Which best defines indemnity in the context of insurance?

Indemnity, in the context of insurance, specifically refers to compensation for a loss. This fundamental principle ensures that the insured is returned to the financial position they were in prior to the loss, without allowing them to profit from their insurance policy. The primary goal of indemnity is to prevent the insured from experiencing a financial setback due to an unforeseen event, such as damage to property or liability incurred.

This concept is crucial because it underpins many types of insurance policies, where the amount compensated corresponds directly to the loss suffered, rather than to any arbitrary figure or gain. In this way, indemnity protects both the insurance company and the insured by ensuring the insurance serves its purpose of covering actual losses without leading to moral hazard or overcompensation.