Which contract provides that the insurer pays an amount directly related to the amount of the loss?

• A. Valued policy
• B. Contract of indemnity
• C. Direct-action statute
• D. Binder

Answer: (B)

The key idea is that an indemnity-based contract pays only what the actual loss amounts to, up to the policy limits, so the payout moves with the amount of damage. The insurance aim in an indemnity contract is to restore the insured to their financial position before the loss, not to provide extra money beyond the loss. If a loss is $8,000 and the policy limit is $10,000 (assuming deductibles are met), the insurer covers roughly that actual loss, rather than a predetermined sum.

This is different from a valued policy, which pays a fixed amount stated in the policy regardless of the actual loss. It’s also different from a direct-action statute, which concerns who may sue the insurer, and a binder, which is a temporary agreement that provides coverage before the policy is issued.