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Fundamental of Insurance
Fundamental of Insurance
Insurance contract between the client (insured) and the insurer is based on the
following principles:
1. INSURABLE INTEREST:
the insurer before the contract is made all matters that are material to the
decision the insurer takes as to whether to offer to insure at all and, if so, on
what terms. The same goes for representations made to the insurer these
must not be materially incorrect. Breach of this duty, which generally ends
when the contract is made, can be catastrophic for the insured. The insurer
has no right to claim damages for a breach of the duty his only option is to
reject the insurance claim.
3. SUBROGATION:
Subrogation is the right of insurers, once they have paid the insurance money
due, to exercise any rights or remedies of the insured arising out of the insured
event to recover their cash outflow from the third party. That right is always
expressed in the wording of the insurance policy but, even if not written in to
the policy, applies in any event.
There are two key underlying principles to bear in mind when dealing with
subrogation. The first is that subrogation is a doctrine founded on the
indemnity principle, namely that an insured has a right to be indemnified
against his loss but cannot make a profit from it by getting paid his insurance
money as well as obtaining compensation from a third party.
Secondly, insurers cannot pursue a claim in the name of their insured until the
insured has been fully indemnified, unless agreed otherwise.
It is also likely that the policy will include an express term giving insurers the
right to control any legal proceedings brought against a third party. In the
absence of a specific term or agreement to that effect, if the insured has
suffered a loss over and above the amount for which they have been
indemnified, the insured is entitled to control the proceedings and can settle
the claim without reference to the insurer. However, the insured must still
act in good faith, which means including both insured and uninsured losses
and not compromising any claim insurers may have when negotiating a
settlement. Should the insurer's claim be prejudiced, the insurer would be able
to seek reimbursement from the insured.
4. INDEMNITY:
One of the basic tenets of insurance, that the insured should not profit from a
loss or damage but should be returned (as near as possible) to the same
financial position that existed before the loss or damage occurred. In other
words, the insured cannot recover more than his or her actual loss from the
insurer. There are, however, certain exceptions to this rule, such as personal
accident and life insurance policies where the policy amount is paid on
occurrence of accident or death and the question of profit does not arise.
Indemnity insurance compensates the beneficiaries of the policies for their
actual economic losses, up to the limiting amount of the insurance policy. It
generally requires the insured to prove the amount of its loss before it can
recover. Recovery is limited to the amount of the provable loss even if the face
amount of the policy is higher. This is in contrast to, for example, life
insurance, where the amount of the beneficiary's economic loss is irrelevant.
The death of the person whose life is insured for reasons not excluded from the
policy obligate the insurer to pay the entire policy amount to the beneficiary.
5. PROXIMATE CAUSE
In insurance, it is the actual cause which results in damage. For e.g. if
earthquake has caused short circuiting in a house and resultantly catches fire,
then the proximate cause is earthquake not the short circuiting. In such case,
the claim will be entertain able only if the insurance coverage of the house
includes coverage against earthquake.