Why are property and liability policies considered contracts of indemnity?

Property and liability policies are considered contracts of indemnity because they are designed to restore the insured to the same financial position they were in before a loss occurred, rather than allowing the insured to profit from the loss. This concept of indemnity ensures that a value can be assigned to the subject matter insured, which is crucial in determining the amount of compensation that the insurer will pay in the event of a loss. By focusing on the actual value of the property or liability that has been affected, these contracts aim to cover the financial impact of a specific incident without providing extra financial benefit beyond what was lost.

The other aspects of the response options do not accurately explain why property and liability policies are classified as contracts of indemnity. For instance, being long-term or non-renewable does not relate directly to the concept of indemnity. Similarly, while cash settlements may be a feature of these policies, they are not exclusive to contracts of indemnity and do not encapsulate the essence of restoring financial equilibrium. Fixed benefits also do not align with the principle of indemnity, which emphasizes compensation based on actual losses rather than predetermined amounts.