Which of the following statements is true about the principle of indemnity?

The principle of indemnity is a foundational concept in insurance that ensures the insured is restored to their financial condition prior to the loss, without allowing them to profit from their insurance claim. This principle helps maintain equity within the insurance system by ensuring that claims are paid out based on the actual loss incurred rather than on a basis that could lead to unjust enrichment.

In practical terms, when someone suffers a loss and makes a claim, the insurance payout is meant to cover the direct and indirect effects of that loss, bringing the insured back to where they were before the incident occurred. This principle is essential because it discourages fraudulent claims and makes insurance a tool for protection rather than profit.

The other statements contradict the core idea of indemnity. The concept does not allow for profit from a loss, does not prohibit any form of insurance coverage, and is not limited to life insurance policies since it applies broadly across various types of property and casualty insurance.