Principle of Insurance:
Insurance is defined as a contract, which is called a policy, in which an individual or organisation receives financial protection and reimbursement of damages from the insurer or the insurance company. At a very basic level, it is some form of protection from any possible financial losses.
The
basic principle of insurance is that an entity will choose to spend small
periodic amounts of money against a possibility of a huge unexpected
loss. Basically, all the policyholder pool their risks together. Any loss that
they suffer will be paid out of their premiums which they pay.
There are seven basic principles that create
an insurance contract between the insured and the insurer:
These 7 principles combine to form an insurance contract. In this blog we are going to briefly explain each item and try to show you how understanding each item can shed light into your personal injury case and insurance questions. These are principles open to interpretation. So if you think your case has breached one of these principles or your insurance claim has wrongfully been denied. Jason McMinn and Justin McMinn for help understanding your rights.
The Principle of 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.
The Principle of Indemnity
- Indemnity is a guarantee to restore
the insured to the position he or she was in before the uncertain incident
that caused a loss for the insured. The insurer (provider) compensates the
insured (policyholder).
- The insurance company promises to
compensate the policyholder for the amount of the loss up to the amount
agreed upon in the contract.
Essentially, this is the part of the contract that
matters the most for the insurance policyholder because this is the part of the
contract that says she or he has the right to be compensated or, in other
words, indemnified for his or her loss.
Compensation is not paid when the incident that caused
the loss doesn’t happen during the time allotted in the contract or from the
specific agreed upon causes of loss (as you will see in The Principle of
Proximate Cause). Insurance contracts are created solely as a
means to provide protection from unexpected events, not as a means to make a
profit from a loss. Therefore, the insured is protected from
losses by the principle of indemnity, but through stipulations that keep him or
her from being able to scam and make a profit.
The Principle of Contribution
- Contribution establishes a
corollary among all the insurance contracts involved in an incident or
with the same subject.
- Contribution allows for the insured
to claim indemnity to the extent of actual loss from all the insurance
contracts involved in his or her claim.
This is the principle of contribution. Each policy you
have on the same subject matter pays their proportion of the loss incurred by
the policyholder. It’s an extension of the principle of indemnity that allows
proportional responsibility for all insurance coverage on the same subject
matter.
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 it’s 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 Proximate Cause
- The loss of insured property can be
caused by more than one incident even in succession to each other.
- Property may be insured against
some but not all causes of loss.
- When a property is not insured
against all causes, the nearest cause is to be found out.
- If the proximate cause is one in
which the property is insured against, then the insurer must pay compensation.
If it is not a cause the property is insured against, then the insurer
doesn’t have to pay.
When buying your insurance policies, you will most likely
go through a process where you select which instances you and your property
will be covered for and which ones they will not. This is where you are
selecting which proximate causes are covered. If you end up in an incident,
then the proximate cause will have to be investigated so that the insurance
company validates that you are covered for the incident.
This can lead to disputes when you have suffered an
incident you thought was covered but your insurance provider says it’s not.
Insurance companies want to make sure they are protecting themselves but
sometimes they can use this to get out of being liable for a situation. This
might be a dispute where you’ll need a lawyer to help argue for you.
The Principle of Loss Minimization
This is our final principle that creates an insurance
contract and the most simple one probably.
- In
an uncertain event, it is the insured’s responsibility to take all
precautions to minimize the loss on the insured property.
Insurance contracts shouldn’t be about getting free stuff
every time something bad happens. Therefore, a little responsibility is
bestowed upon the insured to take all measures possible to minimize the loss on
the property. This principle can be debatable, so call a lawyer if you think
you are being unfairly judged under this principle.
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