The principles of insurance provide guidance to insurance firms when entering into a contract with a person seeking coverage. These principles help determine the validity of an insurance contract when claims are made and ensure the successful operation of insurance for the benefit of both parties involved. It is essential for prospective insured individuals to have a basic understanding of these principles as stated in insurance law.
The principles of insurance include:
- Insurable Interest: This principle states that an insurance claim cannot be valid unless the insured person can prove that they have directly suffered a financial loss due to the insured risk. For example, one cannot insure their parents, friends, or other people.
- Principle of Indemnity: This principle ensures that the insured is reimbursed for the actual financial loss suffered, putting them back in the same financial position as before the loss occurred. It prevents individuals from gaining from a misfortune by receiving compensation exceeding the actual loss suffered. However, this principle does not apply to life assurance, as it is not possible to value one’s life or body in monetary terms.
- Utmost Good Faith (Uberrima Fides): This principle requires the person taking out an insurance policy to disclose all relevant material facts honestly. Failure to comply with this principle may render the contract null and void, resulting in no compensation. For example, a person suffering from a terminal illness should disclose this information to the insurer.
- Subrogation: This principle complements the principle of indemnity by ensuring that a person does not benefit from the occurrence of loss. After the insured has been compensated according to the terms of the policy, whatever remains of the insured property becomes the property of the insurer. This principle does not apply to life assurance since there is nothing to subrogate.
These principles of insurance aim to protect both the insured and the insurer, ensuring fairness and transparency in insurance contracts.