A guide to the fundamental principle of insurance law
Insurance means protection against loss. It is the process of safeguarding the interest of people from loss and uncertainty. It is based on contract. It is a valid agreement that incorporates certain terms and conditions. It may be described as a social device to reduce or eliminate a risk of loss to life and property.
The fundamental principles of insurance law are listed below:
Nature of contract is a fundamental principle of insurance contract. An insurance contract comes into existence when one party makes an offer or proposal of a contract and the other party accepts the proposal.
A contract should be simple to be a valid contract. The person entering into a contract should enter with his/her free consent.
For example - John took a health insurance policy. At the time of taking policy, he was a smoker and he didn't disclose this fact. He got cancer. Insurance company won't pay anything as John didn't reveal the important facts.
The principle of indemnity refers to the payment of money for claims. It says an insured should get no more and no less money than the insurance policy permits and the extent of the loss allows. Provisions in the policy dictate whether claims are valued at cash or replacement value – taking or not taking an allowance for depreciation – or the face value a policy defines for policies that insure valuables such as artwork or antiques. Indemnity does not apply, however, to life insurance policies.
The principle of subrogation enables the insured to claim the amount from the third party responsible for the loss. It allows the insurer to pursue legal methods to recover the amount of loss, For example, if you get injured in a road accident, due to reckless driving of a third party, the insurance company will compensate your loss and will also sue the third party to recover the money paid as claim.
This is the financial or monetary interest that the owner or possessor of property has in the subject-matter of insurance. The mere fact that it might be detrimental to him should a loss occurred because of his financial stake in that assets gives him the ability to insure the property.
Double insurance denotes insurance of the same subject matter with two different companies or with the same company under two different policies. Insurance is possible in case of indemnity contract like fire, marine and property insurance.
Double insurance policy is adopted where the financial position of the insurer is doubtful. The insured cannot recover more than the actual loss and cannot claim the whole amount from both the insurers.
Proximate cause – which does not apply to life insurance – addresses what perils an insured chooses to cover and identifies insurer liability when two or more perils come together to cause a loss. It states that the proximate, closest or most dominant cause determines liability. For example, if an insured has fire but no flood insurance and a fire causes water pipes to burst and flood the home, the insured is liable for damage the fire causes. However, because bursting water pipes are the dominant cause of the flood damage, the insurance company is not legally liable to pay any claims resulting from repairs.
According to this principle, the insured should try to minimize the loss as far as possible when the incident takes place. It is the duty of the insurer to make every effort and to take all possible steps to minimize the loss in the event of the accident.
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