Basic principles of insurance - SS2 Commerce Lesson Note

Utmost Good Faith:

Utmost good faith, also known as the principle of utmost good faith or uberrimae fidei, is a fundamental principle in insurance. It requires both the insurer and the insured to act honestly and disclose all relevant information to each other. The insured must provide accurate and complete details about the risks to be insured, while the insurer must provide clear and transparent terms of the insurance contract. This principle ensures that there is a fair and honest exchange of information, allowing both parties to make informed decisions.

Insurable Interest:

The principle of insurable interest states that the insured must have a financial or legal interest in the subject matter of the insurance policy. In simple terms, it means that the insured must stand to suffer a financial loss or have a legal right to protect in the event of damage or loss. Insurable interest ensures that insurance is not used as a means of speculation or gambling. For example, a person can insure their own property, but they cannot insure someone else's property unless they have a valid insurable interest, such as being a beneficiary or having a legal obligation towards that property.

Indemnity:

The principle of indemnity states that insurance is designed to compensate the insured for the actual financial loss suffered, not to provide a means for making a profit. In the event of a covered loss, the insured should be restored to the same financial position they were in before the loss occurred, without gaining any financial advantage. This principle prevents overcompensation and ensures that insurance is used for its intended purpose of providing financial protection against unforeseen events.

Subrogation:

The principle of subrogation allows the insurance company, after compensating the insured for a covered loss, to step into the shoes of the insured and pursue any legal rights or remedies that the insured may have against a third party responsible for the loss. By exercising subrogation rights, the insurance company aims to recover the amount it paid to the insured from the responsible party, thus reducing its own financial loss. Subrogation helps prevent the insured from receiving double compensation for the same loss and allows the insurance company to mitigate its losses.