Principles of insurance

Principles of insurance

1. Utmost good faith (uberrimae fidei)

   A person applying for insurance is required to disclose all relevant and material facts about the property being insured so as to help the insurance company assess whether it is suitable for insurance and calculate the premium accurately.

   If a person provides wrong information, the insurance company has the right to refuse to pay any claim.

2. Insurable interest

   This principle states that the insured has to insure those risks which affect him directly. This means the insured has to insure his own property and not another person's property, e.g., I can insure my house against fire but not my friend's house against fire.

   NB

   The principles of insurable interest and utmost good faith apply to all contracts of insurance, i.e., assurance and insurance.

3. Indemnity

   This principle states that insurance does not aim to benefit a person; its object is to compensate a person for what he has lost.

4. Subrogation

   This principle states that all salvage goods or stock will belong to the insurance company after the compensation of loss has been paid. The insured has no right over his damaged property and cannot gain anything.

5. Contribution

   This principle states that if the property has been insured by more than one company, e.g., three companies, the compensation will be paid by all three companies in equal contributions.

6. Proximate cause

   The principle states that compensation will be paid when the cause of damage to the insured was a result of an insured risk.

Example

If a person insures his house against burning down by fire but unfortunately the house is burnt down by lightning, the insured would not be entitled to any compensation as the cause of loss is not directly related to the risk insured against.