What is the primary function of indemnity insurance?

The primary function of indemnity insurance is to restore individuals to their pre-loss conditions without providing any profit. This concept is fundamental to the purpose of insurance, which is to reimburse loss rather than create a financial gain. By design, indemnity insurance aims to ensure that the insured is compensated for their actual losses up to the limits of the policy, but not beyond that. This principle prevents individuals from profiting from their insurance claims, which would be contrary to the nature of insurance and the risk-pooling concept it embodies.

In contrast, the other options suggest outcomes that do not align with the principles of indemnity. Profit after a loss would undermine the core purpose of insurance by incentivizing claims beyond actual loss. Covering costs exceeding the policy limits implies a potential for insuring against losses not covered, which is not the role of indemnity insurance. Lastly, paying for future potential losses moves away from the focus on actual past losses, which doesn’t fit the indemnity model. Thus, the emphasis remains on restoring the insured to their financial position before the loss occurred, ensuring equitable treatment in the claims process.