Which statement about indemnity is true?

• A. It guarantees profit for the insured after a loss
• B. It restores the insured to approximately the same financial position as before the loss
• C. It always pays replacement cost without depreciation
• D. It pays a proportional share of a loss

Answer: (B)

Indemnity means the insurer pays an amount that brings the insured back to roughly the same financial position they were in before the loss, not allowing a profit from the event. That’s why the statement that best describes indemnity says it restores the insured to approximately the same financial position as before the loss. In practice, the payment is limited to the actual loss up to the policy limits and can be based on different valuation methods (such as actual cash value or replacement cost, depending on the policy terms). It does not guarantee a profit, and it does not necessarily pay replacement cost without depreciation. It also isn’t a rule that it will always pay a proportional share of the loss; the amount depends on the coverage, limits, and any deductibles or coinsurance in the policy.