Principles of Insurance
User needs to understand the principles of insurance and it will help user to understand the concept of insurance. It also helps insurance agents, insurance lawyers to understand it. Insurance has its fundamental principles which make them usable to the insurer/insured person.
By law, you can understand that Insurance is a Contract between Insurer and Insured person. Insurance is for minimizing the risk of any insured person.
If you need to understand your insurance contract to decide which type of lawyer needs if you have to claim. Here is given Principles of insurance.
- Loss Minimization
- Utmost Good Faith
- Insurable Interest
- Proximate Cause
The interpretation of these principles are given below. Insurancegrams is happy to help.
The Principle of Loss Minimization
People take insurance to minimize their losses against certain events. In some incidents, people can lose their life, health, wealth. In this position the loss happened is far more than he thinks. In this situation, Insurance help to reclaim loss caused by the events.
Insurance cant helps you in every difficult situation but help you in certain events only. These events are written in the insurance contract. For a specific event, people need to choose a different type of insurance.
Like if people care about their health, they should go for health insurance.
The principle of loss Minimization states that insurance company tries their best to minimize the risk of the insurance holder.
Example: If people have taken car insurance then in a situation when the car is damaged, the insurance company pay a price for repairing.
The Principle of Utmost Good Faith
As we said, insurance is a contract between two or more entities. The contract is a legal document. so every entity in the contract has the utmost good faith in each other.
Also, it is needed that each entity discloses every aspect with utmost good faith.
Example: For smokers, the health insurance premium is more. If an insured person hides his smoking habit for a lower premium the insurance can be given. But in a situation of claim of health insurance, an insurance company can not process claim.
Both parties involved in an insurance contract should act in good faith towards each other.
The insurer and the insured must provide true information regarding the terms and conditions of the contract.
The Principle of Insurable Interest
If the financial loss is not justified then the insurance company can’t process the claim. This principle is most usable in Term insurance.
Example: a person needs income documents to claim the term insurance claim. If a person failed to justify the financial loss, an insurance company can deny a claim.
The Principle of Indemnity
This principle give insured person guaranty that insurance will do best to restore the Financial loss. The insurance cant restore emotional loss caused by the incident. but it tries best to help person in this situation.
That’s why insurance is must in life. Insurance company provides financial compensation.
in General terms, indemnity means security, protection against loss, damage. By this principle only insured person gets compensation against the loss and damage.
The Principle of Contribution
Insurance company create fund with the help of money got from each policy holder. The pool of money is created and gives benefits to each policyholder. It secures the risk against financial loss.
Also there is certain clause in this principle like,
If person took insurance took insurance of car at half value, company provide only half amount. the rest amount will be paid by insurance policy holder.
The Principle of Subrogation
The Principle of Proximate Cause
In every incident, the damage is happened because of one or more causes. Insurance company find the nearest cause which is responsible for the damage.
Example: in health insurance, if a person got a lung infection, the company finds the nearest cause. it can be a smoking habit or pollution or the working environment.
In some situation, only some causes is included in the contract. in this situation to processing the claim company tries to find nearest cause for damage.
If the proximate cause is one in which the property is insured against, then the insurer must pay compensation. If it is not a cause the property is insured against, then the insurer doesn’t have to pay.
Hope this article make you to understand the principles of Insurance.