Insurance principles

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Insurance principles

  1. 1. Legal principles of insuranceSoumya V
  2. 2. 1. Principle of indemnityTo Compensate Two fundamental purposes:a. To prevent the insured from profiting from a lossb. To reduce moral hazardActual cash value in property insurance - Replacement cost less depreciation - Fair market value - Broad evidence rule
  3. 3. 2. Principle of insurable interest The insured must be in a position to lose financially if the loss occurs Purposes:a. To prevent gamblingb. To reduce moral hazardc. It measures the amount of insured’s loss in property insurance
  4. 4. Examples of insurable interest In property and liability insurance:a. Ownership of propertyb. Potential legal liabilityc. Secured creditorsd. A contractual rightIn life insurance:a. Own lifeb. Life of close family tiesc. Pecuniary interest in life of third person
  5. 5. When must insurable interest exist?• In property insurance - at the time of loss• In life insurance - at the time of inception of the policy
  6. 6. 3. Principle of subrogation Substitution of the insurer in the place of the insured to claim indemnity from a third person for a loss covered under insurance Purposes:a. Prevents insured from collecting twice for the same lossb. It is used to hold the guilty person responsible for the lossc. Helps to hold down insurance rates
  7. 7. Corollaries to the principle ofsubrogation• The insurer is entitled to recover only the amount it has paid under the policy• The insured cannot impair the insurer’s subrogation rights• The insurer can waive its subrogation rights in the contract• Subrogation does not apply to life insurance and to most individual health insurance contracts• The insurer cannot subrogate against its own insureds
  8. 8. 4. Principle of Utmost good faith Imposes high degree of honesty on the applicant for insurance This principle is supported by 3 important legal doctrines – representations, concealment and warrantya. Representations – statement made by applicant for insurance. The insurance contract is voidable at the option of the insurer if the representation is a. Material b. False c. Relied on by the insurer
  9. 9. b. Concealment – intentional failure of the applicant for insurance to reveal a material fact to the insurerc. Warranty – a statement of fact or a promise made by the insured which is part of the insurance contract and must be true if the insurer is to be liable under the contract
  10. 10. 5. Causa proximaProximate cause6. Contribution In case of double insurance, the insurers are to share the loss in proportion to the amount insured by each of them. Conditions:a. The subject matter of insurance must be sameb. The event insured must be samec. The insured must be the same
  11. 11. 7. Mitigation of lossThe insured must make necessary effort to minimise the loss8. Nature of Contract
  12. 12. Requirements of an insurance contract• Offer and acceptance• Consideration• Competent parties• Legal purpose
  13. 13. Distinct legal characteristics ofinsurance contracts• Aleatory contracts• Unilateral• Conditional• Personal• Contract of adhesion

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