8/3/2019 Definition & Principles of Insurance

1/2

Insurance - Definition

The contract of Insurance is a promise of compensation for certain potential future losses in

exchange for a periodic payment [known as premium]. Insurance is intended to protect the

financial well-being of an individual or a company or any other entity in case of unexpected

loss. An agreement to the terms of an insurance policy creates a contract between the insuredand the insurer. In exchange for the premiums paid by the insured, the insurer agrees to pay

the policy holder a certain sum of money upon the occurrence of a specific event or on

maturity. In most cases, the policy holder pays part of the loss (called the deductible), while

the insurer pays the rest. Examples include health insurance, car insurance, life insurance,

disability insurance, and business insurance.

Main principles of Insurance:

Utmost good faith

Indemnity

Subrogation

ContributionInsurable Interest

Proximate Cause

Utmost Good Faith (Uberrimae Fides)

It is the duty of the client to disclose all material facts relating to the risk being covered. A

material fact is a fact that would influence the mind of a prudent underwriter while deciding

whether or not to accept a risk for insurance and on what terms. This duty to disclose operates

at the time of inception, at renewal as well as at any point mid term.

Indemnity

When the event that is insured against occurs, the Insured will be placed in the same

monetary position that he/she occupied immediately before the happening of the event.

In the event of a claim the insured must:

Prove that the event occurred

Prove that a monetary loss has also occurred

Transfer any rights that he/she may be having for the recovery from another source to the

Insurer, if he/she is fully indemnified.

Subrogation

With regards to insurance, subrogation is a feature of principle of indemnity and therefore

only applies to contracts of indemnity and hence does not apply to life assurance or personal

accident policies. It aims to prevent an insured to recover more than the indemnity that he

receives under his insurance (where that represents the full amount of his loss) and enables

the insurer to recover or reduce the loss.

Contribution

The right of an insurer to call on other insurers similarly, but not necessarily equally, liable tothe same insured to share the loss of an indemnity payment i.e. a travel policy might have an

8/3/2019 Definition & Principles of Insurance

2/2

overlapping cover with the contents section of a household policy. The principle of

contribution permits the insured to make a claim against one insurer. The insurer then has the

right to call on any other insurers liable for the loss in order to share the claim settlement

Insurable Interest

If an insured wants to enforce an insurance contract before the Courts he must have an

insurable interest in the subject matter of the insurance, which means that he benefits from its

preservation and suffers from its loss. In case of non-marine insurances, it is necessary for the

insured to have insurable interest when the policy is taken out and also at the date of loss

giving rise to a claim under the policy.

Proximate Cause

An insurer is liable to pay a claim under an insurance contract only if the loss that gave rise to

the claim was proximately caused by an insured peril. This means that the loss should be

directly credited to an insured peril without any break in the chain of causation.