Tuesday, April 18, 2017

General Principles And Concepts Of Insurance

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General Principles And Concepts Of Insurance

Beside the valid above essentials of a valid contract, insurance contracts are subject to additional principles. Like Principle of Utmost good faith, Principle of Insurable interest, Principle of Indemnity, Principle of Subrogation, Principle of Contribution, Principle of Proximate cause, Principle of Loss of Minimization.

According to the principle of utmost good faith, the insurance contract must be signed by both parties (i.e insurer and insured) in an absolute good faith or belief or trust.

The principle of insurable interest states that the person getting insured must have insurable interest in the object of insurance. A person has an insurable interest when the physical existence of the insured object gives him some gain but its non-existence will give him a loss. In simple words, the insured person must suffer some financial loss by the damage of the insured object.

Indemnity means security, protection and compensation given against damage, loss or injury. According to the principle of indemnity, an insurance contract is signed only for getting protection against unpredicted financial losses arising due to future uncertainties

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According to the principle of subrogation, when the insured is compensated for the losses due to damage to his insured property, then the ownership right of such property shifts to the insurer.

According to the principle of contribution, the insured can claim the compensation only to the extent of actual loss either from all insurers or from any one insurer. If one insurer pays full compensation then that insurer can claim proportionate claim from the other insurers.

Principle of Causa Proxima (a Latin phrase), or in simple english words, the Principle of Proximate (i.e Nearest) Cause, means when a loss is caused by more than one causes, the proximate or the nearest or the closest cause should be taken into consideration to decide the liability of the insurer.

There are two major differences between insurance and guarantees. One difference is that insurance is a direct agreement between the insurance provider and the policyholder, while a guarantee involves an indirect agreement between a beneficiary and a third party, along with the primary agreement between the principal and beneficiary.

The second difference between insurance and guarantee is that insurance policy calculations are based on underwriting and possible loss, while a guarantee is focused strictly on performance or nonperformance.

The principle of insurable interest distinguishes insurance from a wagering contract. Insurable interest is the interest which one has in the safety or preservation of the subject matter of insurance. Where insurable interest is not present in insurance contracts, it becomes a wagering contract and is therefore void.

Where there has been non-disclosure of material facts, whether innocent or fraudulent, sometimes called concealment the contract is voidable at the option of the insurer.

Moral hazard is a situation in which one agent decides on how much risk to take, while another agent bears (parts of) the negative consequences of risky choices.

Insurance Law And Practice - ICSI
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