CLAIMS & POLICY MECHANICS
Indemnity, principle of definition
The principle of indemnity is an insurance principle that restores the insured to their financial position before a covered loss.
In practice, this means the principle by which the insured is restored to the financial position that he or she enjoyed immediately before an insured loss. Most non-life insurance contracts operate on this principle. Insurers may indemnify the insured through financial compensation, repair of damaged assets or replacement of damaged assets (while factoring in depreciation, policy terms and the asset's current market value). This gives insurers, brokers, reinsurers and risk managers a shared way to discuss the concept when reviewing policies, claims, regulation or market data.
This term is especially useful in insurance market analysis, policy wording and risk transfer decisions. It helps users interpret insurance terminology consistently across markets, policies and risk data. It also helps users compare how insurance is structured, regulated, priced or claimed across different markets.
Indemnity, principle of is closely related to subrogation, contribution, underinsurance and benefit policy. Linking these concepts together helps build a clearer glossary structure and gives readers a stronger understanding of how individual insurance terms connect within wider international insurance practice.
At a glance
- Used in
- Insurance market analysis, policy wording and risk transfer decisions.
- Purpose
- Helps users interpret insurance terminology consistently across markets, policies and risk data.
- Important because
- Clear definitions support better comparison of insurance products, market practices and regulatory requirements across jurisdictions.
- Related terms
- subrogation, contribution, underinsurance and benefit policy.
Example of the principle of indemnity
A damaged machine is repaired after an insured loss. The principle of indemnity aims to put the insured back in its pre-loss financial position, not to create a profit.