What does the principle of indemnity state regarding claims?

The principle of indemnity is fundamental in insurance and specifically emphasizes that the goal of an insurance policy is to restore the insured to their pre-loss financial condition without providing a profit. This means that when a loss occurs, the insurer is obligated to compensate the insured for the actual financial loss incurred, ensuring they are made whole again but not enriched.

This principle protects both the insured from suffering a financial loss due to unforeseen events and maintains the integrity of the insurance system by preventing fraudulent claims where individuals might seek more than what they have lost. By adhering to this principle, insurers function within the bounds of fairness and equity, ensuring that the compensation accurately reflects the loss.

In contrast, the other options misalign with the principle's intent. For instance, suggesting that insurers should profit from claims violates the concept of indemnity, as it would allow individuals to gain financially from their losses. Allowing insurers to pay less than the loss amount or to arbitrarily choose which claims to pay also stands against the principle, as it does not ensure the restoration of the insured's financial state.