What is the primary benefit of the principle of indemnity?

The principle of indemnity is fundamental to insurance, as it ensures that an insured party receives compensation for their losses without profiting from those losses. This principle is aimed at restoring the insured to the financial position they were in prior to the loss, thereby promoting fairness and equity in the claims process. By adhering to this principle, insurance helps to prevent moral hazard, where individuals might take on greater risks because they know they will be compensated for losses.

In this context, ensuring equitable compensation means that the payout should not exceed the actual loss suffered. This prevents individuals from abusing the system by claiming more than what they have lost. This principle is a cornerstone of how insurance operates, establishing trust in the system and ensuring financial stability for both the insured and the insurance provider.