What is the purpose of indemnification?

• A. To eliminate all risk for the insured
• B. To maximize insurer profits
• C. To control the moral hazard and prevent the insured from profiting from loss
• D. To ensure you receive a profit from losses

Answer: (C)

Indemnification focuses on restoring the insured to the financial position they were in before the loss, not giving them extra money. This approach keeps the insured from profiting from a claim and helps curb moral hazard—people are less likely to take careless risks if they know they won’t gain financially from a loss. Payments are based on actual losses, up to policy limits, often with deductibles or valuation methods, so compensation reflects the harm suffered rather than any potential windfall. Insurance doesn’t eliminate risk entirely, nor is its primary aim to boost insurer profits or to guarantee a profit for the insured.