Insurance is a financial product that protects against possible losses and helps people and businesses to manage risk.
It works by pooling resources of a large number policyholders who pay premiums to insurers in exchange for protection from a particular risk.
These premiums are then used by the insurer to pay claims for policyholders who have suffered losses that were not covered under their insurance policy.
There are many types of insurance that you can choose from, such as life insurance, health insurance and property insurance.
There are some principles that apply regardless of what type of insurance you have.
These principles ensure that insurance policies are fair, transparent, and provide financial protection for policyholders.
These 10 principles are the foundation of how the insurance industry works.
These principles include the duty of good will, insurable interests, proximate causes, indemnity and subrogation as well as contribution, mitigation of losses, inflation protection, utmost care, and loss minimization.
These principles are important for policyholders as well as insurers. They help them to understand their rights under an insurance contract.
We will be discussing each of these principles in greater detail, and explaining how they relate to insurance.
1 Utmost Good Will:
This principle, also known by the “duty to good faith,” requires that the insured and the insurer act honestly and transparently in all dealings.
The insured must provide all information regarding the risk, including potential hazards, to the insurer. Both must also disclose the terms and conditions of their policy. The insurance contract can be canceled if either party acts in bad faith.
2) Insurable Interest:
A policyholder must own a financial stake in the insured property, or risk, to make an insurance contract valid.
The policyholder is responsible for any financial loss that may result from the insured event. If you own a car for example, you have an insurance interest in it. You would be financially disadvantaged if the car was damaged or destroyed.
The insurance contract will be void if you don’t have an insurable interest or risk being insure.
3) Proximate Cause:
In order to make an insurer liable for a claim, the principle of proximate causes states that the insured event must directly and immediately cause the loss.
This ensures that only losses directly related to insured risk are covered by the insurer.
If you have a home insurance policy and your home is set on fire by an electrical fault, then the insured would be responsible for the payment.
4) Indemnity:
Indemnity is a principle that the policyholder must be restored to the same financial situation they were before the loss.
Insurance is not intended to make a lot of money for policyholders, but to help them recover the losses they have suffered.
If you have car insurance and your car is in an accident, your insurer will cover the cost of repairs up to the policy limits.
5) Subrogation:
This principle allows an insurer to assume the legal rights and recover damages from any third party that may have been responsible for the loss.
This ensures that policyholders are not out of pocket and helps the insurer reduce its claims payout. If you have car insurance and your car is struck by another driver, your insurer could take over your legal rights to seek damages from the other driver.
6) Contribution:
The principle of contribution states, if multiple insurance policies cover the loss, each insurer will be responsible for paying a portion of the claim.
This ensures that policyholders are fully compensated for any loss and prevents policyholders from making a profit from insurance.
If you have both car and home insurance policies and the same loss is covered, each insurance company would pay a portion of the claim.
7) Mitigation of Loss:
To mitigate loss, the policyholder must take reasonable steps to reduce the damage. You could take steps to protect your insured property or seek medical attention in the event of personal injury.
If you have home insurance and your home is hit by a storm you might be required to cover broken windows or remove fallen branches.
8) Protection from Inflation:
Insurance policies often include protection against inflation. This can lead to a loss of value or increase in risk.
These provisions ensure that policyholders are fully compensated for any loss even if the insured property or risk is greater than they were when the policy was first purchased.
If you have home insurance and your home is destroyed by fire, your policy may offer inflation protection. This will ensure that you get compensation for the current value of the home, not the price at which the policy was issued.
9) Principles of Utmost Caution
This principle demands that the insurer exercise caution and diligence when underwriting policies and issuing policies in order to accurately assess the risk being insured.
This ensures that the insurer only takes on risks it can reasonably manage and that policyholders do not pay excessively for coverage.
10) Principles of Loss Minimization
In order to avoid losses, the principle of loss minimization demands that the insurer takes steps to minimize them.
This could be providing loss prevention advice for policyholders or risk management services.
An insurer might offer tips to a homeowner about how to protect their home from burglaries. Or, they may offer business insurance policyholders risk management services to help them identify potential risks and minimize them.
These principles ensure that insurance can be fair and effective for both individuals and businesses.
These principles allow insurers to provide financial protection for policyholders while managing their risk and maintaining their viability.