Which statement about a contract of indemnity is true?

Which statement about a contract of indemnity is true?

• A. Indemnity contracts reimburse for a loss.
• B. Indemnity contracts guarantee a profit.
• C. Indemnity contracts require proof of loss.
• D. Indemnity contracts provide no coverage until a loss occurs.

Answer: (A)

Indemnity relies on restoring the insured to the financial position they had before the loss. The insurer’s obligation is to reimburse the actual loss suffered, up to the policy limit, so the payout equals the amount of the loss rather than creating a windfall profit. For example, if a covered loss is $5,000, the payment is designed to cover that loss (subject to any deductible or limits), not to provide extra money beyond what was lost. Some indemnity contracts require proof of loss to determine the amount paid, but this requirement doesn’t change the fundamental idea: the purpose is to reimburse the loss, not to guarantee a profit. The idea that coverage exists only after a loss or that indemnity provides no coverage until loss occurs confuses the trigger with the purpose; indemnity is specifically about paying to offset an actual loss incurred.

Indemnity relies on restoring the insured to the financial position they had before the loss. The insurer’s obligation is to reimburse the actual loss suffered, up to the policy limit, so the payout equals the amount of the loss rather than creating a windfall profit. For example, if a covered loss is $5,000, the payment is designed to cover that loss (subject to any deductible or limits), not to provide extra money beyond what was lost. Some indemnity contracts require proof of loss to determine the amount paid, but this requirement doesn’t change the fundamental idea: the purpose is to reimburse the loss, not to guarantee a profit. The idea that coverage exists only after a loss or that indemnity provides no coverage until loss occurs confuses the trigger with the purpose; indemnity is specifically about paying to offset an actual loss incurred.