5 fundamental insurance principles

Wang Yan

Global Courant

Insurance is a contract, a risk transfer mechanism whereby a company (insurer) promised to compensate or indemnify another party (policyholder) after paying a reasonable premium to the insurance company to cover the subject of the insurance. Knowing these principles well will help you negotiate your insurance needs.

1. Insurable interest. This is the financial or monetary interest that the owner or possessor of real estate has in the insured object. The mere fact that it could be detrimental to him if a loss were incurred due to his financial interest in those assets gives him the option of insuring the property. Castellin v. Preston 1886.

2. Umberima fadei. It means utmost good faith, this principle stated that the parties to the insurance contract must accurately and completely disclose all facts relevant to the risk being proposed. That is, the insured must disclose to the insurer all facts relating to the risk to be insured (Looker Vs Law Union and Rock 1928). Likewise, the insurer must highlight and explain the terms, conditions and exclusions of the insurance policy. And the policy must be free of ‘small print’.

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3. Indemnity. It stated that after a loss, the insurer should ensure that they put the insured in the exact financial position he enjoyed before the loss (Leppard Vs Excess 1930).

4. Contribution. In a situation where two or more insurers cover a particular risk, if a claim occurs, the insurers must contribute to the settlement of the claim in accordance with their taxable share.

5. Subrogation. It has often been said that dues and subrogation are a corollary to indemnification, which means that these two principles work so that indemnification does not fail. Subrogation mainly works on auto insurance. When an accident has occurred involving two or more vehicles, there must be the perpetrator(s) responsible for the accident. On this basis, the insurer covering the non-default policyholder can recover its expenses from the insurer of the policyholder responsible for the incident.

5 fundamental insurance principles

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