In an indemnity contract, how is the benefit generally determined?

• A. By the amount of loss, not to exceed the lesser of loss value or policy maximum
• B. By the policy's maximum regardless of loss
• C. By a fixed rate independent of loss
• D. By the insured's stated value plus a premium

Answer: (A)

Indemnity means the insurer pays only enough to restore the insured to the financial position they had before the loss, not to create a profit. In an indemnity contract, the benefit is determined by the actual loss, but it cannot exceed the policy’s maximum. If the loss is less than or equal to the policy limit, the payout equals the loss amount. If the loss exceeds the limit, the payout is limited to the policy maximum. This keeps the payment in line with the damage suffered and the coverage purchased, preventing overpayment.

Other approaches would either pay the full policy limit regardless of actual damage, which wouldn’t reflect the real loss; pay a fixed amount regardless of loss, which ignores the extent of damage; or rely on a stated value plus premium, which describes a different, non-indemnity arrangement.