FUNDAMENTAL PRINCIPLES OF INSURANCE
Any general insurance product you buy or you sell is subject to certain unwritten rules. Some could argue as to how can an insurance contract be unique, unlike any contract, that could have “hidden” clauses that could frustrate the policy’s objective?
Do not conclude that insurers used strong arm tactics over hundreds of years to device methods to deny claims! These principles apply to both Insurer and Insured, though most of them apply to the insured. This will be appreciated when you have gone through the following principles.
Insurable Interest
This is clearly stipulated in Marine Insurance Act, 1963. i.e. A cannot insure a Ship owned by B, unless A is a lender for the Ship. Thus, it applies to all marine policies. How does it become applicable to other general insurance products like property insurance? Courts have consistently ruled that Marine Insurance Act concepts apply to other insurance products, except concepts like Sue & Labour or Constructive Total Loss.
Utmost Good faith
Utmost Good faith also known as Uberrima Fidei, is unique to Insurance Contracts. This requires the parties to the contract to act in utmost good faith by disclosing all the relevant information about the risk. This obligation is on for both parties-i.e Insurer & insured. E.g. A buys an Insurance for their property without disclosing existence of certain hazardous materials stored Inside A’s godown. There is an accident due to the hazardous materials. A will not get the claim.
This obligation also works against an Insurer-e.g. Goods left Singapore on 1st September and A goes to Insurer for a policy for the cargo on the 8th September. Insurer B issues a policy for a cargo shipment to A. B knows privately that the cargo shipment has already arrived safely on the 7th evening. A is ignorant of this. This insurance will be void and A can claim refund of the premium, due to this principle of utmost good faith not having been followed by the Insurer.
Proximate Cause
In insurance, proximate cause is the primary cause that leads to an accident. It’s the most significant incident that causes a loss, and it’s the first factor considered when determining the insurer’s liability.
An Insurance surveyor is keen to understand the primary cause of an accident which has contributed to the loss and if such cause is covered in the policy.
For e.g. a ship sailed from Kolkata Port to Singapore with a defective engine. The ship got stranded enroute and there was claim by ship owner for loss suffered after stranding. Though stranding is covered as a risk in a marine policy, the proximate cause was established by the surveyor as defective engine. Hence the claim is refused by the insurer due to “un-seaworthiness” of the ship. For your information-‘unseaworthiness’ is an exclusion in a marine hull policy.
Principle of Indemnity
This principle prevents insured from ‘profiting’ from a loss insured-i.e realising a claim more than the actual loss suffered. It aims to put the insured in the same place the insured was in before the loss occurred. E.g. A fishing vessel is insured by owner A for ₹ 70 Lakhs and the ship is lost due to an insured peril. The insured realises the market value of the ship at the time of loss is actually Rs 85 Lakhs and claims Rs 85 Lakhs. Here, the insurer will only pay Rs 70 Lakhs, entire sum insured for which A paid the premium. as that is indemnity intended. If A wanted indemnity for Rs 85 Lakhs, he should have taken a policy for Rs 85 Lakhs.
If A had overvalued the vessel at, say, Rs 1.5 Crores and taken a policy, the insurer, on finding out the true value later, after a claim, can avoid the policy totally by refusing to pay the claim, due to fraud by A.
Principle of Subrogation
This principle gives the right to the insurer to place himself in policy holder’s position after having settled a claim to recover damages from a third party who was responsible for the loss caused to insured. Subrogation gives the legal right to the insurer to recover damages from the third party and such third party’s insurers.
For e.g. a consignment of tea is exported by A from India to the UK and it is damaged due to poor unloading by the ship’s system in the UK. Insurer B pays A and steps into A’s shoes to recover the claim from the ship operator.
Principle of Double Insurance and Contribution
This situation arises, when the insured has two policies in place to protect the same event. In this case the insured cannot claim from both the insurers which eventually “profits” the insured. Each insurer will only pay the proportion of the sum insured they are liable for a loss. For Example: Metro Ltd insures their hotel under a fire policy for Sum Insured of ₹ 52 Lakhs with Star Light Insurance in their name & their lending bank’s name. Unknowingly, Metro Ltd’s bankers also took insurance for the hotel to protect their loan with Elite Insurance. Unfortunately, a loss occurs which amounts to ₹45 Lakhs. In this case Star Light will Pay 50% of the share and Elite Insurance will pay balance 50%.
Conclusion:
Do you appreciate as to why Insured has more obligations in an Insurance contract?
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