7 principles of insurance
The seven principles of insurance form the foundation of fair and responsible insurance practices. They ensure a well-functioning system that offers security and stability to policyholders while maintaining the financial viability of insurance companies. Let’s delve into each principle:
1. Utmost Good Faith: Both the policyholder and the insurance company must act honestly and openly throughout the entire process, from disclosing all relevant information during the application stage to making claims. This means no misrepresentation or concealment of facts from either party.
2. Insurable Interest: The policyholder must have a legal and financial interest in the insured property or person. This ensures that someone wouldn’t, for example, take out insurance on someone else’s life in the hope of financial gain from their death.
3. Indemnity: The insurance company aims to restore the policyholder to the same financial position they were in before the insured loss occurred. They compensate for the actual loss, not exceeding the covered amount in the policy.
4. Proximate Cause: Only losses directly caused by a covered peril listed in the policy are eligible for compensation. Indirect or coincidental causes wouldn’t qualify.
5. Subrogation: Once the insurance company pays a claim, they have the right to pursue legal action against any third party responsible for the loss to recover their expenses. This helps prevent fraud and reduces costs for policyholders.
6. Contribution: If a policyholder has multiple insurance policies covering the same loss, each insurer contributes proportionally to the compensation amount based on their coverage share. This prevents double recovery.
7. Loss Minimization: Both the policyholder and the insurance company have a responsibility to take reasonable steps to mitigate potential losses. This could involve installing security systems, maintaining the insured property, and promptly reporting claims.
Understanding these principles empowers you as a policyholder to make informed decisions and navigate the insurance landscape with confidence. It also fosters trust and transparency within the insurance industry.