The principle of indemnity provides that insurance should:

Why D is correct

Indemnity means restoring the insured to approximately the same financial position as before the loss, no better and no worse. The principle prevents the insured from profiting from a loss and is fundamental to property-type coverages, where the insurer's payment is limited to the actual economic loss sustained. Life insurance is a valued contract that pays a stated sum upon death, but the general indemnity concept still underlies insurance's purpose of restoring financial position rather than creating gain. Because insurance exists to repair losses, payment is not intended to exceed the loss, and intentional acts generally are not covered.

Why the other options are wrong

• C) Under indemnity contracts, payment is limited to the actual economic loss, not the face amount of the policy regardless of the damage sustained. This statement does not survive the statutory analysis presented above and is therefore wrong.
• A) Insurance is designed to prevent the insured from profiting from a loss. Guaranteeing a profit would violate the indemnity principle and encourage losses. The correct answer follows from the controlling authority, which this option does not follow.
• B) Indemnity does not mean coverage for every cause. Intentional acts and many excluded causes of loss are not covered under insurance policies. This common misconception is exactly what the governing rule rejects, so the option is incorrect.

Memory hook

Indemnity makes you whole, never more. Insurance mends the hole in the pocket, it does not fill it with gold.