3.

EXPALAIN THE FOLLOWING PRINCIPLES OF INSURANCE

The Principle of Insurable Interest
Insurable interest just means that the subject matter of the contract must provide some
financial gain by existing for the insured (or policyholder) and would lead to a financial loss
if damaged, destroyed, stolen, or lost.
The insured must have an insurable interest in the subject matter of the insurance contract.
The owner of the subject is said to have an insurable interest until s/he is no longer the owner.
In auto insurance, this will most times be a no brainer, but it does lead to issues when the
person driving a vehicle doesn’t own it. For instance, if you are hit by a person who isn’t on
the insurance policy of the vehicle, do you file a claim with the owner’s insurance company
or the driver’s insurance company? This is a simple but crucial element for an insurance
contract to exist.
The Principle of Subrogation
This principle can be a little confusing, but the example should help make it clear.
Subrogation is substituting one creditor (the insurance company) for another (another
insurance company representing the person responsible for the loss).
 After the insured (policyholder) has been compensated for the incurred loss on a piece of
property that was insured, the rights of ownership of this property go to the insurer.
So lets say you are in a car wreck caused by a third party and your file a claim with your
insurance company to pay for the damages on your car and your medical expenses. Your
insurance company will assume ownership of your car and medical expenses in order to step
in and file a claim or lawsuit with the person who is actually responsible for the accident (i.e.
the person who should have paid for your losses).
The insurance company can only benefit from subrogation by winning back the money it paid
to its policyholder and the costs of acquiring this money. Anything paid extra from the third
party, is given to the policyholder. So lets say your insurance company filed a lawsuit with
the negligent third party after the insurance company had already compensated you for the
full amount of your damages. If their lawsuit ends up winning more money from the
negligent third party than they paid you, they’ll use that to cover court costs and the
remaining balance will go to you.

The Principle of Uberrima Fidei (Utmost Good Faith)

 Both parties involved in an insurance contract—the insured (policy holder) and the insurer
(the company)—should act in good faith towards each other.
 The insurer and the insured must provide clear and concise information regarding the terms
and conditions of the contract
This is a very basic and primary principle of insurance contracts because the nature of the
service is for the insurance company to provide a certain level of security and solidarity to the
insured person’s life. However, the insurance company must also watch out for anyone
looking for a way to scam them into free money. So each party is expected to act in good
faith towards each other.
If the insurance company provides you with falsified or misrepresented information, then
they are liable in situations where this misrepresentation or falsification has caused you loss.
If you have misrepresented information regarding subject matter or your own personal
history, then the insurance company’s liability becomes void (revoked).
The Principle of Insurable Interest
Insurable interest just means that the subject matter of the contract must provide some
financial gain by existing for the insured (or policyholder) and would lead to a financial loss
if damaged, destroyed, stolen, or lost.
 The insured must have an insurable interest in the subject matter of the insurance contract.
 The owner of the subject is said to have an insurable interest until s/he is no longer the owner.
In auto insurance, this will most times be a no brainer, but it does lead to issues when the
person driving a vehicle doesn’t own it. For instance, if you are hit by a person who isn’t on
the insurance policy of the vehicle, do you file a claim with the owner’s insurance company
or the driver’s insurance company? This is a simple but crucial element for an insurance
contract to exist.
4. EXPLAIN REAL INSURANCE

What Is Insurance?

Most people have some kind of insurance: for their car, their house, or even their life. Yet
most of us don’t stop to think too much about what insurance is or how it works.

Put simply, insurance is a contract, represented by a policy, in which a policyholder receives

financial protection or reimbursement against losses from an insurance company. The
company pools clients’ risks to make payments more affordable for the insured.

Insurance policies are used to hedge against the risk of financial losses, both big and small,
that may result from damage to the insured or their property, or from liability for damage or
injury caused to a third party.
Key Takeaways

 Insurance is a contract (policy) in which an insurer indemnifies another against

losses from specific contingencies or perils.1
 There are many types of insurance policies. Life, health, homeowners, and auto are
the most common forms of insurance.1
 The core components that make up most insurance policies are the deductible, policy
limit, and premium.

How Insurance Works

A multitude of different types of insurance policies is available, and virtually any individual
or business can find an insurance company willing to insure them—for a price. The most
common types of personal insurance policies are auto, health, homeowners, and life. Most
individuals in the United States have at least one of these types of insurance, and car
insurance is required by law.

Businesses require special types of insurance policies that insure against specific types of
risks faced by a particular business. For example, a fast-food restaurant needs a policy that
covers damage or injury that occurs as a result of cooking with a deep fryer. An auto dealer
is not subject to this type of risk but does require coverage for damage or injury that could
occur during test drives.

 
To select the best policy for you or your family, it is important to pay attention to the three
critical components of most insurance policies: deductible, premium, and policy limit.

There are also insurance policies available for very specific needs, such as kidnap and
ransom (K&R), medical malpractice, and professional liability insurance, also known
as errors and omissions insurance.

Insurance Policy Components

When choosing a policy, it is important to understand how insurance works.

A firm understanding of these concepts goes a long way in helping you choose the policy
that best suits your needs. For instance, whole life insurance may or may not be the right
type of life insurance for you. Three components of any type of insurance are crucial:
premium, policy limit, and deductible.

Premium

A policy’s premium is its price, typically expressed as a monthly cost. The premium is
determined by the insurer based on your or your business’s risk profile, which may
include creditworthiness.

For example, if you own several expensive automobiles and have a history of reckless
driving, you will likely pay more for an auto policy than someone with a single midrange
sedan and a perfect driving record. However, different insurers may charge different
premiums for similar policies. So finding the price that is right for you requires some
legwork.2

Policy Limit

The policy limit is the maximum amount that an insurer will pay under a policy for a
covered loss. Maximums may be set per period (e.g., annual or policy term), per loss or
injury, or over the life of the policy, also known as the lifetime maximum.

Typically, higher limits carry higher premiums. For a general life insurance policy, the
maximum amount that the insurer will pay is referred to as the face value, which is the
amount paid to a beneficiary upon the death of the insured.

Deductible

The deductible is a specific amount that the policyholder must pay out of pocket before the
insurer pays a claim. Deductibles serve as deterrents to large volumes of small and
insignificant claims.

Deductibles can apply per policy or per claim, depending on the insurer and the type of
policy. Policies with very high deductibles are typically less expensive because the high out-
of-pocket expense generally results in fewer small claims.