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.

The principle of indemnity is also implemented by the principles of subrogation. This principle gives the insurance
company whatever right against third parties the insured may have as a result of the loss for which the insurer paid
him. So, the doctrine of subrogation refers to the right of the insurer to stand in the place of the insured, after
settlement of a claim, in so far as the insured’s right of recovery from an alternative source is involved.

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.
Contribution is a right that an insurer has, who has paid under a policy, of calling other interested insurers in the
loss to pay or contribute ratably to the payment. This means that if at the time of loss it is found that there is more
than one policy covering the same loss then all policies should pay the loss proportionately to the extent of
their respective liabilities so that the insured does not get more than one whole loss from all these sources.
If a particular insurer pays the full loss than that insurers shall have the right to call all the interested insurers to pay
him back to the extent of their individual liabilities, whether
equally or otherwise.

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

The rule is than immediate and not the remote cause in to be regarded. The maxim is sed causa proxima non-remote
spectature i.e., see the proximate cause and not the distant cause. The real cause must be seen while payments of the
loss. If the real cause of loss is insured, the insurer is liable to compensate the loss; otherwise the insurer may not be
responsible for loss.

So, Proximate cause means the active efficient cause that acts in motion a train of events which brings about result,
without intervention of any force started and working activity from a new and independent source.

“Utmost good faith”

Utmost good faith simply means, the both parties should enter in to the contract good faith. In Latin it’s called
“uberrimae fidei”. That is a duty of both parties to enter in to an insurance contract with the full disclosure of
material facts related to subject matter.

Suppose you want to have life insurance policy being a diabetic patient, and then it’s your duty to disclose the
insurer about the illness as it is a material facts to a life insurance policy.

The duty to disclose of important facts’ usually referred to as material facts is often rest on the insured as he knows
more about the subject matter insured. Non disclosure of material facts by the policy holder would affect the insurer
in deciding whether he enters in to the contract or on which premium rate, it should be considered.

However, insurance contract would become voidable on the request of the party not at fault, if the contract did not
follow the principle of utmost good faith. The doctrine of disclosing all material facts in embodied in the important
principle ‘utmost good faith’ which applies to all forms of insurance. Both parties of the insurance contract must be
of the same mind (ad item) at the time of contract. There should not be any misrepresentation, non-disclosure or
fraud concerning the material facts. An insurance contract is a contract of uberrimae fidei, i.e., of absolute good
faith where both parties of the contract must disclose all the material facts truly and fully.

Indemnity

Indemnity is the second principle of insurance contract. It is simply meant, that the insured will only be re-instated
to the previous position after the loss, resulted from occurrence of uncertain event. It’s clear any insured is not
allowed to make profit from the insurance contract and could recover the actual amount of loss not exceeding the
amount of policy.

Insurance is usually a contract of indemnity. The insurer agrees to pay for actual loss suffered by the insured, and no
more. The purpose of the contact is to shift the burden of risk from the insured to the insurer. So, according to this
principle, the insurer undertakes to put the insured, in the event of loss, in the same position that occupied
immediately before the happening of the event insured again.

Insurable Interest.

Insurable interest is another fundamental principle of an insurance contract and it means that the insured should
have particular relationship with the subject matter insured. For an insurance contract to be valid, the insured must
posses an insurable interest in the subject matter of insurance. The insurable interest is the pecuniary interest
whereby the policy-holder is benefited by the existence of the subject-matter and is prejudiced by the death or
damage of the subject-matter.

The essential of a valid insurable interest are the following:

There must be a subject-matter to be insured.
 The policy-holder should have monetary relationship with the subject-matter.
 The relationship between the policy-holders and the subject-matter should be
recognized by law.
 The financial relationship between the policy-holders and subject-matter be such that the policy0holder is
economically benefited by the survival or existence of the subject-matter and/or will suffer economic loss at the
death or existence of the subject-matter. When a person fulfils the above criteria or when a person has such a
relationship with the subject-matter, it is said that he has insurable interest and it is only then that he can insure.

WARRANTIES

There are certain conditions and promises in the insurance contract which are called warranties. A warranty is that
by which the assured undertakes that some particulars thing shall or shall not be done, or that some conditions shall
be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts. Warranties which are
mentioned in the policy are called express warranties. There are certain warranties which are not mentioned in the
policy. These warranties are called express warranties.