What does the indemnity provision in an insurance policy allow the insured to collect?

The indemnity provision in an insurance policy is designed to ensure that the insured is compensated for their financial loss without profiting from the claim. This means that the insured can collect an amount that corresponds to the actual financial loss they experienced, rather than exceeding that loss or being limited to a predetermined amount.

When the indemnity principle is applied, the insurer evaluates the situation and determines the value of the claim based on the documentation provided by the insured. This may include repair costs, replacement costs, or other relevant factors that indicate the extent of the financial impact on the insured. The objective of this provision is to make the insured whole again to the extent of their loss without allowing them to gain an advantage or profit from the situation.

For instance, if a policyholder suffers a loss of $10,000 due to damage and has a policy that covers that type of loss, the indemnity provision allows them to receive compensation that aligns with that $10,000 loss. This principle underscores the essential balance of fairness in insurance practices, preventing the policyholder from collecting more than what was lost.