The principles of insurance are fundamental guidelines that ensure the effective operation of insurance contracts. They help maintain fairness, transparency, and mutual trust between insurers and policyholders. Here’s an overview of the key principles:
1. Utmost Good Faith (Uberrimae Fidei)
Both parties in an insurance contract must act honestly and disclose all material facts.
- Insured's Duty: Share accurate details about the subject being insured.
- Insurer's Duty: Clearly explain terms, conditions, and coverage.
2. Insurable Interest
The policyholder must have a financial or legal interest in the subject of insurance.
- Example: You can insure your own car but not your neighbor’s because you would not suffer a financial loss if their car is damaged.
3. Indemnity
Insurance is meant to compensate for the actual loss, not for making a profit.
- The insured is restored to their financial position before the loss occurred.
4. Contribution
If the insured holds multiple policies for the same risk, the compensation will be proportionately distributed among the insurers.
- This avoids overcompensation for the same loss.
5. Subrogation
After compensating the insured, the insurer gains the legal right to recover the loss from third parties responsible for the damage.
- Example: If your car is damaged due to someone else's fault, your insurer can sue the at-fault driver after compensating you.
6. Proximate Cause
The insurer will cover the loss if it is caused by an insured peril directly and not due to any excluded events.
- Example: If a fire damages your property, but the fire was started by an earthquake (excluded peril), the loss might not be covered.
7. Loss Minimization
The policyholder must take reasonable steps to minimize the loss or damage to insured property.
- Example: If there is a fire in your house, you must try to extinguish it or call emergency services instead of allowing it to burn entirely.
Understanding these principles helps both insurers and insured parties navigate their roles and responsibilities effectively.
