Principle Of Insurance 

The main role of insurance is to pay the insured when loss or misfortune occurs. However, the payment is only made to those who have taken insurance cover. Insurance is based on trust of both between insured and insurer of the insurance policy. To make this trust work, insurance is governed by six main rules include utmost good faith, insurable interest, proximate cause, indemnity, subrogation and contribution.

Utmost Good Faith

Utmost good faith is a principle used in insurance contracts that legally requires insured to reveal important information about property or life being insured to the insurer. Insured must also tell the truth to the insurer based on the incident that have happened to the insured when making claim.

When proposing to buy insurance, you will be asked to fill a proposal form. The proposal form are agreements made in the utmost good faith, which implies a standard of honesty. The proposal form is designed to obtain information from you concerning the property or life you want to insure. The form contains relevant questions which you must answer truthfully. It has a section called declaration which you must sign to prove that all the information you have given in the form is correct and true to the best of your knowledge and belief. The policy is voidable if utmost good faith is not observed by the insured.

Insurable interest

To have an insurable interest, entity would take out an insurance policy protecting the person, item or event in question. The insurance policy mitigates the risk of loss should something beset the asset.

Insurable interest is an essential requirement for issuing an insurance policy which makes the entity or event legal, valid and protected against intentionally harmful acts. People not subject to financial loss do not have an insurable interest. Therefore, a person or entity cannot purchase an insurance policy to cover themselves in the event of a loss.

Insurance is a method of pooled risk exposure which protects policyholders from financial losses. Insurers have created many tools to cover losses related to various factors such as automobile expenses, health care expenses, loss of income through disability, loss of life and damage to property.

Insurable interest is a type of investment which protects anything subject to a financial loss. It specifically applies to people or entities where there is a reasonable assumption of longevity or sustainability, barring any unforeseen adverse events. Insurable interest insures against the prospect of a loss to this person or entity.

Proximate cause

The cause having the most significant impact in bringing about the loss under a first-party property insurance policy, when two or more independent perils operate at the same time to produce a loss. Courts employ a set of proximate cause rules to resolve causation disputes when a property policy states that it covers or excludes losses caused by a peril and there is more than one peril at work in a fact pattern. Under common law, whether the policy provides coverage depends on which peril is chosen as the proximate cause. If the peril selected as the proximate cause is covered, courts consider the loss to have been caused by the covered peril and will hold that the loss is covered. If the peril selected as the proximate cause is uncovered or excluded, courts consider the loss to have been caused by the uncovered or excluded peril and will hold that the loss is not covered.

Indemnity

Indemnity is a comprehensive form of insurance compensation for damages or loss, and in the legal sense, it may also refer to an exemption from liability for damages.

Indemnity is considered to be a contractual agreement between two parties whereby one party agrees to pay for potential losses or damages caused by another party. Atypical example is an insurance contract, in which the insurer or the indemnitor agrees to compensate the other for any losses in return for premiums paid by the insured to the insurer. With indemnity, the insurer indemnifies the policyholder-that is, promises to make whole the individual or business for any covered loss.

Indemnity is common in agreements between an individual and a business. But it also applies on a larger scale to relationships between businesses and government or between governments of two or more countries. Sometimes, government, a business, or an entire industry must take on the costs of larger issues on behalf of the public, such as outbreaks of disease.

Subrogation

Subrogation is a term describing a legal right held by most insurance carriers to legally pursue a third party that caused an insurance loss to the insured. This is done in order to recover the amount of the claim paid by the insurance carrier to the insured for the loss. When an insurance company pursues a third party for damages, it is said to “step into the shoes of the policyholder,” and thus will have the same rights and legal standing as the policyholder when seeking compensation for losses. If the insured party does not have the legal standing to sue the third party, the insurer will also be unable to pursue a lawsuit as a result. Subrogation literally refers to the act of one person or party standing in the place of another person or party. Subrogation effectively defines the rights of the insurance company both before and after it has paid claims made against a policy. Subrogation makes obtaining a settlement under an insurance policy go more smoothly. In most cases, an individual’s insurance company pays its client’s claim for losses directly, then seeks reimbursement from the other party, or his insurance company. The insured client receives payment promptly, which is what he pays his insurance company to do; then, the insurance company may pursue a subrogation claim against the party at fault for the loss.

Contribution

the principle holding that two or more insurers each liable for a covered loss should participate in the payment of that loss. Having paid its share of a loss, an insurer may be entitled to equitable contribution—a legal right to recover part of the payment from another insurer whose policy was also applicable. Many insurance policies stipulate the formula under which contribution among multiple insurers will take place. Two standard methods are Contribution by limits and Contribution by equal shares.