Fundamental Principles of Insurance

For an insurance contract to be valid and fair to both parties, it must satisfy several well-established legal principles:

• Utmost Good Faith (uberrimae fidei). Unlike an ordinary commercial contract, both the insurer and the insured must disclose every material fact relevant to the risk being insured, honestly and completely, even if not specifically asked. A proposer who conceals a known material fact (e.g. an existing illness in a life-insurance proposal) makes the resulting policy voidable by the insurer.
• Insurable Interest. The insured must have a genuine financial stake in the subject-matter of insurance, such that its loss/damage would cause the insured actual financial loss. Without insurable interest, an insurance contract would be indistinguishable from a wager (a bet) on an uncertain event — this is exactly why a stranger cannot insure someone else's house or a rival trader's cargo.
• Indemnity. Except in life and personal-accident insurance (where a human life/limb cannot be given a precise money value), most insurance contracts (fire, marine, motor) are contracts of indemnity — the insured can recover only the actual financial loss suffered, and no more, so that insurance never becomes a source of profit from an unfortunate event.
• Contribution. If the same subject-matter is insured with more than one insurer (for the same risk, same interest), and a loss occurs, the insured cannot recover the full loss from each insurer separately — the insurers between themselves contribute proportionately, so that the insured's total recovery still does not exceed the actual loss (consistent with the principle of indemnity).
• Subrogation. After paying a claim under a contract of indemnity, the insurer steps into the insured's shoes and acquires the insured's legal right to recover the loss from any third party responsible for it (e.g. suing a negligent driver who caused the accident) — this prevents the insured from being paid twice for the same loss (once by the insurer, once by the responsible third party).
• Causa Proxima (Proximate Cause). When a loss results from a chain of causes, the insurer is liable only if the nearest, most direct (proximate) cause of the loss is a risk actually covered by the policy — not necessarily the very first or the most remote cause in the chain of events.
• Mitigation of Loss. The insured must take all reasonable steps to minimise the loss once an insured event has occurred (e.g. trying to put out a small fire, or moving goods to safety), rather than behaving carelessly on the assumption that insurance will cover everything regardless.