What differentiates indemnity from an insurance policy?

The distinction between indemnity and an insurance policy lies in their definitions and functions within the realm of insurance. Indemnity refers specifically to the compensation provided to an insured party for a loss they have suffered. This concept ensures that the insured is restored to the financial position they would have been in had the loss not occurred, without allowing for profit from the insurance.

On the other hand, an insurance policy is a formal contract between the insurer and the insured, which outlines the terms, coverage, and conditions under which compensation will be provided for certain specified losses. The policy sets the framework within which indemnity operates, detailing what losses are covered, how claims are made, and the responsibilities of both parties.

Understanding this difference is crucial because it emphasizes that while indemnity is a principle that governs the nature of insurance compensation, an insurance policy serves as the legal agreement that defines the obligations of the insurance company to provide that compensation in the event of a covered loss. This clarity helps individuals and businesses navigate their insurance needs and understand the protections available to them.