Indemnity is the insurance principle of restoring a policyholder to the financial position they were in before a loss, no better and no worse. Payouts reflect the actual value of what was lost, often after deducting for age and wear.
In one line: Indemnity is the principle of putting a policyholder back to their pre-loss financial position.
How indemnity works
The principle of indemnity stops a claimant profiting from a loss. Settlement aims to match the true value of the damaged or lost item at the time of the loss, which on an indemnity basis means deducting depreciation.
If a seven-year-old sofa originally costing 900 GBP is destroyed, an indemnity settlement might pay only 300 GBP, reflecting its used value, rather than the cost of buying a brand-new replacement.
Indemnity underpins most general insurance, though some policies vary it, for example with new for old contents cover or agreed-value classic car policies.
Indemnity vs new for old cover
Indemnity pays the depreciated value of an item, so older possessions attract smaller payouts. New for old cover overrides this by paying for a brand-new equivalent instead.
Indemnity is the default principle, and new for old or agreed-value terms are specific exceptions written into particular policies.
Primary source: FCA: Insurance