Principles of Insurance

The principles of insurance serve as the foundation for the operation of the insurance industry and guide the relationship between the insured (policyholder) and the insurer. These principles help ensure fairness, transparency, and the proper functioning of the insurance mechanism. Here are the key principles of insurance:

1. Utmost Good Faith (Uberrimae Fides):

   – Both the insured and the insurer are bound by the principle of utmost good faith. This means that both parties must provide complete and honest information during the application process. Failure to disclose material information may result in voiding the insurance contract.

2. Insurable Interest:

   – Must have a genuine interest in the property or person being insured. This interest is based on the potential for financial loss or other adverse consequences if the insured event occurs. Without insurable interest, an insurance contract may be considered void.

3. Indemnity:

   – The principle of indemnity states that insurance is designed to compensate the insured for the actual financial loss suffered and not to provide a source of profit. The goal is to restore the insured to the financial position they were in before the loss occurred.

4. Subrogation:

– Subrogation allows the insurer, after settling a claim, to take over the insured’s rights against a third party responsible for the loss. This helps prevent the insured from receiving double compensation for the same loss.

5. Contribution:

   – If the insured has multiple insurance policies covering the same risk, the principle of contribution comes into play. Each insurer contributes proportionally to the loss based on the coverage provided by their policy.

6. Causa Proxima (Proximate Cause):

   – This principle determines the dominant or most immediate cause of a loss. The insurance claim is typically based on the proximate cause, even if there are multiple contributing factors

7. Mitigation of Loss:

   – It has a duty to take reasonable steps to minimize the extent of a loss after it occurs. Failing to do so may affect the insurer’s obligation to provide full compensation

8. Loss Minimization:

   – It is expected to take reasonable measures to prevent or minimize losses. Failure to implement adequate safety measures may affect the insurance coverage.

9. Contract of Adhesion:

   – Insurance contracts are often considered contracts of adhesion, meaning that the terms and conditions are drafted by the insurer, and the insured typically has little power to negotiate. Courts interpret any ambiguous terms in favor of the insured.

10. Good Security Practices:

    – It is expected to follow good security practices to prevent losses, especially in property insurance. Failure to do so may lead to the denial of a claim.

These principles collectively form the ethical and legal framework that governs the insurance industry. Adhering to these principles helps ensure fairness, trust, and the efficient functioning of the insurance system. It’s important for both insurers and insured parties to understand and abide by these principles to maintain the integrity of insurance contracts.