Principles of Insurance

For an insurance contract to work fairly and to remain financially sound for the insurer, it must satisfy certain well-established principles. These principles are what distinguish a genuine insurance contract from an ordinary wager or bet.

Utmost good faith (uberrimae fidei). Because the insurer generally cannot verify every fact about the risk it is agreeing to cover, both parties — but especially the person seeking insurance — must disclose every material fact relevant to the risk honestly and completely, even if not specifically asked. A material fact concealed or misrepresented can make the policy voidable by the insurer.

Insurable interest. The insured must have a genuine financial stake in the continued existence, safety or good condition of the subject matter being insured — that is, they must actually stand to suffer a financial loss if the insured event occurs. Without insurable interest, an insurance contract would be indistinguishable from a bet on an event, which the law does not permit.

Indemnity. Under the principle of indemnity, the insured is to be placed, as nearly as a payment of money can do it, in the same financial position they were in immediately before the loss occurred — no better and no worse. This principle prevents insurance from becoming a source of profit from a loss, and it applies strictly to general insurance contracts; life insurance is treated as an exception, since a human life cannot be given a precise monetary value.

Contribution. If the same subject matter has been insured with more than one insurer, the principle of contribution allows each insurer to bear only its proportionate share of the loss, so that the insured cannot recover more than the actual loss suffered by claiming the full amount separately from each insurer.

Subrogation. Once an insurer has paid a claim in full under the principle of indemnity, it steps into the shoes of the insured and acquires the insured's rights to recover the loss from any third party who was actually responsible for causing it. This prevents the insured from being compensated twice for the same loss — once by the insurer and again by the responsible third party.

Causa proxima (proximate cause). When a loss results from a chain of causes, the insurer looks at the proximate, or the most direct and effective, cause of the loss — not necessarily the first or the most remote one in the chain — to decide whether the loss is covered by the policy.

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