Insurance operates on key principles that ensure fairness, transparency, and effective risk management. These principles guide both insurers and policyholders in maintaining trust and achieving financial protection.
1. Utmost Good Faith (Uberrimae Fidei)
Both the insurer and the policyholder must act honestly and disclose all relevant information. The insurer relies on the policyholder to provide accurate details, while the policyholder trusts the insurer to honor the policy terms.
- Example: When applying for health insurance, the applicant must disclose any pre-existing medical conditions.
2. Insurable Interest
The policyholder must have a legitimate interest in the subject of the insurance. This means they would suffer a financial loss if the insured item or person is damaged, lost, or harmed.
- Example: You can insure your own house or car, but not a stranger’s property, as you have no financial stake in it.
3. Indemnity
The principle of indemnity ensures that the policyholder is compensated only to the extent of the actual loss. Insurance is meant to restore the insured to their original financial position, not to provide a profit.
- Example: If your car is damaged and repair costs are $5,000, the insurer will only pay that amount, even if your coverage limit is higher.
4. Contribution
If the same risk is insured by multiple insurers, the principle of contribution ensures that each insurer pays a proportionate share of the claim. This prevents the policyholder from claiming the full amount from multiple insurers.
- Example: If a house is insured with two companies, both insurers share the compensation for any loss proportionally.
5. Subrogation
After compensating the policyholder, the insurer has the right to pursue a third party responsible for the loss, to recover the payout amount.
- Example: If your car is damaged in an accident caused by another driver, your insurer can recover the payout from the at-fault driver’s insurer.
6. Proximate Cause
The principle of proximate cause ensures that compensation is provided only if the loss is directly caused by an insured event. If an unlisted cause leads to the loss, the claim may be denied.
- Example: If a fire (an insured event) causes damage to your property, the insurer will pay. But if the fire started due to war (an excluded event), the claim may be rejected.
7. Loss Minimization
The policyholder has a responsibility to take reasonable steps to minimize losses or damages, even after the insurance policy is in place.
- Example: If your house catches fire, you must try to extinguish the fire or call emergency services immediately, rather than allowing the damage to worsen.
Conclusion
These 7 principles form the foundation of the insurance industry, ensuring fairness, transparency, and trust between insurers and policyholders. By adhering to these principles, both parties can effectively manage risks and maintain a reliable financial safety net.
