The principle of indemnity ensures that you receive compensation for the financial loss you suffer due to a covered event, but without making any extra profits. It means that your financial position before the loss should be restored.

When you have insurance coverage based on this principle, the insurer will compensate you for the actual amount of the loss, up to the limits set in the policy or the value of the insured item. This indicates that if you experience a covered loss, like damage to your property or a car accident, the company will pay for the necessary repairs or the fair market value of the item.

This principle helps prevent situations where someone intentionally causes damage or insures an item for more than its value to benefit financially from a loss. It promotes fairness and guarantees that the purpose of insurance is to provide financial protection and restore you to the same monetary position you were in before the loss.

The indemnification clause within an insurance contract specifically establishes the terms and conditions under which this principle of indemnity will be applied.