Principles of insurance 1 Insurable interest Insurable interest
Principles of insurance
1) Insurable interest • Insurable interest means that the person opting for insurance must have pecuniary interest in the property he is going to get insured and will suffer financial loss on the occurrence of the insured event. • This is one of the essential requirements of any insurance contract. • Therefore , a person can go for insurance of only those properties where he stands to benefit by the safety of the property, and will suffer loss, damage, injury if any harm takes place to such property.
Example • If the house you own is damaged by fire, the value of your house has been reduced by the damages sustained in the fire. • Whether you pay to have the house rebuilt or you and up selling it at a reduced price. You have to suffered a financial loss resulting from the fire. • By contrast, if your neighbor’s house, which you do not own, is damaged by fire, you may feel sympathy
2) At most good faith • Uberrima fides – Almost good faith • The insurance contract must be based on good faith. • If the insurance contract is obtained by way of fraud or misrepresentation it is void. • When an individual apply for life insurance, it is important to answer all questions truthfully and to volunteer any information even if not asked, if in doubt, just disclose it. Failure to disclose material facts could render the entire contract void.
Example • If a person was suffering from sinusitis but did not disclose it, the entire contract could be cancelled when the insurer discover non-disclosure. • Cancellation of the entire contract means other nonrelated illnesses like cancer could no longer be covered. • Some financial advisors who in their enthusiasm in closing the sale advice their clients not to disclose their pre-existing conditions for fear that the underwriter would reject the case. • Therefore it is important to engage an ethical financial
3) Material facts disclosure • In the insurance contract, the proposer is required to disclosure to the insurer all the material facts in respect of the proposed insurance. • This duty of disclosing the material facts not only applies to the material facts which are known to him but also extends to material facts which he is supposed to know.
Examples • • Acquisition of new companies and/or mergers Changes to your business description. Additional product lines and/or new services Hazardous trade processes, or storage of hazardous matter, including changes or additons to processes or storage already declared • Incidents not reported to insurers that might otherwise have led to a claim e. g theft or small fires.
4) Indemnity • The insurance contract should always be a contract of indemnity only and nothing more. • Insured can’t make any profit from the insurance contract. Insurance contract means for coverage of losses only. • Indemnity means a guarantee to put the insured in the position as he was before accident. • This principle does not apply to life insurance contracts. • The main object of this principle is to ensure that the insured is not able to use this contract for speculation or gambling.
5) contribution • In case the insured took more than one insurance policy for same subject matter, he/she can’t make profit by making claim for same loss more than once. • For example: Raj has a property worth Rs 5 lakhs. He took insurance from company A worth Rs. 3 lakhs and from company B –Rs 1 lakhs. • In case of accident, he incured a loss of Rs. 3 lakhs to
6) Subrogation What is subrogation? Subrogation is defined as a legal right that allows one party (e. g. , your insurance company) to make a payment that is actually owed by another party (e. g. , the other driver’s insurance company) and then collect the money from the party that owes the debt after the fact. Subrogation is one of the ways that car insurance companies recover money that was paid out in claims to drivers insured by them.
How subrogation works? Example : • Suppose another driver runs a red light and your caris totaled. You have insurance on your car, so you call your insurance carrier and they pay you for all of your expenses related to the accident. • Your insurance company realizing that the other driver had an insurance policy, then seeks reimbursement from the as fault party’s insurance carrier. • Your insurer is “subrogated” to the rights of your policy and can “step in your shoes” to recover any amount paid out on your behalf.
Partial fault and subrogation • If the insurance company’s investigation finds that you’re partially at fault in the accident, the amount of the deductibleyou can recover will be prorated to the percentage of your fault. • Example – if the judgment is that you were 40 %of fault, for example and your insurer chooses to subrogate your claim, you’ll be entitled to 60% refund of your deductible.
Waiving subrogation • If you sign any settlement with other driver’s insurance company, be careful to read the fine print. • Some insurers attempt to insert a “waiver of subrogation” clause to prevent your insurance company from attempting to get reimbursement for money that it has paid out to you. • If you waive subrogation after an accident, your auto insurance company may refuse to pay your claim because they will not be able to seek reimbursement from the other driver’s insurancecompany.
7) Loss minimisation • This principle states that the insured must take all the necessary steps to minimize the losses to insured assets. • For example – Ramtook insurance policy for
8) Causa proxima • Word “Causa Proxima” means “Nearest Loss” • An accident may be caused by more than one cause. • In case property insured for only one cause. In such case nearest cause of the accident is fount out. • Insurer pays the claim money only if the nearest cause is insured.
A Unit Linked Insurance Plan (ULIP) • It is a product offered by insurance company that unlike a pure insurance policy, gives investors both insurance and investment under single integrated plan.
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