Which of the following best describes the term 'indemnity' in insurance?

The term 'indemnity' in insurance refers to the principle of compensating the insured for losses they have incurred due to a covered event, but only up to a specified limit. This means that when a policyholder files a claim, the insurance company will reimburse them for the actual losses and damages sustained, reflecting the value of the loss and adhering to the policy limits established in the insurance contract.

This principle is essential to maintaining fairness in the insurance system. It ensures that policyholders are restored to their pre-loss financial position without profiting from their loss, which is the essence of risk management within the insurance framework. Consequently, indemnity reinforces the idea that insurance should cover actual losses rather than provide guaranteed payouts or uniform payments for all claims, which could lead to moral hazard or insurance fraud.