What is the principle of indemnity? Why is this principle important?

This principle states to compensate the insured organization or private individual so that their financial position is not affected by the loss. This principle means that someone seeking to take out insurance should not be able to earn a profit from the loss incurred. Example; an office fire ruins computers and therefore the insurance company would compensate only for the value of the equipment and they would not buy a brand new computer as this would mean that the insured individual or business has profited from the fire caused.