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When an insurance policy is written on an indemnity basis, it ensures that the insured is restored to the same financial position they were in prior to the loss, without providing any profit from the incident. In this scenario, Mr. Green’s machine has been destroyed, and he is looking to replace it with a second-hand machine.

If the insured value of the machine is less than or equal to the cost of a similar second-hand replacement, the payout would typically match this amount. Given that the answer provided indicates Mr. Green would receive £700, this suggests that the value of the destroyed machine on the indemnity basis—taking into account depreciation or the market value for a similar second-hand item—is assessed at £700.

Thus, £700 represents a fair compensation for the loss, aligning with the principles of indemnity, where the aim is to cover the actual loss incurred without exceeding it. The other amounts listed would imply either a new value (£1,000 or £1,100) or a higher second-hand market value than what Mr. Green would need to pay, which is not consistent with the indemnity principle.