Principles of Insurance

Summary

This video introduces the fundamental principles of insurance, explaining key concepts such as indemnity, average, subrogation, proximate cause, contribution, utmost good faith, and insurable interest. It highlights how insurers restore policyholders to their financial state before a loss, how underinsurance is handled, and the role of subrogation in claims. The video also explores the importance of disclosing material facts and the necessity of having an insurable interest in the insured property. These principles are essential to understanding how insurance policies function and ensure fairness in claims processing.

Takeaways

• 🛡️ The principle of indemnity ensures that the insured is placed in the same financial position as before the loss and prevents profit from the loss.
• ⚖️ Average is used to address underinsurance, with the insured paid proportionally based on the sum insured versus the actual value of the property.
• 🔄 Subrogation gives insurers the right to take legal action or sell salvaged property to recoup costs after settling a claim.
• 🔥 Proximate cause determines the main cause of loss by examining the chain of events that led to the damage.
• 🤝 Contribution ensures that when multiple insurance policies exist, each insurer only pays a proportionate amount, preventing the insured from making a profit.
• 🧐 Utmost good faith requires both the insured and the insurer to fully disclose material facts that could influence the insurance contract.
• 🏠 Insurable interest mandates that the insured must have a legal and financial interest in the insured item at the time of the loss.
• 💰 Life insurance differs from property insurance in that it does not follow the principles of indemnity or contribution due to the inability to place a monetary value on human life.
• 📜 Insurable interest must exist at different points depending on the type of insurance—at the time of policy issuance, loss, or renewal.
• 🚢 Marine insurance requires that insurable interest exists at the time of the loss due to changing ownership of the cargo during transit.

Q & A

What is the principle of indemnity in insurance?

The principle of indemnity ensures that the insurer places the insured in the same financial position as they were before the loss. The insured cannot profit from the loss and is compensated for the actual value of the loss minus any applicable excess.

How is the principle of average applied in cases of underinsurance?

In cases of underinsurance, the principle of average is used, meaning the insured is compensated proportionately to the amount they insured relative to the actual value of the property. The formula used is: (Sum insured / Actual property value) x Value of loss.

What does subrogation allow the insurer to do?

Subrogation allows the insurer to step into the shoes of the insured after a claim is paid, enabling them to recover funds from a third party that caused the damage or to sell any salvage left from the loss to recover expenses.

What is the definition of proximate cause in insurance?

Proximate cause refers to the active and efficient cause that sets in motion a chain of events leading to a loss, without any intervention from an independent force. It determines the root cause of the loss in a claim.

How does the principle of contribution work in insurance claims?

The principle of contribution applies when multiple insurers cover the same event. In such cases, each insurer is responsible for a ratable proportion of the claim, preventing the insured from making a profit by claiming the full amount from multiple insurers.

Why does contribution not apply to life insurance policies?

Contribution does not apply to life insurance policies because a human life cannot be assigned a monetary value in the same way as property or assets. Therefore, multiple life policies can pay out in full without considering proportionality.

What does the principle of utmost good faith require from the insured?

The principle of utmost good faith requires the insured to disclose all material facts that could influence the insurer's decision to accept the risk and set the premium. Failure to disclose material facts could invalidate the insurance contract.

What is the difference between material and non-material facts in insurance?

Material facts are details that affect the insurer's decision, such as past claims or risk-related details (e.g., age in motor insurance). Non-material facts, such as a minor error in age for household contents insurance, do not impact the insurer's decision.

What is insurable interest, and why is it important in insurance contracts?

Insurable interest refers to the legally recognized relationship between the insured and the financial loss they suffer in the event of a loss. It is essential because it ensures that the insured has a legitimate financial stake in the property or asset being insured.

When must insurable interest exist in different types of insurance claims?

In fire, accident, and motor insurance, insurable interest must exist when the policy is issued, at the time of the loss, and during policy renewal. For marine insurance, it must exist at the time of loss, while for life insurance, it must exist when taking out the policy.