Certainly! The seven fundamental principles of insurance guide the functioning of insurance contracts. Let’s explore each principle:
- Principle of Utmost Good Faith (Uberrima Fides):
- Both parties (insurer and insured) must enter into the contract with complete honesty and transparency.
- The insured should provide accurate information about the subject matter, risks, and other relevant details.
- The insurer, in turn, must disclose all relevant terms and conditions of the policy.
- Any misrepresentation can lead to the policy being legally revoked or canceled.
- Principle of Insurable Interest:
- The policyholder must have a legitimate interest in the subject matter of the insurance.
- For example, you can’t insure someone else’s property or life without a valid reason.
- This principle ensures that insurance contracts are not speculative or based on profit motives.
- Principle of Indemnity:
- Insurance contracts exist to compensate for losses, damages, or injuries suffered by the insured.
- The goal is to restore the insured to their original position before the loss occurred.
- Indemnity doesn’t apply to life insurance contracts.
- Principle of Contribution:
- When the same risk is insured with multiple insurers, each contributes proportionately to the claim.
- This prevents the insured from profiting by claiming more than the actual loss.
- Principle of Subrogation:
- After compensating the insured, the insurer has the right to step into the insured’s shoes and recover from third parties responsible for the loss.
- For example, if your car is damaged in an accident, the insurer may recover the repair costs from the at-fault driver.
- Principle of Loss Minimization:
- The insured must take reasonable steps to minimize the loss when an insured event occurs.
- Failure to do so may affect the claim amount.
- Principle of Proximate Cause (Causa Proxima):
- The insurer assesses the actual cause of the loss.
- If the proximate cause is covered by the policy, the claim is valid.
- For instance, if a fire damages a building, the proximate cause is the fire itself, not any subsequent water damage from firefighting efforts.
