What does the principle of 'indemnity' ensure?

The principle of indemnity is a fundamental concept in insurance that ensures a policyholder is restored to their financial position prior to an insured loss, rather than profiting from it. This principle operates to prevent a situation where an insured may receive an amount greater than the actual loss incurred.

When a claim is made, the insurer evaluates the loss and compensates the insured in a manner that covers the actual damages or losses incurred, effectively putting the insured back in the financial position they were in before the incident occurred. This serves to uphold the fairness of insurance and keeps it functioning as a risk management tool rather than a profit-making venture for policyholders.

The other options pertain to outcomes that deviate from this principle. For instance, profiting from claims or exceeding the value of losses is contrary to the principle of indemnity, as it could incentivize individuals to experience losses. Reimbursement for future losses also does not align with the principle, since indemnity focuses strictly on restoring the financial condition following a specific, past loss.