Insurance is one of the main topics that is taking interest of both individuals and businesses. Principles of insurance take a major space in identifying the insurance concept clearly. Insurance is considered a form of contract between two parties. Hence, there are certain principles that are placed to ensure the honesty and validity of the contract.
These principles help to ensure equality for both parties involved in the insurance agreement. There can be six main principles of insurance identified.
01. Utmost good faith
The type of insurance and the insurance premium is usually calculated based on the facts and information given by the insured to the insurance company. Based on the type of risk that is being covered by the insurance company, the premium and the conditions of the insurance contract can vary from person to person.
Because of that reason, this is considered as one of the main principles of insurance. The contract between two parties who are involved in insurance should be made based on utmost good faith. It is highly important for the insured party to disclose all the relevant information to the insurance company without hiding it. Any information and facts that would increase the premium amount of the insured or the information that would cause any prudent in the agreement should be clearly disclosed for the insurer to reconsider the policy if necessary.
If the insurer discovers any intentionally hidden fact by the insured after activating the policy, the insurer has the right to void the insurance policy.
02. Insurable interest
This insurance principle states that the insurance company must show any type of interest in the subject matter of the insurance. In simple terms, the insurer need not be the owner of the insured property but he should show some vested interest in the property. If the property is damaged due to a reason mentioned in the insurance agreement, the insurer must bear the financial loss according to the agreement.
This is one of the principles of insurance that is most important for insurances such as marine and fire. According to this, the insurer undertakes the responsibility of paying the compensation to the insured against any possible loss or damage that may occur. The insurer will indemnify based on the amount of the loss that has occurred.
This principle is not applicable for life insurance contracts because the value of human life cannot be ascertained.
According to this insurance principle, once the insurance compensation is paid, the right of ownership of the property will be transferred from the insured to the insurance company. This principle has been set to ensure that the insured will not be able to make a profit from the damaged property or sell the property to make an additional profit.
There are instances that one property is insured with more than one insurance company. Even though this is possible for the insured to reach several insurance companies and insure the property, the above insurance principle stated that the insured cannot make a profit from the insurance agreement.
Based on that, this principle states that, if there is more than one insurance contract for the same property, the insurer can ask other insurers to contribute their share of the compensation. The insured will receive the compensation based on the valuation of all the involved insurers together.
If the insured party claims the full amount from one insurer, he losses the right to claim any amount for the same damage from other insurers.
06. Proximate cause
This is another main principle of insurance. This principle explains that the property is only insured against the incident or incidents mentioned in the insurance agreement. If the cause of the loss is not covered in the insurance agreement, the insurance company has no liability to pay for the loss. If the loss is due to more than the reasons mentioned in the agreement, the most effective cause for the damage is considered when paying for the damage.