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principles of insurance

This document discusses key principles of insurance, including insurable interest, subject matter of insurance, assignment of policies, utmost good faith, proximate cause, indemnity, subrogation, and contribution. It defines these terms and explains concepts like when insurable interest must exist, exceptions to free assignment of policies, the duration of utmost good faith, factors limiting indemnity, and conditions required for contribution between insurers.

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RISK AND INSURANCE PRINCIPLES OF INSURANCE
INSURABLE INTEREST (i.i)  One major difference between insurance and gambling is the the former has to be supported by insurable interest.
Subject Matter of Insurance - Contract  Subject matter of insurance is the life, limbs, property, rights or any potential legal liability insured under a policy.  Subject matter of contract is the insured’s financial interest in the subject matter of insurance.
What is i.i  The right to insure arising out of legally recognized financial interest which a person has in the subject matter of insurance.  Which is the financial interest that is recognized under the common law or statute.
When i.i must exist?  At the time of inception and at the time of loss.  EXCEPT: – Life insurance – at the time of inception – Marine – at the time of loss
ASSIGNMENT  The transfer of rights and liabilities by one person to another.  An assignee, the person who takes over the assignment rights will have no better rights that those enjoyed by the assignor.
Exception of the Rule  Marine Policies – Freely assignable by statutory provision. Only cargo policies are freely assignable.  Life Policies – Freely assignable by statutory provision
Assignment of Policy Proceeds  Arises when an insured instructs his insurer to pay the policy proceeds to a third party.  The insurer remains a party to the insurance contract and continue to assume liabilities under it.  All policy proceeds are freely assignable under the policy unless the contract provides otherwise.
UTMOST GOOD FAITH (UGF)  Subject to duty of good faith in relation to disclosure during negotiation.  The buyer should ask questions if the need more information (caveat emptor – let the buyer beware)
Duty of UGF and Contractual duty of UGF  Positive duty (of the insured) to disclosed fully and accurately all material facts that he (the insured) knows or ought to know, whether asked for or not by the insurer.  The proposal form commonly contain a declaration to the effect that the particulars given in the proposal is true and correct.  By signing the form, the proposer warrants the truth of this statement.
Material Fact  A fact which would influence the PRUDENT underwriter in accepting the risk or fixing the premium.
Duration  Lasts until the completion of the insurance contract.  If any changes in teh material facts occur after they have been intimated to the insurer but before the completion of the contract, the proposer is required to notify the changes to the insurer otherwise the contract would be voidable.
Breaches of UGF  Breaches of UGF is committed the contract is voidable.  Breaches of UGF if: - Fails to provide the insurer with information relating to the material fact, consider as non- disclosure or - Misrepresent a material fact, i.e incorrect information relating to a material fact, termed as misrepresentation.
PROXIMATE CAUSE  When a loss has occurred the onus is on the insured to prove that the loss in respect of which a claim is made was caused by the operation of an insured peril.
Definition  The active, efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force started and working from a new and independent source.
INDEMNITY  To make good a loss or damage.  When the insured has measurable insurable interest the contract of insurance will be a contract of indemnity.
Methods and Measures  1C 3R  Measure – Cash – Total Loss • Method 1 Reinstatement / – Repair Replacement – deduct wear and – Replace tear – Reinstate • Method 2 Market Value of a property similar to the one destroyed – Partial Loss • Cost of repair
Factors Limiting Indemnity  Sum Insured  Average Condition  Policy Excess  Franchise
Policies Which Pay More Than Indemnity  Reinstatement Policies  Agreed Additional Costs  Valued Policies
SUBROGATION  Taking the rights belonging to an insured by the insurer after the latter has indemnified the insured.  Rights including those rights against third parties who are also liable for the loss which is the subject of the claim and the right of the insured in the salvage.
Subrogation rights may arise  Subrogation arising from tort  Subrogation arising out of contract  Subrogation arising out of a statute  Subrogation arising out of salvage
CONTRIBUTION  The amount which each insurer has to contribute to the cost of a loss when the loss is covered by two or more insurers
Principle of contribution and reason for necessary  Principle of indemnity – an insurer who has indemnified the insures may call upon the other insurers who are similarly liable for the loss to contribute to the payment of indemnity.  If the insured is allowed to recover from more than one insurer for the same loss, he may recover more than the loss, because there is no enrichment out of insurance claim.
Conditions  2 or more policies of  The policies must indemnity exists. cover a common  The policies must subject matter. cover a common  Each policy must be interest. liable for the loss.  The policies must cover a common peril which gives rise to the loss.