Fundamental Principles of Insurance

Fundamental Principles of insurance

In the insurance industry, the fundamental principles of insurance happen to be a compass for all the players operating within its ecosystem.

Principles of insurance serve as a guide to the functioning of insurance as an industry and as a financial planning tool.

fundamental principles of insurance

For you to build a house, you must have a foundation in place. The strength and sufficiency of this foundation will determine how tall the building will be and how long it will stay standing no matter the circumstances that fight against it.

A good understanding of these principles will be of benefit to us in the future.

The principles of insurance are:


Now, let us consider them one after the other…..

Utmost good faith as a Principe of Insurance

In Latin, this principle is referred to as ”Uberima Fidei”

According to the principle of Utmost good faith, all parties to an insurance policy must declare all material facts that concern the subject matter of insurance.

It is the responsibility of the insurance company to declare the specific risk to the client through a policy document.

This exchange of information establishes the trust required to commence an insurance cover.

fundamental principles of insurance

Insurable interest principle of insurance

Insurable interest establishes that A LEGALLY RECOGNISED RELATIONSHIP must exist between an item to be insured and the person that desires the cover.

This can be by way of ownership through purchase or assignment, matrimony, lender-borrower agreement, holding based on trust and leasehold.

fundamental principles of insurance

Indemnity principle of insurance

This principle of indemnity seeks to establish the responsibility and limit of an insurer in carrying out its claim obligations.

What does this mean?

The benefits of an insurance claim are for restoration not to be an improvement.

So for example, when there is damage to an insured vehicle, the compensation is limited to the cost of repairs.

This is the major basis of insurance.

fundamental principles of insurance

Subrogation principle of insurance

Subrogation principle is one of the two corollaries to the principle of indemnity. It influences how compensation is paid out to a beneficiary after loss is experienced. Subrogation states that an insurance transaction is not one of profit. This reinforces the fact that an insured gets compensation just to the tune of financial loss, not more than.

fundamental principles of insurance

Principles of Insurance: Contribution

This is the second corollary to the principle of indemnity. Contribution principle shows us how subrogation is to be executed.

If two insurances happen to be in place on an item and when discovered, the two insurers will contribute(based on some agreed method) to the compensation required just as if one insurance existed on the item insured.

For example, if two Insurance companies have coverage on a vehicle valued at $300,000 and this vehicle gets stolen.

The two insuring companies will share the load of $300,000 instead of each paying the full sum. This is still supporting the principle of subrogation.

fundamental principles of insurance

Principles of Insurance: Proximate cause

This is the principle that refers to the closely related cause of a loss with no other influence and no time-lapse between the active peril and the actual loss. This means the peril that gives rise to an insured loss must not be excluded. The peril must be in the chain of events that gives rise to the specific insured loss in a policy. This principle helps to decide if a claim is to be honored or not.

fundamental principles of insurance

With a firm grasp of these principles, dealing with issues of insurance should be more convenient going forward. Please feel free to share this and follow this blog for more information. Thanks.

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