The Principles of Insurance | Proximate Cause | Utmost Good Faith | Insurable Interest | Indemnity | Subrogation | Contribution

Insurance has 6 principles. These are as follows:

  1. The principle of proximate cause
  2. The principle of utmost good faith
  3. The principle of insurable interest
  4. The principle of indemnity
  5. The principle of subrogation
  6. The principle of contribution

The Principle of Proximate Cause

Proximate cause simply means the factor responsible for any harm. Throughout the history of human affairs, every event that occurs is as a result of some cause. The event must have been proceeded by some cause or happening.

The doctrine of proximate cause is concerned with the rates which the insurance industry employs as a guide in determining whether or not a loss which is the subject of claim was brought about by an insured peril (risk), thus each time an accident occurs resulting in a loss which would form the subject of a claim, the cause of the loss must first be ascertained, if the proximate cause of the loss is an insured peril, then the insured can recover but if on the other hand, the proximate cause of the lost material information is concealed or misstated even if the propose acted innocently or misstated the facts unintentionally, the insurer is entitled to refuse to pay for the breach.

The Principle of Insurable Interest

For any contract of insurance to be legally valid, it is required that the incurred possesses a recognizable insurance interest in the subject matter of the insurance, by this statement we simply mean that the policy holder should have a recognizable financial as well as legal relationship with subject matter of the insurance, such that, he stands to lose something of value if that subject matter suffers damage.

Insurable Interest Defined

Insurable interest is an insurance term, which states what the policyholder stands to suffer if there is financial loss due to the occurrence of an event. It has been viewed and interpreted as a statutory, right to insure which are a financial relationship recognized at law between the insured and the content of insurance.

Ordinarily a question may arise that what is it that is insured by a policy of insurance? And most likely answers would reflect on some physical objects e.g. in the case of flood policy on a shop, people might say that the buildings of the shop and its contents are what is insured however, for life assurance, a blood relative may have an insurable interest even though no financial loss occurs in the event of death of the insured. The law makes it mandatory for every insurer to have an insurable interest in the content of insurance, absence of which makes the contract invalid.

The following is an example of insurable interest.

The most obvious example of an insurable interest is that of the absolute and unconditional owner of property, e.g. the owner of a motor car or a house such an owner has an insurable interest to the extent of the cash value of the motor car or the house, and this is the simplest example of an insurable interest and individual has an insurable interest in his own life to an unlimited amount. A wife has an interest in her husband’s life

Principle of Indemnity

Indemnity in insurance contract is the exact financial compensation sufficient to place the insured in the same financial position after a loss, as he enjoy immediately before it occurred. In the event of any claim, the payment made to an insured cannot therefore exceed the extent of his interest for life policies as well as personal accident insurance, there is generally an unlimited interest as financial evaluation is not very possible hence in these cases, indemnity is not possible.

It can also be said to be an event of a loss the insurer should provide financial compensation that will place the policyholder in same, financial position, which he was immediately before the loss.

Indemnity is actually seen as the basis of insurance contract. It is apply to all forms of insurance policies with modified exceptions in the cases of life policies, health policies and policies coverage relating to properties whose values are somewhat subject to what the owner perceives them. As noted in life and personal accident contracts, the reason is not far-fetched; it is very difficult to fix the actual monetary value on human life or parts of his body that may suffer loss, damage or injury. In view of this the law allows that anyone who so desire to take up more than one life or personal accident insurance. In other words, these are not contract of indemnity. Indemnity can only be provided through cash payment, repair and replacement.

The Principle of Subrogation

The principle of subrogation is mainly concerned with the rights of recovery against third parties in respect of payment of indemnity, it needs not involve any other insurer, (except where an insurer is liable because his insured is the cause of the loss) therefore, it can be said, that “subrogation exists so that indemnity does not fail”.

It is the exercise for ones benefit of rights and remedies possessed by another against third. In other words, an insurer usually acquires it as a right after providing indemnity. Subrogation is a corollary to the principle of indemnity i.e., the natural consequence of an established principle, and subrogation rights are only acquired when indemnity has been affected.

Irukwe (1977) refers to subrogation as a right of one person to stand in the place of another in other to avail himself of those others rights and remedies, from the insurance perspective; subrogation is the substitution of the insurer who paid the loss in place of the insured to whom the payment was made. E.g. if a motorist negligently damages the vehicle of another insured motorist in an accident at law, the offended motorist has the right to sue the negligent motorist for damages or repairs, but if he collects compensation for his insurer, the insurer is subrogated and acquires the insured’s right against the third party, which he can exercise by bringing up a case in the insured’s name.

The Principal of Contribution

The principle of contribution is rather a doctrine which enables insurers to call upon other insurers that are similarly liable to the same insured for the same loss to proportionately contribute to the indemnity and also ensures that the insured cannot be more then indemnified and cannot receive less than indemnity.

Irukwe (1977) defined the term contribution as the right of an insurer who has paid under a policy to call upon other insurer equally or otherwise liable for the same loss to contribute to the payment.

How Contribution Arises

It arises where an insured undertakes two or more policies in respect of the same subject matter, for the same peril and so the same interest. Sometimes this might create suspicion of fraud, which might invalidate the contract if proved for this reason; double insurance is not usually deliberate or intentional. It often times arise by mistake or accident.

Example, a man who does not reside in the same state with his wife buys an expensive shoe for her but decided to insure the shoe before the shoe before sending it, on receiving the shoe the woman decides to insure the shoe again, in the event of a loss, contribution may arise.

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