What does the term "indemnify" mean in the context of insurance?

The term "indemnify" in the context of insurance specifically refers to the principle of providing compensation to restore an insured party to their original financial position before a loss occurred. This is a fundamental concept in insurance, designed to protect individuals or businesses from suffering financial hardship due to unforeseen events like accidents, theft, or natural disasters.

When an insurer indemnifies an insured, they pay for damages or losses incurred up to the limits specified in the insurance policy, ensuring that the insured does not profit from the loss but is rather made whole again. This principle of indemnity helps to maintain the balance of risk and prevents moral hazard, where the insured might take greater risks because they know they will be compensated for any losses.

The other options, while they touch on different aspects of insurance, do not accurately capture the essence of "indemnify." Reducing premium costs, limiting liability, or increasing coverage limits are separate insurance functions that do not relate directly to the act of making someone whole after a loss has occurred.