What does the principle of indemnity primarily aim to accomplish?

The principle of indemnity is a fundamental concept in insurance that aims to ensure that an insured party is restored to their previous financial condition before a loss occurred, without allowing them to make a profit from the insurance payout. This principle helps to prevent moral hazard, where an individual might engage in risky behavior knowing they would profit from an insurance claim. By restoring the insured to their prior condition, indemnity encourages responsible behavior and ensures fairness in the insurance process.

In this context, options focusing on maximizing financial gain, keeping premiums lower, or guaranteeing an increase in policy value do not align with the primary objective of indemnity. The core idea is compensation for loss without profit, which directly ties back to the necessity of equitable treatment for all parties involved in an insurance contract.