3. Continued.......
1. Principles of Insurable Interest
An insurable interest involves a relationship between
the person and the subject matter of the insurance
such as dwelling or person’s life.
Insurable interest has the following essentials:
Subject matter to be insured
Existence of monetary relationship between the
policy holder and the subject matter
The relationship between the policy holder and the
subject matter need to be legal
The policy holder must be economically benefited
from the survival or suffer an economic loss from the
damage or destruction of the subject matter.
4. Continued.......
What constitute Insurable Interest
Insurable interest can be established in property
and liability insurance and life insurance.
Property and liability insurance
Insurable interest in property and liability
insurance is established by the following means:
a. Ownership
Ownership of property can support an insurable
interest, since owners of property will loss
financially if their property is damaged.
5. Continued.......
b. Bailees
Potential liability can support insurable interest,
since individuals will be responsible for damages
of third party property on their hands.
c. Mortgages
Commercial banks or saving and loan institutions
that grants mortgages have an insurable interest
on the property pledged.
d. Husband and Wife
A husband has an insurable interest in his wife’s
property, and it is the same for a wife.
6. Continued.....
Life Insurance
In life insurance insurable interest can be established as
follows:
a. Self-insurance
An individual has an insurable interest in his/her life.
b. Husband and wife
A wife can insured the life of her husband since his
continued existence is valuable to her. It works the
same for the husband.
c. Creditor and Debtor
A creditor can insure the life of the debtor up to the
amount of the loan.
7. Continued.......
d. Partners
The death of partner can cause financial loss
to survivor, so the survivor has the right to
insure his/her partner's life.
When must an insurable interest exist?
In property insurance, the insurable interest
must exist at the time of loss.
In life insurance, insurable interest exist during
the inception of the policy.
8. Continued....
2. Principle of Indemnity
It states that the insured should not profit
from a covered loss but should be restored to
approximately the same financial position that
exists prior to the loss.
The principle of indemnity has two
fundamental purposes:
To prevent insured from profiting from
insurance.
To reduce moral hazard.
9. Continued......
Methods of providing Indemnity
There are four basic methods of providing indemnity:
a. Cash
It is settlement of claims by means of cash payment
to the insured.
b. Repair
The insurer settles the repair bill directly with the
concerned garage.
c. Replacement
It is a method of replacing the item rather than to pay
cash
10. Continued......
d. Reinstatement
It refers to the restoration or rebuilding of
premises.
3. Principle of Subrogation
It means substitution of the insurer in place of
the insured for the purpose of claiming indemnity
from third person for a loss covered by insurance.
It means the insurer is entitled to recover from
negligent third party any loss payments made to
the insured.
11. Continued........
Subrogation has three basic purposes:
a. It prevents the insured from collecting twice for
the same lose
b. It used to hold guilty persons responsible for the
loss.
c. Subrogation tends to hold down insurance rates.
Main points in relation to subrogation
a. The insurer is entitled only to the amount it has
paid under the policy.
b. The insured can’t impair the insurer’s
subrogation right.
12. Continued.......
c. The insurer can waive its subrogation right in the
contract.
d. Subrogation doesn’t apply to life insurance and
to most individual health insurance.
5. Principle of Utmost good faith
It means that higher degree of honesty is
imposed on both parties to an insurance contract
than is imposed on parties to other contract.
The application of the principle of utmost good
faith may best be explained in definition of
Representation, concealment and warranty.
13. Continued..........
Representations
Are statements made by an applicant for insurance
before the policy is issued.
An insurer can avoid a contract if the applicant
misrepresent or give false information and it is
material to the insurance.
Concealment
Is intentional failure of the applicant for insurance to
reveal a material fact to the insurer.
To deny a claim based on concealment, an insurer
must prove two things:
a. The concealed fact was known by the insured to be
material
b. The insured intended to defraud the insurer.
14. Continued......
Warranty
A warranty is a statement of fact or a promise
made by the insured, which is part of the
insurance contract and which must be true if
to be liable under the contract.
Warranties may be either express or implied
Express warranties are those stated in the
contract, where as implied warranties are
found in the contract but are assumed by the
parties to the contract.
15. Requirements of Insurance Contract
• To be legally enforceable, an insurance contract
must four basic requirements:
a. Offer and Acceptance
The applicant for insurance make the offer, and
the company reject or accept the offer.
b. Consideration
Refers to the value that each party gives to the
other.
The insured’s consideration is payment of first
premium, where as the insurer’s consideration is
giving promise to indemnify from loss.
16. Continued........
c. Competent parties
The parties must have legal capacity to enter in to
a binding contract.
Most adults are legally competent to enter into
insurance contract, except:
inane persons
Intoxicated persons
Minors (below the age of 18)
d. Legal purpose
The contract must be for a legal purpose.
17. Distinguishing characteristics of
insurance contracts
• The following are the main distinguishing
characteristics:
a. Aleatory Contracts
Insurance contracts have a chance element and
an even exchange, where as other contracts are
commutative which the value exchanged by
both parties is even.
b. Unilateral contract
It means that only one party makes a legally
enforceable promise, where as other
commercial contracts are bilateral.
18. Continued.......
c. Conditional contract
The insurer’s obligation to pay a claim depends
on whether or not the insured or the beneficiary
has compiled with all policy conditions.
d. Personal contract
A property insurance contract doesn’t insure
property, but insures owner of the property.
e. Contract of Adhesion
It means any ambiguities or uncertainties in the
wording of the agreement will be construed
against the drafter, the insurer.
