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⚖️ '''Principle of indemnity''' is a foundational doctrine in insurance law holding that an [[Definition:Insurance policy | insurance policy]] should restore the [[Definition:Policyholder | policyholder]] to the same financial position they occupied immediately before a covered [[Definition:Loss | loss]] — no better, no worse. It prevents insurance from becoming a vehicle for profit; the insured should not gain a financial windfall from a [[Definition:Claim | claim]]. This principle shapes the design of [[Definition:Property insurance | property]], [[Definition:Casualty insurance | casualty]], and [[Definition:Marine insurance | marine]] policies and distinguishes most non-life [[Definition:Insurance contract | insurance contracts]] from [[Definition:Life insurance | life insurance]] and certain [[Definition:Health insurance | health]] products, where indemnity gives way to fixed-benefit or valued-policy approaches.

🔧 In practice, indemnity governs how [[Definition:Loss adjustment | losses are adjusted]] and how [[Definition:Claims payment | claim payments]] are calculated. When a commercial building sustains fire damage, the [[Definition:Claims adjuster | adjuster]] determines the [[Definition:Actual cash value (ACV) | actual cash value]] or [[Definition:Replacement cost | replacement cost]] of the damaged property — whichever the policy specifies — rather than simply paying out the [[Definition:Policy limit | policy limit]]. [[Definition:Subrogation | Subrogation]] rights flow directly from this principle: if a third party caused the loss, the insurer that indemnified the policyholder can pursue recovery from the responsible party, because allowing the insured to collect from both the insurer and the tortfeasor would violate indemnity. Similarly, the [[Definition:Contribution | principle of contribution]] ensures that when [[Definition:Other insurance | multiple policies]] cover the same loss, the insured does not recover more than the actual loss amount across all carriers. [[Definition:Underwriter | Underwriters]] embed indemnity logic into policy language through [[Definition:Valuation clause | valuation clauses]], [[Definition:Deductible | deductibles]], and [[Definition:Coinsurance clause | coinsurance provisions]] that calibrate payouts to demonstrated economic harm.

🛡️ Without indemnity as a governing constraint, [[Definition:Moral hazard | moral hazard]] would escalate dramatically — policyholders would have an incentive to cause or exaggerate losses if doing so could produce a net gain. The principle also disciplines [[Definition:Underwriting | underwriting]] and pricing by anchoring coverage to measurable economic exposure rather than arbitrary sums. Courts regularly invoke indemnity when adjudicating coverage disputes, and [[Definition:Insurance regulator | regulators]] reference it when reviewing policy forms for fairness and consistency. In emerging areas like [[Definition:Parametric insurance | parametric insurance]], where payouts trigger based on an index rather than assessed damage, the industry is actively debating how the traditional indemnity framework adapts — or whether these products sit outside it entirely, requiring distinct regulatory treatment.

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

Definition:Principle of indemnity - Revision history

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