The general principles of insurance provide a framework for the functioning and regulation of insurance contracts. These principles guide the relationship between the insurer and the policyholder, as well as the overall operation of the insurance industry.
General Principles of Insurance
Principle of Utmost Good Faith
This principle requires both the insured and the insurer to act with utmost honesty, integrity, and good faith in all dealings related to the insurance contract. The insured must disclose all relevant information about the risk being insured, and the insurer must provide complete and accurate information about the terms and conditions of the policy.
In simple words, both the insurance company and the person getting insurance should be honest and provide all relevant information. This principle is about trust and transparency.
Principle of Insurable Interest
Insurable interest refers to the requirement that the insured must have a legal or financial interest in the subject matter of the insurance policy. This principle ensures that the insured has a legitimate stake in protecting against potential loss or damage to the insured property or person.
In simple words, the person getting insurance must have a real reason to protect what they’re insuring. They need to have a financial or legal connection to the thing they’re insuring.
Principle of Indemnity
The principle of indemnity states that insurance aims to compensate the insured for the actual loss suffered and to restore them to the same financial position they were in before the occurrence of the insured event. It prevents the insured from making a profit from the insurance policy and ensures that compensation is limited to the amount of the loss.
In simple words, insurance is meant to help you recover financially after a loss, not make a profit. The insurance company should pay you enough to get you back to the same financial position you were in before the loss.
Principle of Contribution
The principle of contribution applies when the insured has obtained multiple insurance policies covering the same risk. According to this principle, in the event of a loss, each insurer will contribute proportionately towards the compensation, but the total amount received by the insured cannot exceed the actual loss suffered.
In simple words, if you have multiple insurance policies covering the same thing, each company will pay a fair share of the claim, so you don’t get more money than you lost.
Principle of Subrogation
Subrogation allows the insurer, after compensating the insured for the loss, to step into the insured’s shoes and pursue legal action against third parties who may be responsible for the loss. This principle prevents the insured from receiving double compensation and enables the insurer to recover part or all of the amount paid to the insured.
In simple words, after the insurance company pays your claim, they can step into your shoes and sue the person or entity responsible for the loss to recover their costs. This prevents double recovery and helps the insurer get their money back.
Principle of Proximate Cause
The principle of proximate cause determines the primary or most direct cause of the loss or damage. It states that insurance coverage is triggered by the proximate cause of the insured event, even if there are other contributing factors involved. The insurer is liable for the loss only if it is directly linked to the insured event.
In simple words, the main cause of the loss will determine if it’s covered by the insurance policy. If the insured event is directly related to the loss, it will likely be covered.
Principle of Loss Minimization
This principle places a duty on the insured to take reasonable measures to minimize or mitigate the losses after an insured event occurs. The insured is expected to act responsibly to prevent further damage and reduce the extent of the loss. Failure to do so may affect the coverage or compensation provided by the insurer.
In simple words, you have a responsibility to take reasonable steps to minimize your losses after an insured event occurs. Failing to do so may affect the amount the insurer will pay.
