary goal of indemnity in insurance?

The primary goal of indemnity in insurance is to restore the insured to their pre-loss financial state. This principle ensures that when a loss occurs, the insurance compensation received by the policyholder does not allow them to profit from the situation but instead puts them back in the same financial position they were in before the loss occurred. This aligns with the fundamental purpose of insurance, which is to provide financial protection against unexpected events while preventing moral hazard—where individuals might otherwise take undue risks because they would benefit financially from a loss.

Indemnity is crucial in maintaining fairness in the insurance system, as it ensures that the payouts are aligned with the actual financial impact of the loss, rather than providing excess funds that could lead to exploitation of the insurance process.