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⚖️ '''Indemnity''' is the foundational insurance concept of restoring a [[Definition:Policyholder | policyholder]] to the same financial position they occupied immediately before a covered loss — no better, no worse. It represents the economic bargain at the core of most [[Definition:Property and casualty insurance (P&C) | property and casualty]] coverages: the [[Definition:Insurance carrier | insurer]] promises compensation equal to the actual loss sustained, rather than a fixed or predetermined amount. This distinguishes indemnity-based arrangements from [[Definition:Valued policy | valued policies]] or [[Definition:Benefit trigger | benefit-triggered]] products, where payment amounts are set in advance.

🔧 In practice, calculating indemnity requires establishing the actual cash value or replacement cost of the damaged or lost asset, minus any applicable [[Definition:Deductible | deductible]]. [[Definition:Claims adjuster | Claims adjusters]] assess the extent of damage, review [[Definition:Policy terms and conditions | policy terms]], and determine the amount the insurer owes. For [[Definition:Liability insurance | liability coverages]], indemnity extends to the sums the insured becomes legally obligated to pay a third party, plus associated [[Definition:Defense cost | defense costs]] if the policy provides them. The process grows more complex in [[Definition:Reinsurance | reinsurance]], where the [[Definition:Cedant | cedant's]] indemnity obligation to its policyholder must first crystallize before the [[Definition:Reinsurer | reinsurer's]] indemnity to the cedant is triggered — a sequential chain that can introduce timing and valuation disputes.

💡 Indemnity keeps the insurance system honest by preventing [[Definition:Moral hazard | moral hazard]] — if policyholders could profit from losses, the incentive to prevent them would collapse. It also underpins the legal doctrines of [[Definition:Insurable interest | insurable interest]] and [[Definition:Subrogation | subrogation]], both of which assume that insurance is a mechanism for compensation, not enrichment. Courts and regulators scrutinize indemnity calculations closely, and any perceived overcompensation can raise questions about [[Definition:Fraud | fraud]] or policy misapplication. For [[Definition:Insurtech | insurtech]] firms building parametric or index-based products, the tension between speed of payment and strict indemnity measurement is an active design challenge.

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Indemnification]]
* [[Definition:Indemnity principle]]
* [[Definition:Actual cash value (ACV)]]
* [[Definition:Replacement cost]]
* [[Definition:Subrogation]]
* [[Definition:Moral hazard]]
{{Div col end}}

Definition:Indemnity - Revision history

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