Indemnity occurs when an individual or entity receives reimbursement and is made whole for a loss.  Insurance policies provide indemnity to the insured when the insurance company pays claims on losses that are directly related to a covered cause of loss.

Most forms of insurance are consider a contract of indemnification or contract of indemnity.  A contract of indemnity requires that an insured be made whole in the event of a loss.  The contract further states that the insured may only be made whole.  Better said, the insured cannot profit from the contract of indemnity.

The no profit clause in the contract of indemnity is critical to insurance companies and insureds as well.  Without it, individuals could legal receive economic benefits from an insured loss.  This would expose insurance companies to adverse selection, higher claims, which would result in higher premiums for consumers.