Which principle is embodied in a contract of indemnity?

A contract of indemnity is designed to restore the insured to the financial position they were in prior to the loss, without providing a profit. This principle is known as the principle of indemnity, which asserts that the payment made by the insurer should be directly related to the actual loss suffered by the policyholder.

Choosing the correct answer reflects an understanding that the insurer's obligation is to compensate for the actual loss incurred, rather than to pay out arbitrary amounts or amounts exceeding the loss. This ensures that the insured does not benefit financially beyond the loss itself, which is foundational to the insurance policy's integrity and purpose.

In this context, the other options do not fit the principle of indemnity: payments exceeding the loss would imply a profit to the insured (which violates the idea of indemnity), while unrelated payments and payments regardless of loss further disconnect the compensation from the actual financial impact suffered by the insured. Thus, the choice highlighting the insurer's obligation to pay amounts directly related to the loss is the correct embodiment of the principle of indemnity.