Principles of Insurance

The principles of insurance are the rules of conduct adopted by the parties in the insurance business. Seven principles are of the greatest significance to a valid insurance contract.

• Utmost good faith — An insurance contract is one of uberrimae fidei (utmost good faith). Both parties must act in good faith: the insured must voluntarily make a full and accurate disclosure of all facts material to the risk, and the insurer must make clear all the terms and conditions. Any fact likely to affect a prudent insurer's decision to accept the proposal or fix the premium is "material." Failure by the insured to disclose material facts makes the contract voidable at the insurer's discretion.
• Insurable interest — The insured must have an insurable interest in the subject matter. It is not the house, ship, machinery or life that is insured, but the insured's pecuniary interest in them. The insured must stand to suffer financially if the insured event occurs. For property, this interest must exist at the time the event happens. Ownership is not essential — for example, a trustee holding property for others has an insurable interest in it.
• Indemnity — All fire and marine insurance contracts are contracts of indemnity: the insurer undertakes to put the insured back into the same position he occupied immediately before the loss, compensating (in money terms) for damage or destruction of the insured property. The principle of indemnity does not apply to life insurance.
• Proximate cause — A policy compensates only for losses caused by the perils stated in it. When a loss results from two or more causes, the proximate cause is the direct, most dominant and most effective cause of which the loss is the natural consequence, and it is this cause that is taken into account.
• Subrogation — After settling a claim, the insurer has the right to stand in the place of the insured with respect to recovering from an alternative source. Once the insured is compensated, the ownership of the damaged property passes to the insurer — so that the insured does not make a profit by also selling the damaged property or keeping recovered lost property. …