Insurance Principles

Main principles of Insurance:

  Utmost good faith

  Indemnity
  Subrogation
  Contribution
  Insurable Interest
  Proximate Cause

Utmost Good Faith (Uberrimae Fides)

As a client it is your duty to disclose all material facts to the risk being covered.  A material fact is a fact which would
influence the mind of a prudent underwriter in deciding whether to accept a risk for insurance and on what terms. The
duty to disclose operates at the time of inception, at renewal and at any point mid term.

Indemnity

On the happening of an event insured against, the Insured will be placed in the same monetary position that he/she
occupied immediately before the event taking place.  In the event of a claim the insured must:

  Prove that the event occurred

  Prove that a monetary loss has occurred
  Transfer any rights which he/she may have for recovery from another source to the Insurer, if he/she has
been fully indemnified.

Subrogation

The right of an insurer which has paid a claim under a policy to step into the shoes of the insured so as to exercise in
his name all rights he might have with regard to the recovery of the loss which was the subject of the relevant claim
paid under the policy up to the amount of that paid claim. The insurer’s subrogation rights may be qualified in the
policy.

In the context of insurance subrogation is a feature of the principle of indemnity and therefore only applies to contracts
of indemnity so that it does not apply to life assurance or personal accident policies. It is intended to prevent an
insured recovering more than the indemnity he receives under his insurance (where that represents the full amount of
his loss) and enables his insurer to recover or reduce its loss. 

Contribution

The right of an insurer to call on other insurers similarly, but not necessarily equally, liable to the same insured to
share the loss of an indemnity payment i.e. a travel policy may have overlapping cover with the contents section of a
household policy.  The principle of contribution allows the insured to make a claim against one insurer who then has
the right to call on any other insurers liable for the loss to share the claim payment.

Insurable Interest

If an insured wishes to enforce a contract of insurance before the Courts he must have an insurable interest in the
subject matter of the insurance, which is to say that he stands to benefit from its preservation and will suffer from its
loss.
In non-marine insurances, the insured must have insurable interest when the policy is taken out and also at the date of
loss giving rise to a claim under the policy.

Proximate Cause

An insurer will only be liable to pay a claim under an insurance contract if the loss that gives rise to the claim was
proximately caused by an insured peril. This means that the loss must be directly attributed to an insured peril without
any break in the chain of causation.

 Risk

Risk is the possibility of adverse results flowing from any occurrence. An insurance risk means
uncertainty about a financial loss.

[edit] Peril and Hazard

A peril is a cause of loss e.g. fire, windstorm, hail or burglary.

A hazard is a condition that may create or increase the chance of loss arising from a given peril.

 kinds of hazards
o physical hazard
o moral hazard

B) KINDS OF RISK

 FINANCIAL AND NON-FINANCIAL RISKS

 STATIC AND DYNAMIC RISKS
 FUNDAMENTAL AND PARTICULAR RISKS
 PURE AND SPECULATIVE RISKS

PURE RISKS

ALWAYS PRODUCE LOSS.

CAN BE INSURED.

Eg – DAMAGE BY FIRE

SPECULATIVE RISK

 MAY RESULT IN GAIN OR LOSS

 CANNOT BE INSURED.

Eg - GAMBLING
[edit] Classification of Pure Risks

[edit] Personal Risks

e.g. Premature death, old age,sickness,unemployment

[edit] Property Risks

Direct Losses/Consequential Losses

[edit] Liability Risks

It is the unintentional injury of other person/damage to property through RISK ARISING

FROM FAILURES OF OTHERS Arises due to failure ofnegligence another person to meet an
obligation

[edit] Method of handling risks

Risk Risk may be TRANSFERRED  Risk may be RETAINED  Risk may be AVOIDED 
Risk may be REDUCEDmay be SHARED

[edit] Insurance

Is a process by which losses of a few are Is a Risk Transfer mechanism  Insurance is a

contract between one partymeted out by a fund created by many called the Insured and another
party called the Insurer whereby in consideration of payment of premium by the Insured the
Insurer agrees to make good any financial loss the insured may suffer due to operation of an
Insured peril

[edit] Characteristics of an insurable risk

Must be Must be a pure Risk  Must be accidental and fortuitous in nature  Must not be
against Must not be illegal quantifiable in terms of money Must not be of a catastrophic
naturepublic policy

[edit] The Basic Principles of General Insurance

 Utmost Good Faith  Insurable Interest Subrogation Indemnity   Contribution  Proximate

Cause.

[edit] Essentials of a valid contract

ConsiderationOffer and acceptance The intention to create legal relations  Legality
ofConsensus ad idem Certainty of terms Capacity to contract  Possibility of
performancepurpose

[edit] Utmost good faith

As for the nature of the subject matter of the insurance contract the “product” is an intangible
one. Again the circumstances surrounding the subject matter are known mainly to the proposer
therefore utmost good faith – UBERRIMA FIDES.

The proposer thus has a duty of disclosure to disclose to the insurer all material facts. Material
Facts – Facts that can affect the judgment of an underwriter. For eg nature of packing in case of
marine insurance.

[edit] Insurable Interest

 There must be some property, right, interest, life, potential liability  It is this property, right,
interest which is the subject matter of insurance TheThe insured must benefit from its safety
and prejudiced by its loss relationship between insured and the subject matter of insurance must
be recognized at law

[edit] How Insurable Interest arises

Arising out ofArising out of contract Arising out of law From Ownership.  Interest of a
person on his lifelegal liability

[edit] Indemnity

The principle of indemnity would signify that an insured who suffers a loss must be paid to the
extent of his loss and not be allowed to make profit or loss out of it

Reinstatement Replacement  Repair  Cash payment 

Deductibles Excess and Franchise  Average Limitations:

[edit] Corollaries to the principle of indemnity

If the Insured has any rights of action to recover the loss from any third party who is
responsible for the loss, the Insurer having paid the loss is entitled to avail himself of these rights
to recover the loss from the third Subrogation rights arise inparty. This is called the right of
subrogation. 1) Tort- Lorry driver backing on tofour ways:
 your building.

2) Contracts – Contractual rights to

compensation.

4) Subject matter of Insurance – Salvage 3) Statute - 

[edit] Contribution

Is the right of an Insurer who has paid a loss under the policy to recover a proportionate amount
from other Insurers who are also liable for the loss

The Two or more policies of indemnity exist A) Contribution applies when: The policies
cover common peril which givespolicies cover common interest Each policy must The
policies cover a common subject matter rise to the loss be liable for loss

[edit] Illustration —Contribution

Total Amount of Loss – Rs 6,000

S.I with A – Rs 5,000

S.I with B – Rs 10,000
S.I with C – Rs 15,000

Policy A will Pay 5,000/30,000X6000 = Rs 1,000 Policy B will Pay10,000/30,000X6000 = Rs

2,000 Policy C will pay 15,000/30,000X6000 =Rs 3,000

[edit] Proximate cause

An An Insured Peril. There is no ambiguity when a loss is caused by: An Excluded Peril.
But in certain cases the loss may be theUninsured Peril. result of two or more causes acting
simultaneously or one after the other. Then it becomes necessary to choose the most important,
the most effective, the most powerful cause which brought about the loss. This cause is termed
the proximate cause all other causes being considered remote.

[edit] Classic Definition

The active and efficient cause which sets in motion a train of events which brings about a result
without the intervention of any force started and working effectively from a new and
independent source
An example under PA policy Person went out hunting. Fell down from his horse. Injured unable
to walk. Lay there on wet ground. Contracted Cold. Developed Pneumonia (something not
covered under PA Policy) Died. Proximate Cause – Accidental Fall. Remote Cause – Pneumonia

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