Insurance is a vital tool for protecting individuals and companies against unforeseeable risks and uncertainties. Insurance can provide a safety net to policyholders, from protecting assets to providing financial security. To truly benefit from an insurance policy, you must understand the key principles that are at the core of all insurance contracts. These principles provide policyholders with clarity, but they also ensure fairness between insurers and insureds. This article explores core principles every policyholder needs to know in order to make informed choices.
Principle of Insurable Interest
A contract of insurance is based on the principle of insurable interests. The principle of insurable interest states that the insured must have an economic or personal interest. The insured must suffer financial losses or adverse effects in the event that the insured person or object is damaged, lost, or injured.
A home insurance policy, for example, is valid because a homeowner has a legitimate interest in protecting his or her property. A policy is not valid without this interest. This principle prevents insurance from being taken as a way to gain unjustified wealth or for speculation. The policyholder must demonstrate their insurable interests at the time they purchase the policy, or in the case of life insurance, when the insured person dies. This principle enables policyholders and insurance companies to work together by ensuring that the information provided is accurate.
Principle of Utmost Good Faith
The principle of “utmost good will,” also known as the “uberrima-fides” principle, is another essential insurance principle. This principle requires that both the insurers and insured disclose all material information honestly and without omission during the entire insurance process. Material facts are any information that could affect the insurer’s decision on whether to offer coverage or to determine the terms and premiums of the policy.
When applying for health coverage, the applicant is required to reveal any pre-existing conditions. The insurer is also required to provide the necessary information about policy exclusions and benefits. In the event of either party’s breach of good faith, it could result in disputes, invalid contracts, or denial of claim. Both parties can build a relationship that is transparent and mutually advantageous by adhering to this principle.
Principle of Indemnity
Indemnity is the principle that underpins most insurance policies. This includes those for property, liability, and health. This principle states that the insurer will compensate the insured in order to return them to their original financial position. The policyholder is not allowed to profit from an insurance claim. This maintains the purpose of insurance, which is loss compensation and not profit generation.
If, for example, an item valued at $10,000 is damaged, then the policyholder can be compensated up to that amount. This principle is especially important for policies like motor insurance, marine insurance, and property insurance. This principle not only ensures that all parties are treated fairly, but also stops the insured from falsifying their claims to make personal gains.
Principles of Contribution
Contribution comes into play when a policyholder has multiple policies on the same subject or risk. This principle prevents the policyholder from claiming all of the loss amount for multiple policies, and instead distributes it fairly amongst the insurers.
If, for example, someone has two insurers who have insured their home at $100,000 each, and then suffers a $50,000 loss, the amount of compensation will be shared proportionally by both insurers. Contribution aims to make sure that claimants do not gain excessively and that insurers also share the cost of compensation. By understanding this principle, policyholders can avoid disputes and smooth out claim settlements.
Subrogation Principle
Subrogation is a legal principle that allows insurance companies to recover amounts paid out in a claim by a third party responsible for the loss. After the insurer pays the policyholder for the loss, the rights of the policyholder to recover the losses from a third party are transferred to the insurer.
Imagine, for example, a car crash where the driver at fault is negligent and not the policyholder. The insurer has the right, if it compensates the policyholder and the damages are caused by the negligent driver, to recover those costs from him. This principle allows insurers to ensure that an insured does not receive compensation twice for the same loss—once by the insurance company and potentially by a third party. Understanding subrogation helps policyholders understand the implications of claims that involve third parties.
Principle of Proximate Cause
In determining the amount of claims payable under an insurance policy, the principle of proximate causes is crucial. The principle of proximate cause identifies a loss’s dominant and effective cause out of a number of possible causes. This principle is used by insurers to determine if the loss falls under the coverage of the policy.
If, for example, damage to a property is caused by a storm but the cause is flooding, then the insurer will check whether the policy covers flood damage. In the event that the policy excludes flooding, the storm will not be considered as the primary cause, and the insurer may deny your claim. This principle provides clarity and fairness to both the policyholders and insurers in the settlement of claims.
FAQs
1. How important is it for policyholders that they understand insurance principles?
By understanding insurance principles, policyholders can be assured of their rights as well as obligations. It allows them to make informed decisions and avoid unnecessary disputes.
2. What happens when utmost honesty is violated?
The policy can be voided if either the policyholder or insurer fails to disclose material information. It could also lead to a denial of claim or legal disputes.
3. Can I claim under multiple insurance policies?
You can only claim the proportionate amount of each insurer under the principle contribution to make sure you get a fair compensation, without profiting off the loss.
4. What is the purpose behind the indemnity principle?
Indemnity is the principle that ensures insurance as a tool for compensation of losses, without allowing the policyholder to profit financially from a claim. This preserves the purpose of coverage.
5. What are the benefits of subrogation for insurers?
Subrogation is the process by which insurers recover their claim amounts from the third party who caused the loss. This ensures that the policyholders are compensated promptly while the financial burden of the claim is transferred to the responsible entity.
