The principles of insurance are a set of guidelines that form the foundation of insurance policies and contracts. These principles are designed to ensure that insurance policies are fair, reliable, and sustainable for both the insurance company and the policyholders. The six fundamental principles of insurance are:
- Principle of Utmost Good Faith: Both the insurance company and the policyholder must act honestly and disclose all relevant information to each other.
- Principle of Insurable Interest: The policyholder must have a financial interest in the object or person being insured. This means that they must suffer a financial loss if the object or person is damaged or lost.
- Principle of Indemnity: The purpose of insurance is to compensate the policyholder for the loss they have suffered, not to make a profit. Therefore, the amount paid out should be no more than the actual amount of the loss.
- Principle of Contribution: If the same object or person is insured with more than one insurance company, the policyholders can only claim up to the amount of their loss from each insurer.
- Principle of Subrogation: After an insurer has paid out a claim, they have the right to take legal action against any third party responsible for the loss or damage.
- Principle of Loss Minimization: Both the insurance company and the policyholder have a responsibility to minimize the loss or damage to the insured object or person. This means taking reasonable steps to prevent accidents, thefts, or other losses from occurring.
- Principle of Causa Proxima (Proximate Cause): The insurance policy covers only the loss or damage resulting from the proximate (nearest) cause of the event. If the loss is caused by an excluded event, it will not be covered by the policy.
- Principle of Substantial Change: If there is a substantial change in the insured object or person after the policy is issued, the insurance company must be notified, and the policy may need to be modified.
- Principle of Adequate Premium: The premium paid by the policyholder should be adequate to cover the risk of loss. If the premium is too low, the insurance company may not be able to pay out claims.
- Principle of Good Risk Selection: The insurance company must select the risks they insure carefully to ensure that they are not taking on an excessive amount of risk. This is done through underwriting, which involves evaluating the risk factors associated with the object or person being insured.
Sure, here are some frequently asked questions related to the principles of insurance:
Why is the principle of utmost good faith important in insurance?
The principle of utmost good faith is crucial in insurance because it requires both the insurer and the policyholder to act honestly and disclose all relevant information. This principle ensures that insurance policies are based on accurate and complete information, which helps to prevent fraud and maintain trust between the insurer and the policyholder.
What is an insurable interest?
An insurable interest is a financial interest that a person has in an object or person being insured. It means that the policyholder would suffer a financial loss if the insured object or person is damaged, lost, or destroyed. Without an insurable interest, an insurance policy would be considered a form of gambling or speculation, which is not the purpose of insurance.
What is the principle of indemnity?
The principle of indemnity is the fundamental principle of insurance. It means that the purpose of insurance is to compensate the policyholder for the actual loss suffered, not to make a profit. Therefore, the amount paid out should be no more than the actual amount of the loss.
What is subrogation in insurance?
Subrogation is the right of the insurance company to take legal action against any third party responsible for the loss or damage to the insured object or person. After an insurer has paid out a claim, they have the right to recover that amount from any responsible third party. Subrogation helps to ensure that insurance policies remain affordable and sustainable by holding responsible parties accountable for their actions.
What is underwriting in insurance?
Underwriting is the process by which an insurance company evaluates the risks associated with the object or person being insured. This involves assessing the likelihood and severity of potential losses and determining the appropriate premium to charge. Underwriting helps insurers to select risks carefully and price their policies accurately, which helps to ensure the sustainability of the insurance industry.