Principles of Insurance
Utmost Good Faith
Is the duty to disclose all material facts relating to the risk to be 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.
Examples: Motor: Age of drivers, licence status, details of any accidents, claims or convictions, exact model of vehicle etc.
Household: Construction of house, location of house ie. close to river, any previous claims etc.
Duty of Disclosure applies to both the Proposer and the Insurer. Duty of disclosure operates at :
- inception - until the date cover is confirmed by the Insurers
- renewal - up to the renewal date
- mid term alterations - until the Insurers confirm cover in respect of the alterations
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Indemnity
Is the placing of the insured in the same financial position after a loss as he/she was immediatley before the loss.
In the event of a claim the Insured must:
- prove that he/she has sustained a monetary loss
- prove the extent and value of his/her loss
- transfer any rights which he/she may have for recovery from another source to the Insurer, if he/she has been fully indemnified.
The settlement of the loss will be subject to the following limitations:
- Sum Insured
- Average
- Excess / deductible
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Subrogation
Is the right of an insurance company who has paid a claim to its client to persue another party who may have caused the incident resulting in the claim.
Notes:
- The Insurer must exercise the right of recovery in the name of the Insured (prevents the Insured from obtaining more than one indemnity)
- Subrogation rights only apply where there is a legal liability under the policy i.e. where policy cover existed.
Example: A client makes a claim under his/her own comprehensive policy for damage done to his vehicle by another person. His/her insurance company pay the claim but persue the negligent third party for the cost of the claim they have paid.
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Contribution
Although the Insured may effect more than one policy to cover the same property or interest, he/she cannot recover in total more than a full indemnity.
Note:
Cover can only arise when the policies:
- Cover the same peril
- Cover the same subject matter
- Are effected by or on behalf of the same Insured
Example: An insured loses his/her watch whilst on holidays. He/she has holiday insurance which covers the loss. But he/she also has the watch covered under his/her house policy. The cost of the claim should be shared by both policies ie. the insured cannot claim twice.
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Insurable Interest
To insure anything the Insured must have an insurable interest in the subject matter of insurance, i.e. he/she must benefit by its safety or be prejudiced by its loss.
Notes:
Insurable Interest may be created either by:
- Obligation to Insure
- by Statute
- by Contract
- by Custom
Option to Insure
- Owners
- Mortgagors
- Lessors
- Trustees
- Tenants
Examples: Everybody would have an insurable interest in their own personal possessions e.g. house, car, or watch but your next door neighbour would not normally have an insurable interest in your house.
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Proximate Cause
The efficient cause which brings about a loss with no other intervening cause which breaks the chain of events.
Example: Firemen remove undamaged stock from a burning building to avoid its involvement in the fire. It is stacked in the open yard and subsequently damaged by rain. Was the proximate cause of the damage the fire or the rain ?
If the rain damage occurred before the Insured had an opportunity to protect it then the proximate cause of the damage would be the fire and fire is covered under a fire policy. However, if the stock was left unprotected for an unreasonably long period, the rain would be a new and independent cause of damage and damage caused by rain may not be covered under a policy.
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