Indemnity means putting you back, not making you better off

Everything below about the principle of indemnity comes from what actually happens rather than from what is supposed to.

The principle in plain terms

A contract of indemnity puts you back in the financial position you occupied immediately before the loss. It does not restore what you paid for the item, and it does not fund an upgrade. That single idea explains market value settlements on vehicles, depreciation on baggage, and betterment deductions on repairs.

Once you know it, most settlement offers stop looking arbitrary.

Why insurers hold to it

If insurance could leave people better off, there would be a financial incentive to suffer losses. That incentive would raise claim frequency, which would raise premiums for everyone in the pool. The principle therefore protects the price of insurance rather than the insurer's margin specifically.

In practice, it is the reason you cannot insure the same item twice and collect twice.

The measure of indemnity

For a repairable item it is the cost of repair; for a destroyed item it is the value immediately before the loss. Value means what it would cost to obtain an equivalent item in the same condition, not the original purchase price. For buildings, reinstatement is normally used because a partially depreciated repair is not practical.

For most people, these measures are stated in the policy under a basis of settlement clause.

Where policies depart from it

New-for-old, agreed value, and reinstatement cover all deliberately pay more than strict indemnity. Each is a priced enhancement and appears in the schedule, which is why identical-looking policies settle differently. Agreed value policies, common for classic vehicles and specified jewellery, fix the sum in advance and avoid the argument entirely.

Where an item is unusual, an agreed value arrangement is often the only sensible structure.

Benefit policies are different

Life cover, critical illness and personal accident policies pay a stated sum on a defined event, with no measurement of loss. You can hold several and claim on all of them, because they are not indemnity contracts. Travel and health policies sit in between, with some benefits fixed and others reimbursing actual costs.

Knowing which type each of your policies is tells you whether cover can usefully be stacked.

Adjust the size of it until it is something you would actually do tired.

Contribution and double insurance

Where two indemnity policies cover the same loss, insurers share it between them rather than paying twice. This commonly arises where home contents and travel policies both cover an item away from home.

Where it helps most, you must usually declare other cover when claiming, and failing to do so is a disclosure issue. The practical implication is that paying for overlapping indemnity cover buys nothing.

The takeaway

Insurance restores a position, not a purchase. Every settlement offer follows from that.

Small and repeatable beats ambitious and abandoned, almost every time.