Indemnity is an underlying general insurance principle which means that the insured, after having suffered a loss for which a subsequent claim was made, should be put in the same financial position after the loss as that which he was in immediately before the loss. Indemnity is a process of taking over the responsibility for loss by the Insurance Company in exchange for the monthly payment of insurance premiums.

The principle of indemnity comes from common law and is directly linked to the principle of insurable interest. Indemnification is described as the act of providing compensation for a loss where the clear intention is for restoration of the insured party to the financial position prior to the loss.

Benefits are not set at a predetermined level or amount but based on restoring the policyholder’s financial position. It therefore implies another insurance principle, namely that insurance cannot be for gain; you cannot be better off financially after an insurance claim than before the claim. Insurance is designed to make you “whole” again, not to enrich.

There are factors that can prevent the insured from receiving a full indemnity at the time of a claim. These factors include underinsurance, the amount of the excess and also inadequate sums insured as well as non-adherence to the terms of the policy. Account is also taken of depreciation.