10 Important Principles of Insurance to Remember

WHAT IS INSURANCE?

This is a contract whereby a party known as the insurer undertakes, in consideration for a sum of money known as premium paid by the insured, to pay a sum of money or its equivalent on the happening of a specified future event.

The insurance contract is a contract like any other, but with particular peculiar principles. The key thing is in knowing how to create contracts.

PRINCIPLES OF INSURANCE

Principles of insurance are as follow:

INSURABLE INTEREST

This is the financial or monetary interest at stake or in danger if the subject matter is not insured. It is the interest a person has in the subject matter which he stands to lose in the event of its loss or destruction.

Think of it this way, if you take a medical cover, you are not insuring yourself against being sick because that is something beyond your control. You are insuring yourself against the idea of not having money to cover your medical bills if and when you become sick at given period.

To ascertain whether a person has insurable interest in subject matter, courts employ the following rules: –

1. There must be a direct relationship between the insured and the subject matter.
2. The insured bears any loss or liability arising
3. The insured must have a legal or equitable interest /right in the subject matter
4. The insured’s interest/right must be capable of financial/pecuniary estimation or

NON-DISCLOSURE / UTMOST GOOD FAITH

The nature of insurance contracts is that they are contracts of uberrimae fidei, which is just Latin for at most good faith hence the duty to disclose.

The duty to disclose exists throughout the negotiation period. It generally comes to an end when the proposal form is accepted.

Effect of Non-Disclosure: what if you lie or don’t disclose?

The non-disclosure of a material fact by either partly renders the contract voidable at the option of the innocent party. Check out more about commercial contracts here.

In London Assurance Company V. Mansel (1879) when responding to a question in the proposal form, the proposer stated that no other insurer had declined to take his risk; in fact, 2 companies had previously declined to insure him. Subsequently, the insurer sought to avoid the contract on the ground of non-disclosure of a material fact. It was held that the contract was voidable at the option of the insurer for the concealment of material fact.

A similar holding was made in Horne v.Poland (1922)

Although the contract of insurance is one of the utmost good faith certain matters need not be disclosed for instance;

1. Provisions and propositions of law
2. Unknown facts as was the case in Joel v. Law Union and crown Insurance Company
3. Facts known by other party
4. Matters of public notoriety as was the case in Bates V.Hemitt.

INDEMNITY

This principle means that when loss occurs, it is the duty of the insurer to restore the insured to the position he was before the loss.

Remember, insurance is all about indemnity, basically putting you back to where you were before the incident and not about making you better than you originally were. This is one of the principles of insurance that proves that.

The insurer must so far as money can do, put the insured to the position he was before the loss. Indemnity means that there should be no more or no less than restitutio in integrum.

Indemnity is a basic principle in property insurance. it has its justifications in equity in that in its absence the insured is likely to benefit from the contract.

The principle of indemnity is given effect by the subordinate principles such as, Subrogation, Salvage, reinstatement, contribution and appointment etc.

SUBROGATION

As one of the principles of insurance, subrogation means that after the insurer has indemnified the insured, he steps into the shoes of the insured in relation to the subject matter.

It means that after indemnity the insurer becomes entitled to all the legal and equitable rights respect the subject matter previously exercisable by the insured.

Subrogation facilitates indemnity by ensuring that the insured does not benefit from the contract.

SALVAGE

This is the recovery by the insurer of the remains of the subject matter after indemnity. It is part of subrogation and facilities indemnity.

Think of it this way, if your car gets involved in a serious accident and the insurance company gives you money for a new car, what do you do with the scrap metal from the destroyed car? Remember your original position was, you had a car and not a car plus scrap metal, hence the need for salvage.

Salvage is justified on the premise that the amount paid by the insurer as indemnity includes the value of the remains.

RE-INSTATEMENT

This is the repair or replacement of the subject matter in circumstances in which it may be reinstated.

Most indemnity policies confer upon the insurer an option to pay full indemnity or reinstate the subject matter.

The insurer must exercise his option within a reasonable time of notification of loss and is bound by his option. If the insurer opts to re-instate, the subject matter must be re-instated to the satisfaction of the insured.

DOUBLE INSURANCE

Insurance contracts are full of risk in the sense that claims could end up making a company bankrupt or just make it hard for the company to pay out its policy. This is why some people go for double insurance.

This is a situation whereby a party takes out more than one policy on the same subject matter and risk with different insurers but where the total sum insured exceeds the value of the subject matter.

CONTRIBUTION AND APPORTIONMENT

If an insured has taken out more that one policy on the same subject matter and risk with different insurers and loss occurs, the twin principles of contribution and appointment apply;

1. If the insured claims from all the companies at the same time, they apportion the loss between themselves on the basis of the sums insured. Each insurer bears part of the loss. This is the “Principle of Apportionment”
2. If one of the insurers makes good the total liability to the insured, such insurer is entitled to recover the excess payment from the other insurers. This is the “Principle of Contribution”.

This principle is to the effect that an insurer who has paid more that his lawful share of the loss is entitled to receive the excess from the other insurer.

The principle of contribution is equitable. An insurer is only entitled to contribution if the following conditions exist;

1. There must have been more than one policy on the same subject matter and risk.
2. The policies must have been taken out by or on behalf of the same person
3. The policies must have been issued by different insurers
4. The policies must have all been in force when loss occurs
5. All the policies must have been legally binding agreements
6. None of the policies must have exempted itself from contribution.

The twin principles of contribution and apportionment facilitate indemnity.

ABANDONMENT

This is the surrender by the insured of the remains of the subject matter for full indemnity. It entails the giving up the res (residue) to the insurer for indemnity. This principle has its widest application in Marine Insurance but generally applies in case of;

1. Partial Loss
2. Constructive total loss.

The insured must notify the insurer of his intention to abandon the subject matter. However, it is for the insurer to determine whether or not abandonment is applicable. If the insurer opts to pay full indemnity, it signifies the sufficiency of the insured’s notice and it is an admission of liability.

The insurer becomes entitled to the remains of the subject matter.

PROXIMATE CAUSE

An insurer is only liable where loss is proximately caused by an insured risk and not liable where the risk is excepted.  This is what separates insurance from a wager or gambling.

The principle of proximate cause protects the insurer from undue liability.

Under this principle, the proximate and not the remote cause is to be looked into. (Causa proxima non remota spectatur)

The proximate cause of an event is the cause to which the event is attributable. It is the cause which is more dominant direct, operative and efficient in giving rise to the event.

Courts have not developed any technical test of ascertaining what the proximate cause of an event is. They rely on common place tests of the reasonable man and that among competing causes, one must be more dominant that the rest. The proximate cause need not be the last on the chain but must be the must operative in occasioning the loss.